A New NAFTA Is Having a Ripple Effect in Los Angeles

With changes in the North American Free Trade Agreement in the wind, Los Angeles blue-jeans factories have been fielding more inquiries from denim labels thinking about switching production from Mexico to California.

“We have had some people visit—big brands that are used to doing production in Mexico and China. They came to see if they could do American made,” said Mateo Juarez, the general manager of United Jeans, a factory with 80 workers that has been doing premium-denim manufacturing in south Los Angeles since 1994. “I think they want to do more production in the U.S., but they want to pay Chinese and Mexican prices.”

That is particularly challenging in the city of Los Angeles and unincorporated areas of Los Angeles County, where the minimum wage for businesses with more than 26 employees rises to $12 an hour on July 1, up from the current $10.50 an hour. “Nobody wants to pay this minimum wage,” Juarez said. It is only adding to the additional cost of an already higher production price that keeps going up in California with new laws and regulations.

“If you make blue jeans in China, including the fabric washes, it is $6. If you do the same jeans in Mexico, you can make it for $10, which includes dropping if off here in Los Angeles. And if you do it in the U.S.A., you are looking at $40 to $50. That’s a big difference,” Juarez explained.

He calculates that if you manufacture 100,000 jeans in Mexico, it will cost $1 million. Make those jeans in Los Angeles, the price skyrockets to $4 million. The difference is astronomical and only economically practical if blue jeans are selling for $100 to $200.

Steve Rhee, owner of Jean Mart Inc., another major Los Angeles denim factory with 300 workers, said he has been getting a lot of phone calls and inquiries about switching production from Mexico to Los Angeles. But he is not sure if it is because of NAFTA or brands shifting to a fast-fashion production model.

He did get one big order from a brand that traditionally has done production in Mexico, but he notes that the July 1 rise in the minimum wage could put a damper on that. He will be forced to increase his prices and wonders if customers will be willing to accept the higher production price. “The only option we have is to raise prices,” he said.

Atomic Denim—which has 200 workers who have made premium blue jeans for Tom Ford, Diesel and Hudson—has been getting its share of telephone calls from brands doing an exploratory search for possible Los Angeles production facilities. “I definitely think there is a bigger interest from brands for manufacturing in Los Angeles, but I don’t think I have seen any significant production changes. Time will tell,” said Claudia Bae, Atomic Denim’s vice president.

The manufacturing facility used to be a principal production site for True Religion, Bae said, but the company switched its production to Mexico and Vietnam after True Religion in 2013 was sold for $835 million to TowerBrook Capital Partners. She doesn’t think they’re coming back to Los Angeles.

NAFTA renegotiations

Public hearings on NAFTA’s renegotiations will be held June 27 in Washington, D.C., where companies, industries and interested parties can suggest what changes they would like to see or not see implemented in a revamped trade agreement that hasn’t been overhauled in 23 years.

The real heavy lifting starts on Aug. 16, when the renegotiations on the free-trade agreement between the United States, Canada and Mexico are scheduled to be launched. U.S. Trade Representative Robert Lighthizer has been keeping NAFTA renegotiation plans under wraps.

Many believe that more effort will be spent on overhauling big industries such as autos, dairy, sugar, energy and e-commerce. Apparel and textiles may be less affected because clothing imports from Mexico look minuscule compared with imports from China and Vietnam.

“Textiles and apparel are not going to be making headlines,” said Nicole Bivens Collinson, a partner who manages the Washington, D.C., office of international law firm Sandler, Travis & Rosenberg. “Many think the textile and apparel positions of NAFTA have been beneficial to both sides, but there are some changes that could be implemented.”

She pointed out that some of those changes could include the de minimis requirements that under NAFTA allow 7 percent of the total weight of the component that determines the classification of a garment to be from outside the NAFTA region. Under the Dominican Republic–Central America Free Trade Agreement, the accord allows for 10 percent to be from outside the region.

Sewing thread, pocket lining and other inputs are another subject that is likely to be addressed. Currently, NAFTA rules allow the use of sewing thread, narrow elastic fabric and pocket lining fabric from outside of the United States, Mexico and Canada. But under DR-CAFTA, which began to be implemented in 2006, the rule is that sewing thread, narrow elastic fabric, visible linings and pocket-lining fabric must come from the region unless they are short-supply fabrics.

Under free-trade agreements, garments have to be made of regionally made fabrics coming from regional yarns, but exceptions to this rule can be requested if a fabric is not made in any of the countries that are part of the free-trade agreement. This means fabrics can be added to a short-supply list after a formal request is made to the trade authorities of the participating member countries in the free-trade pact.

Under DR-CAFTA, the addition of a fabric to the short-supply list takes about 45 days. Under NAFTA, it can take years, Collinson said. Many would like to see a speedier process implemented under a new NAFTA.

Then there are the trade-preference levels, which allow a certain amount of yarns and fabric produced outside the free-trade-agreement region to be used in apparel production as long as the non-regional goods are cut and sewn within the free-trade countries.

Many U.S. yarn and textile manufacturers would like to see TPLs done away with under a revised NAFTA, giving more opportunity for U.S.-made products to be incorporated into clothing production. Currently, Mexico is allowed to bring in 45 million square-meter equivalents of yarn and fabric a year from places such as China, which it normally uses up halfway through the year. These preference levels don’t expire.

Under DR-CAFTA, the TPLs were limited to Nicaragua and Costa Rica. Nicaragua’s TPLs expired at the end of 2014. For Costa Rica, the TPLs should expire in 2019.

Some see stricter origin rules for NAFTA. “The objective under the renegotiation of NAFTA will be reciprocal access for U.S. and Mexican apparel and textile products and to improve the competitive opportunity for U.S. exports,” said Jonathan Fee, an international trade attorney with Alston & Bird in Washington, D.C. “They want to make original rules that support U.S. production and jobs.”

There could also be stronger enforcement of countervailing duties and anti-dumping laws that add tariffs on goods being subsidized by foreign governments or on goods priced below fair-market value.

Julie Hughes, president of the U.S. Fashion Industry Association in Washington, D.C., is hoping there won’t be too many changes to NAFTA for the apparel and textile industries. “After 20 years, companies have spent a lot of time and energy trying to understand and work with NAFTA as it exists today,” Hughes said. “In the current environment with tough retail and a tough consumer environment for fashion products, we don’t think it is the time to tear it apart and start all over again.”