The U.S. Free-Trade Agreement With Central America Is Next in Line for a Makeover

Experts are meeting for their fourth round of NAFTA trade talks in Washington, D.C., this week with the idea of wrapping up negotiations to revamp the North American Free Trade Agreement by the end of this year if President Trump doesn’t derail the deal. But as soon as NAFTA has been repackaged, the spotlight is expected to be pointed at the U.S. trade agreement with Central America.

Central America, with its hundreds of clothing factories, is a big player in the apparel industry, exporting most of its production to the United States. There are factories that employ thousands of workers cutting and sewing T-shirts for Target and Walmart as well as producing T-shirts for several Los Angeles clothing companies such as Jerry Leigh.

The region is a top manufacturer of basic T-shirts, underwear, sweatshirts, pants, synthetic activewear and socks. In the Dominican Republic, a member of the Central American free-trade agreement, which also includes the United States, Guatemala, Honduras, Nicaragua, El Salvador and Costa Rica, the HanesBrands employs some 8,000 people.

But the difference between Central America and NAFTA is that the United States has a $5 billion trade surplus when dealing with the DR-CAFTA countries while the United States has a $74 billion deficit when dealing with its NAFTA partners, Mexico and Canada.

From Canada, the United States imports a lot of crude oil and natural gas. From Mexico, it brings in a large number of cars, trucks and auto parts.

That means that a renegotiated DR-CAFTA may not be as drastic as it could be with NAFTA.

“We export about $29 million in goods to CAFTA countries and import about $24 billion,” said Gail Strickler, former assistant U.S. trade representative for textiles under the Obama administration and now president of global trade at Brookfield Associates in Washington, D.C. “I don’t think anyone is going to want to mess with a $5 billion surplus.”

Strickler expects that CAFTA negotiations down the road will concentrate on intellectual-property protection and digital commerce—subjects that weren’t that important or prevalent when the free-trade accord initially took effect in 2006.

Other areas that probably will be addressed include trade facilitation. The U.S. administration would like to speed up customs processing in Central America, improve training of customs officials at the borders, and reduce corruption at customs-entry points and at the ports.

The extent of corruption in Central America was front and center in 2015 when then-Guatemala President Otto Pérez Molina and his vice president, Roxana Baldetti, were arrested on customs-fraud charges for allegedly siphoning off millions of dollars in customs duties from importers trying to get their goods in at a reduced rate in exchange for financial kickbacks. Perez and Baldetti are still in prison.

But what happens with DR-CAFTA depends on what happens with the NAFTA negotiations. The fourth round, Oct. 11–17, is being held in Washington, D.C., with hopes that the trade talks will wrap up by the end of this year or early 2018.

“NAFTA is being renegotiated first. I think that will have a big impact on what may or may not be discussed relating to CAFTA,” said Julie Hughes, president of the U.S. Fashion Industry Association, a trade group in Washington, D.C., that represents U.S. apparel and textile importers.

Right now, one of the sticking points in the NAFTA renegotiations is trade-preference levels, also known as TPLs. TPLs allow for a certain amount of yarn and fabric produced outside the free-trade-agreement region to be used in apparel production as long as the non-regional inputs are cut and sewn within the free-trade countries.

Overall, Mexico and Canada combined are permitted to use nearly 236 million square meter equivalents (SME) of apparel, made-ups and fabric and 12.8 million kilograms of yarn containing third-party components.

U.S. textile companies would like to see this regulation disappear, but the Mexicans, who use it more than the Canadians, want it to remain. “My Mexican and Canadian contacts said they are not willing to give up some of the things that our administration is asking. One of them is the elimination of TPLs,” Hughes said.

Many U.S. clothing manufacturers that produce in Mexico and Canada would like to see TPL levels increased rather than reduced because it would lower their production costs.

Saving TPLs is also supported by the American Apparel & Footwear Association, whose U.S. members represent some 1,000 brand names manufactured primarily overseas; the National Retail Federation; theU.S. Fashion Industry Association; theCouncil of Fashion Designers of America; and the California Fashion Association.

Steve Lamar, the AAFA’s executive vice president, noted that TPLs often help retain duty-free status that might be eliminated. For example, if there were no TPLs, U.S. clothing manufacturers could not use foreign-made linings in U.S.-made garments and get duty-free access to Canada or Mexico. Hardly any coat linings are manufactured in the United States. “Using Chinese or Italian lining would disqualify the entire garment from duty-free status even if it is made of U.S. fabric and sewn in the United States. If we keep the TPLs, you get that duty-free qualification,” he said.

The only country in the DR-CAFTA region that has TPLs is Costa Rica, which can bring in fabric for wool apparel and swimwear, but it is hardly used at all.

One element Central American clothing factories would like to see changed is having the ability to send a certain amount of fabric made in Central America to Mexico, where it could be cut and sewn and exported to the United States and Canada without paying duties.

This is similar to a provision—called cumulation—that allows 100 million square meter equivalents of fabric to be sent from Mexico to Central America to be cut and sewn and then shipped duty-free to the United States. Most of that fabric shipped from Mexico to Central America is denim for blue jeans, but it also includes wool, cotton and man-made fiber bottom-weight cloth.

However, the U.S. textile industry opposes that idea because it would cut into the nearly $3 billion in cotton, yarn and fabric it sends every year to the DR-CAFTA countries.

CAFTA is still a work in progress with NAFTA still first in everyone’s mind. “The focus is really still NAFTA,” Lamar of the AAFA said. “Then we’ll see about CAFTA.”