NAFTA Priorities Should Include Rules of Origin, TPL Updates, Textile and Apparel Groups Tell USTR

Representatives of the international and domestic textile and apparel industry concurred that a renegotiated NAFTA should preserve application of the Berry Amendment, in testimony on June 27, but differed on whether tariff preference levels (TPLs) should stay in place. Speaking during a hearing convened by the Office of the U.S. Trade Representative featuring interagency partners, American Apparel and Footwear Association Executive Vice President Stephen Lamar and Rubber and Plastics Footwear Manufacturers Association trade counsel Marc Fleischaker said NAFTA should maintain the general statutory requirement for the Defense Department to give procurement preferences to domestically produced products. “The NAFTA government procurement chapter should carefully and specifically preserve the applicability of the Berry Amendment in the United States,” Fleischaker said during the hearing at the International Trade Commission.

Opinions differed on rules-of-origin opinions between groups that largely operate across borders and those that more specifically advocate for domestic production. An updated NAFTA should erase TPLs and procurement “concessions,” National Council of Textile Organizations (NCTO) President Augustine Tantillo said. National Cotton Council Vice President of Washington Operations Reece Langley also called for the elimination of TPLs, and also requested that the U.S. look at the “value” of NAFTA’s “single transformation” rule reserved for certain apparel made from fabrics in short supply or not commonly produced in North America. NAFTA allows non-North American-originated fabrics on its short supply list to qualify for preferential treatment if cut and sewn in one or more NAFTA territories. The list comprises fabrics not produced in commercial quantities in the U.S.

On the other hand, Richard Gottuso, general counsel for window fabric manufacturer Hunter Douglas, recommended that NAFTA “yarn-forward” rules for window coverings be eliminated, as many inputs aren’t made in North America. The window fabrics industry can’t benefit from the agreement as a result of it being subject to “yarn-forward” rules, he said. Tantillo said NAFTA’s intention was to draw investment and employment to North America, “and not to grant an unnecessary backdoor entry for Asian suppliers of textiles to, in essence, get duty-free access into our marketplace.” Canada and Mexico ship 80 million square meters of products per year under NAFTA TPLs, which equates to about $320 million to $350 million worth of goods entering the U.S. with no tariff revenue.

But U.S. Fashion Industry Association Washington Trade Counsel David Spooner said TPLs were written into NAFTA to balance out the general North American sourcing requirement, with provisions allowing for tariff preferences for fabrics especially rare or expensive in the North American region. “We, frankly, would not view the TPLs as a loophole, or their elimination as solving a technical glitch or problem in the agreement,” Spooner said. “In our view, if the TPLs were taken away, those 80 million square meters would not go to U.S. yarns and fabrics, they would probably leave the region entirely.”

Lamar asserted that TPLs allow flexibilities that strengthen the effects of NAFTA rules of origin. TPLs allow for pieces other than the subject item to be assembled in the U.S., and removing that mechanism would delete a NAFTA “staple” that spurs trade and jobs. Randy Price, VF Corporation managing director for product supply in the Americas, also voiced support for maintaining TPLs, adding that reducing them would also reduce the volume of products made in the U.S.

Tantillo said the U.S. government has “produced a scant level of detail” about what actually is shipped through TPLs, but “I venture to say that the vast majority is using yarn and fabric abundantly available” in the NAFTA region. “It’s that type of exception that is hard to explain to U.S. manufacturers,” he said. “Why, when a product is available within the contracting parties, within the region, why would we look to China or some other supplier for that?”

In general, the U.S. government should “be more vocal” about how it is “stepping up” in the customs area throughout renegotiations, Tantillo said. Lamar and Price agreed that NAFTA could benefit from “trusted trader” provisions, while Spooner voiced the possibility of the agreement adopting language providing for a North American single window initiative. “We’d have to do a little bit of thought as to how much of that should be codified in a revised NAFTA,” he said. “The initiative aims to streamline regulations and reduce the cost of business in the region, which we all agree would be a good idea.”

One area where Lamar and Tantillo agreed was that NAFTA should level the duty drawback mechanisms of the U.S., Canada and Mexico. Despite NAFTA's restrictions on drawback (see 1705100034), Canada and Mexico use elaborate structures to allow duty-free imports of inputs. NAFTA’s “single transformation” rule for textile and apparel then allows those products to flow to the U.S. duty-free, Tantillo said. The Trump administration should examine whether to “replicate” some of the Canadian and Mexican manufacturing incentives or push them to scale back the programs, he added. Lamar said negotiators should simply strike NAFTA’s drawback restrictions, which would bring the deal more in line with the drawback provisions in the vast majority of other U.S. FTAs.

Allowing more textile and apparel manufacturing in U.S. foreign-trade zones could help decrease production costs, too, Spooner said. U.S. foreign trade zones are intended to function as export platforms, but ever since the start of import quotas on textiles and apparel, CBP and the Commerce Department have been “extremely reluctant” to permit that type of production activity to occur in FTZs, which should change, Spooner said.

Also speaking during the hearing, House Ways and Means Trade Subcommittee ranking member Bill Pascrell, D-N.J., said any changes to NAFTA shouldn’t undermine “Buy American” procurement policies and that negotiators should re-examine the deal’s rules of origin on several products to ensure non-parties don’t enjoy the benefits. He also called for USTR to push for strong and enforceable environmental and labor provisions that take effect when the agreement activates.