Apparel Production in Mexico Will Change Slightly Under NAFTA 2.0

The renegotiated free-trade deal between the United States and Mexico has a new name and a new set of rules that will make it a little more difficult to manufacture apparel in Mexico.

From what trade experts know, the changes for apparel in the new free-trade accord, now being called the United States–Mexico Trade Agreement unless Canada decides to continue negotiating, aren’t draconian. That is probably because the United States doesn’t have a trade deficit with Mexico when it comes to apparel and textiles under the current North American Free Trade Agreement.

We export about $8 billion a year in apparel and textile products—mostly fabric and other raw materials—and import about $5 billion.

But still, the full details of the accord haven’t been revealed and probably won’t be released for at least another month as Congress examines the terms of the renegotiated deal, announced Aug. 27.

What is known about the trade agreement comes from a fact sheet previously distributed by the U.S. Trade Representative’s office, which said the U.S. government wanted to require that sewing thread, pocketing fabric, narrow elastic bands and coated fabric, when used in apparel and other finished products, come from the free-trade region to qualify for duty-free benefits. Under the previous NAFTA deal, those raw materials could come from any region in the world.

One big question mark is whether trade-preference levels would be altered, allowing for some non-regional yarns and fabric to be used when producing garments within the free-trade area while still receiving duty-free status.

In previous negotiations, U.S. representatives—with the backing of the U.S. textile industry—had proposed eliminating TPLs. In the U.S. Trade Representative’s fact sheet, it said the Trump administration did want to limit rules that allow for some use of non-NAFTA inputs in textile and apparel trade, but it didn’t go into specifics.

“They [the U.S. trade negotiators] have been pretty silent on TPLs,” said Julie Hughes, the president of the U.S. Fashion Industry Association, a Washington, D.C., trade group representing apparel importers and retailers. “And that has been one of the major concerns for us. I have heard different things from different people who say there will only be minor changes.”

But no one is sure about the future of TPLs. Tom Gould, senior director, customs and international trade, at the international law firm Sandler, Travis & Rosenberg, said the companies he works with doing production in Mexico plan to use the TPLs as long as possible until the specifics of a new trade deal are implemented.

If they can’t use those TPLs—allowing a certain amount of fabric from countries such as China and South Korea for duty-free production—they will have to start using more regionally produced fabrics or move their production to other countries to keep their costs low. “Fortunately, my clients are not panicking because for a long time I have recommended that companies be agile and not put their eggs in one basket,” he said.

But there are several apparel companies in Los Angeles, he said, that are doing 100 percent of their production in Mexico and should be concerned about changes under NAFTA 2.0.

The little things

For years, sewing thread and pocket linings under the Dominican Republic–Central America Free Trade Agreement have had to come from regional sources, but that was not the case under NAFTA.

So, integrating those rules into the new free-trade agreement with Mexico shouldn’t be a huge problem as long as there is enough supply to go around.

Daniel Barcenas, who previously worked in sourcing with Hudson jeans and Fortune Fashions and now runs his own consulting company called the Barcenas Sourcing Group, believes there will be an immediate gap between the amount of regional sewing thread available and the demand by factories. “American & Efird makes some thread in the United States, but it is not enough,” he said.

American & Efird, the largest sewing-thread manufacturer in the United States, has five plants in North Carolina and one plant in Mexico.

Les Miller, the chief executive officer at American & Efird, said that most Mexican apparel factories currently are using regional sewing thread because it streamlines the production process. When it comes time to export their products to the United States, it makes life easier and the importing process more efficient when you don’t have to explain where your non-regional sewing thread came from. “There is going to be little change as far as I know,” he said.

Gail Strickler, the former assistant U.S. trade representative for textiles under the Obama administration and now president for global trade at Brookfield Associates in Washington, D.C., is more concerned about pocket linings.

In the past, apparel factories have often used fabric scraps left over from production to make pocket linings. With the new regional requirement, apparel manufacturers will have to verify that those scraps come from regionally made fabric instead of Asian or Central American fabrics.

“This regulation doesn’t allow you to use waste material. You will have to trace where it comes from,” Strickler said. “Pocket linings are a great place to recycle material.”

The timetable

The Trump administration is scheduled to submit the United States–Mexico Trade Agreement to Congress on Aug. 31 to give them 90 days to examine the agreement under something called the Trade Promotion Authority, which allows for expedited congressional consideration of trade agreements struck by the executive branch.

“This is a chance for Congress to review the free-trade agreement and schedule briefings,” said Steve Lamar, executive vice president of the American Apparel & Footwear Association, who is on all of the congressional advisory committees that will start reviewing the trade pact 30 days after it is submitted to Congress.

Once the advisory committee reviews take place, businesses and the public will have a better idea of what is actually in the free-trade agreement.

The big question is whether Canada will wrap up negotiations in time to be part of the accord, which first went into effect in 1994 and opened up the borders for trade between Canada, Mexico and the United States.

President Trump has threatened to keep Canada out of the pact if it doesn’t agree to some of the United States’ demands.

But few people want to see Canada left out. Rick Helfenbein, president and chief executive of the AAFA—a trade group in Washington, D.C., that represents hundreds of apparel, footwear and sewn-products companies—said it is mandatory that Canada remain in the free-trade deal.

“It is essential that the updated agreement remain trilateral,” he said.