TTIP Expected to Include Relaxed Apparel Rules of Origin, Say Industry Executives

The Office of the U.S. Trade Representative (USTR) is poised to permit less stringent apparel rules of origin in the Transatlantic Trade and Investment Partnership (TTIP) than the agency has in many other U.S. free trade agreements (FTAs), said industry executives close to the negotiations. U.S. textile and apparel importers are hoping to see more flexibility in TTIP rules of origin, considering the relatively low threat of European Union apparel exports to U.S. domestic industry, the executives said in interviews.

U.S. negotiators wrapped up on May 23 the 5th round of TTIP negotiations with European Union (EU) counterparts in Arlington, Virginia. At the outset of the talks, the Office of the USTR sought progress on rules of origin and market access, among other areas of negotiations (see 14051923). But the negotiations are in their early stages, and USTR negotiators have likely not yet made specific proposals on apparel rules of origin in TTIP, said the industry officials. “Although the two sides are meeting, I don’t expect there to be any outcomes,” said David Spooner, counsel for the U.S. Fashion Industry Association and a former USTR official, as the negotiations wound down last week. “At this stage, both sides are spending time describing their offers and going into detail as to why they are proposing certain rules and exceptions. But it’s too early for there to be real back and forth or compromise.”

Negotiators from both sides of the Atlantic have broached textile rules of origin, but those talks are just beginning, said chief U.S. negotiator Dan Mullaney and Ignacio Garcia Bercero, the chief EU negotiator, in a May 23 press conference (here). The Office of the USTR did not respond to a request for further comment. USTR says U.S. textile and apparel manufacturers sold nearly $2.4 billion worth of products to the EU in fiscal year 2013 (here).

The U.S. and EU have implemented different styles of rules of origin in their respective free trade agreements, so the two sides will have to ultimately bridge gaps in order to broker consensus, said Ron Sorini, a consultant and former textile negotiator at the Office of the U.S. Trade Representative. “There’s a bit of difference, but not a huge gulf. It’s not like the differences between the U.S. and Vietnam in [Trans-Pacific Partnership],” said Sorini. “There’s a different economic dynamic for sure. The U.S. will not generally view the EU as a source of low-priced apparel that will cause harm to U.S. industry. But the issue will be whether TTIP will expand to other countries.” Sorini suggested Turkey or North African countries, both of which are capable of producing lower priced apparel, may lobby to accede to the agreement.

The National Council of Textile Organizations called for a ‘yarn forward’ rule of origin in a final TTIP agreement during a May 21 stakeholder presentation at the negotiations (here). The U.S. has implemented a ‘yarn forward’ rule of origin in nearly all of its free trade agreements (FTAs), and is adamantly pressing for its inclusion in TPP negotiations (see 13082011). The ‘yarn forward’ rule is the basic principle that yarns need to be sourced in the country that receives preferential treatment for the manufactured products it exports to also get preferential treatment. The producers in that country must then turn the yarn into fabric and the fabric into apparel in order to earn preferential status, a process called "triple transformation" among Europeans.

The rule is typically championed by proponents as a means to prevent manufacturing giants, often poorer countries, from harming U.S. domestic producers. “The rule of origin for apparel in this agreement will be very interesting to watch. In the past the domestic textile representatives argued, ‘yarn forward’ is needed in order to prevent lower income producers from flooding our markets,” said Spooner. “The EU has similar living standards to the U.S. and is not a dominant textile producer, so this will be very interesting fight.”

The Italian wool and suit industry is one apparel sub-sector that is expected to lobby hard, and possibly successfully, for more flexible rules of origin, said one industry official. The Italian wool and suit industry sells a large amount of its products in the U.S., but it sources a critical amount of yarns and fabrics from outside the European bloc, according to the official. "I could see the Italians wanting single transformation, or ‘cut and sew’ rules, for suits given … there’s still a lot of Italian production of those. At least by value, it’s a decent sized export to the U.S. But [I say this] with the caveat that the U.S. wool production has gone away rapidly over the last ten years," said the official. U.S. wool production over recent years has declined drastically, and the U.S. domestic industry may resist the more flexible rules of origin in order to preserve remaining production, the official added. Brassieres will also likely be subject to single transformation requirements, as they have been in all FTAs over the past ten years, said Spooner.

The Europeans generally adopt more relaxed rules of origin on woven apparel than U.S. negotiators, whereas knit apparel rules are akin to U.S preferences, said Sorini, adding that rayon and cashmere yarns would likely meet criteria for admission to a short supply list in TTIP. The U.S. recently added certain cuprammonium rayon and cashmere yarns to the short supply list in the U.S. FTA with South Korea, building on such inclusions in a number of other U.S. FTAs (see 14041715 and 14042324). The U.S. has implemented short supply lists for both yarns and fabrics in past agreements.

But U.S. importers of textiles and apparel are not only targeting exceptions to a ‘yarn forward’ rule. The sector is lobbying to move away ‘yarn forward’ all together, said Steve Lamar, executive vice president at the American Apparel & Footwear Association (AAFA). “It’s baffling to us that [‘yarn forward’ rules of origin] are being [considered] because there is a lot of evidence that shows that those rules don’t work. The support for ‘yarn forward’ is akin to muscle memory,” said Lamar. “The EU is pushing for double transformation. You have all this evidence that shows the restrictive approach just doesn’t work.”

In its stakeholder presentation, NCTO emphasized that apparel market access cannot be determined before cementing rules of origin. Some industry officials agreed with that insight, although Lamar said realistically both rules of origin and market access negotiations advance in parallel. But Mullaney and Bercero, the two chief negotiators, pledged to forge ahead on wide-ranging talks related to apparel trade. “There have been specific discussions on textiles. We have looked into tariffs. We have also looked into regulatory issues in the textiles sector,” said Bercero. “The United States has explained to us its ideas for a specific textile chapter. It’s not something which is part of our model. We don’t do that in our agreements … but we are certainly ready to hear and to reflect on what United States has put forward.”

The Office of the USTR has pledged to prioritize in TTIP the elimination of all textile and apparel trade tariffs between the U.S. and Europe (see 14031101). The U.S. retail industry staunchly supports reciprocal tariff elimination. "Elimination of all textile import tariffs from Europe will be a powerful boost for U.S. manufacturing, especially in the New York City garment district, which is already responsible for tens of thousands of apparel jobs. New York based companies already pay about $30 million a year in U.S. textile tariffs from Europe," said the Council of Fashion Designers of America and the AAFA in a recent letter (here) to USTR Michael Froman "That number climbs to more than $100 million when we include those companies located in parts of the United States. Removal of these duties will significantly reduce costs to U.S. apparel manufacturers, allowing them to hire more sewers and designers, invest in technology and capital improvements, and make U.S. made apparel more affordable."

Aside from market access, flexible rules of origin in TTIP could reflect the growing political strength of the U.S. apparel and textile import industry, according to an industry official. "There is no question that the retail industry has more clout than it did 20 years ago compared to the domestic manufacturing industry," said the official. "U.S. manufacturing used to get more than an eye from congressmen and senators, but that political influence could be going generally in the direction of overseas investment." -- Brian Dabbs