As of Friday, October 21, 2016
With high-priced blue jeans made in Los Angeles taking a beating in the market, manufacturers facing rising wages in California are amping up their production of premium jeans in Mexico.
Mexico has several advantages: It is only three hours away by plane, a few days away by truck, has a free-trade agreement with the United States and has apparel wages that are about two-thirds of what they are in Los Angeles.
Sources note that Hudson, True Religion and 7 For All Mankind are now producing as much as 70 percent of their denim product in Mexico, bringing it back to the United States duty-free.
Los Angeles denim manufacturer Jean Mart Inc., which used to do a hefty amount of production for True Religion, said that at the beginning of this year the blue-jeans label shifted its production to Mexico.
Paige Premium Denim and Frame are two other brands doing more production south of the border, sources said.
“A lot of the companies in Los Angeles are looking for lower-cost labor and moving out of LA,” said Tom Gould, senior director, customs and international trade, at Sandler, Travis & Rosenberg.
The various Los Angeles wash houses that have been the go-to people for finishing high-end blue jeans are also seeing a shift to Mexico. Denim experts say the more simple washes are being done in Mexico and more sophisticated washes are being executed in Los Angeles.
“The shift to Mexico is quite noticeable,” said Wesley Chung, president and chief executive of U.S. Garment, a wash house located next door to the 7 For All Mankind headquarters in Vernon, Calif., an industrial area near Los Angeles. “True Religion, Seven, Hudson, AG—all the big names are producing in Mexico,” he said. “We are not doing the same volume as we did, but we are doing a lot more different processes that are more complicated. Gone are the days of doing a thousand pieces of the same washes. We are now doing a lot more specialized and labor-intensive washes.”
Under the North American Free Trade Agreement, denim brands and other apparel manufacturers can produce their goods in Mexico and bring them back without paying duty on them if they are made from fabric produced in Canada, Mexico or the United States. The duty savings on cotton blue jeans is 16.6 percent, and for manmade-fiber jeans it is 28.6 percent.
But if blue jean makers use Italian or Japanese denim imported into Mexico, the duty savings disappear.
But Gould, who recently gave a webinar on “Lowering Duties on Apparel Imported from Mexico,” said there are a number of measures that can be taken to reduce duty costs.
One way to avoid paying duties is under the Mexico “special regime rule,” which says U.S.-made fabric cut in the United States may be shipped to Mexico to be sewn and brought back to the United States without paying duty. The labor cost is considerable because the average garment worker in Los Angeles is making about $420 a week versus $148 a week for a Mexican apparel worker.
Another duty-saving device is something called “U.S. goods assembled abroad.” Formerly it was known as the 807 provision. Under this measure, fabric that comes from anywhere in the world can be sent to Mexico to be cut and sewn and duty is charged only on the value added to the product. This includes labor and imported components.
Many clothing manufacturers don’t realize that under NAFTA, garments can be sent to Mexico for screen printing, alterations and repairs and brought back duty-free.
Some manufacturers are reducing their tariffs by using something called the “First Sale Rule.” Under this provision, when filing paperwork with U.S. Customs and Border Protection, manufacturers list the price paid by their vendor to the factory instead of listing the price paid to the distributor, importer or agent. The “First Sale Rule” allows importers to pay duty on the first or earlier sale price. “First sale is about saving duty,” Gould said.
A more limited option is the special tariff preference level program that allows for a certain amount of goods to be cut and sewn in Mexico out of fabric that comes from anywhere in the world. While this program does not apply to denim makers, it can be used by twill and corduroy pant makers as well as other items such as T-shirts, loungewear and pajamas.
This program is subject to a quota and usually fills up by June. It also involves a lot of paperwork because Mexico’s Department of Economy has to issue a special certificate, which is usually obtained by the Mexican factory manufacturing the goods.
A new law that went into effect earlier this year is changing the way e-commerce businesses operate. The U.S. government raised from $200 to $800 the amount of goods that are brought into the country free of duty by one person every day.
This rule applies to people such as vacationers coming through customs after a trip abroad or e-commerce sites shipping clothing or other items to U.S. buyers. “If you are shipping a $100 manmade-fiber shirt, this saves you $32 in duties,” Gould said.
He is noticing a number of e-commerce sites setting up warehouses in Mexico to take advantage of this new rule.
For more information about NAFTA reductions, you can access the Tom Gould webinar at https://www.strtrade.com/products-Lowering-Duties-Apparel-Imported-Mexico-OnDemand.html.