Why NCTO and Euratex Disagree on the Textile and Apparel Rules of Origin in T-TIP?

eu-and-us-ta-rules-of-origin1

In an April 13 press briefing, the National Council of Textile Organizations (NCTO) which represents the U.S. textile industry, insists the Trans-Atlantic Trade and Investment Partnership (T-TIP) shall adopt the so called “yarn-forward” Rules of origin (RoO). Yarn-forward (or “triple transformation”) in T-TIP means, in order to receive preferential duty treatment provided under the trade agreement, yarns used in textile production in general need to be sourced either from the US or EU.  All 14 existing free trade agreements (FTA) in the United States adopt the yarn-forward RoO.

In comparison, in its position paper released in June 2015, the European Apparel and Textile Confederation (Euratex), which represents the EU textile and apparel industry, favors a so called “fabric forward” RoO in T-TIP instead of “yarn-forward”. Fabric-forward (or “double transformation”) in T-TIP means in order to receive preferential duty treatment provided under the trade agreement, fabrics used in apparel production in general need to be sourced either from the US or EU, but yarns used in textile production can be sourced from anywhere in the world.

US

Exploring data at the 4-digit NAICS code level can find that the United States remains a leading yarn producer. Value of U.S. yarn production (NAICS 3131) even exceeded fabric production (NAICS 3132) in 2014. This means: 1) U.S. has sufficient capacity of yarn production; 2) it will be in the financial interests of the U.S. textile industry to encourage more use of U.S.-made yarns in textile production in the T-TIP region (i.e. pushing the “yarn-forward” RoO).

eu textile production

EU yarn import

However, data at the 4-digit NACE R.2 code level suggests that EU(28) was short of €5,643 million local supply of yarns (NACE C1310) for its manufacturing of fabrics (NACE C1320) in 2013 (latest statistics available). This figure well matched with the value of €4,514 million yarns that EU (28) imported from outside the region that year. Among these yarn imports (SITC 651), over half came from China (22%), Turkey (19%) and India (13%), whereas only 5% came from the United States. Should the “yarn-forward” RoO is adopted in T-TIP, EU textile and apparel manufacturers may face a shortage of yarn supply or see an increase of their sourcing & production cost at least in the short run.

Sheng Lu

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Author: Sheng Lu

Professor @ University of Delaware

23 thoughts on “Why NCTO and Euratex Disagree on the Textile and Apparel Rules of Origin in T-TIP?”

  1. While T-TIP aims to create more demand for yarn made in US, it would also push the demand high which would potentially negate the low cost manufacturing benefits in Vietnam, Indonesia, Malaysia etc. Would American mills be able to meet the surge in yarn demand will remain a question. US could well achieve its goal to reduce dependency on China, but, Yarn Forward rule in T-TIP is going to be a tough choice. I suspect, there can be a short supply list appended to the agreement, with an option to source yarn form India to meet short/medium term demand.

    1. other than the economic factors presented above, the us textile industry insists yarn-forward in T-TIP also because it does not want to set a precedent for future FTAs, which could affect the western hemisphere supply chain. I agree that retailers/fashion brands would push for flexibilities/exceptions to the yarn-forward rule in T-TIP as they always do. But it could be harder to propose a very long short supply list because EU (28) has a relatively complete supply chain.

      1. True, but don’t forget that “double transformation” rule aims at taking into account also finishing operations – not only spinning and weaving. This can bring benefits to both EU and US manufacturers.

  2. Which US apparel companies are still producing within the US fulfilling the yarn-forward rule and are or will successfully export to the US ? Are there sufficient yarn and fabric capacities existing to fulfill the demand within the FTAs ? Is the “yarn-forward rule” really a rule to promote free trade or is she supporting protectionism by using rules which exporters to the US cannot fulfill ? Under TTIP the chance that European manufacturers will buy US yarns is low due to product and transportation costs and lead time effects.

  3. Which US apparel companies are still producing within the US fulfilling the yarn-forward rule and are or will successfully export to the EU under TTIP ? Are there sufficient yarn and fabric capacities existing to fulfill the demand within the FTAs ? Is the “yarn-forward rule” really a rule to promote free trade or is she supporting protectionism by using rules which exporters to the US cannot fulfill ? Under TTIP the chance that European manufacturers will buy US yarns is low due to product and transportation costs and lead time effects.

  4. Is a yarn-forward rule really beneficial to free trade or is it solely in the best interest of the US? It seems as thought a yarn-forward rule hurts European countries, as they would see the most improvements from a fabric-forward rule. How can they come to an agreement that would meet both of their needs?

    1. I agree with this statement made above. It seems as though a yarn forward rule may hurt European countries, because outsourcing yarns from other countries aside from those in the EU and the United States is a huge portion of the textile market. Although the United States needs to remain selfish to an extend in order to ensure the best outcome for the apparel industry of our own nation, at what point are we willing to step back and look at just how negative the impacts may be on other countries, both in terms of the EU and countries outside of the two?

  5. The Yarn Forward rule seems to benefit the U.S. but only at a cost for other countries. I agree that the rule will ultimately hurt European countries because the fashion industry looks at a large amount of countries to source from aside from yarn only made in the U.S. or the EU. It effects transportation, costs and lead times in a negative way. While it may benefit the U.S. textile industry, I think it is important to look at the bigger picture and look into the negative effects the yarn forward rule has on other countries and economies.

  6. After reading this article, it seems to me that Yarn Forward only helps the United States and in turn hurts other nations, such as European countries. What are other methods that could better benefit the U.S. and Europe? What are some ways the United States can give up the yarn-forward rules of origin? I am interested to see how and if this will change within the coming years.

  7. While the yarn forward movement would certainly be financially beneficial to the US, it could be detrimental to the EU as data suggests it would cause a shortage in yarn supply and increase in production costs in the short term. However, the alternative rule known as fabric forward which the EU hopes to pursue, is not in the Unites States best interest. Is there anyway both rules could be joint in some way so the benefits are fair to each country? For example, is it possible to enact a yarn forward rule for a given period of time and then a yarn fabric rule for a given period of time? Then both can be evaluated so that whichever rule provides the most benefits, as a whole, to both the US, EU, and other TPP members can be enacted long term? Or would something like this be too risky or create more complications in the apparel industry?

  8. While benefitting the US, I believe that the yarn forward RoO adopted by T-TIP will be hurtful and undesirable to the European countries. There will me a mass amount of loss in yarns and textile materials if countries are forced to source from either the US or the EU. As this rule stands, there will also be an increase in production and means for production… this seems like two things that the EU will need to adjust to. I feel as though this rule has been set in place to solely benefit the US, rather than to free trade. This causes Euratex to favor the fabric forward RoO, rather than the yarn forward RoO, which allows the T-TIP member countries to sourced from anywhere around the world. Do you think there is any possible intermediary agreement where the US and EU can both feel comfortable with sourcing rules? How long do you think it would take for member countries to come to an agreement?

    1. I completely agree with the questions Christina brought up. The article explains the importance of the yarn forward rule for the U.S and how all 14 free trade agreements in the U.S. utilize this concept. On the other hand, the EU apparel and textiles industry supports the fabric forward rule. The U.S. is also the leading yarn producer in the world which shows that the yarn forward rule is benefitting the U.S. mainly and not the other countries involved in the trade policy. Overall, I agree with Christina’s statements. The main question is whether or not there is a rule regarding yarn and fabric that could be a compromise between the two? This way, both the EU and the U.S. will flourish within their textile and apparel industries, rather than have one country come out on top and the other one suffer.

    2. you raised a great question! Actually I brought a similar question to David when he Skyped with us. Overall I think it is yes! First, to mediate the differences between textile manufacturers and importers, policymakers usually will allow some exceptions to the yarn-forward rule in free trade agreement, such as “Short Supply List” and “Tariff Preference Level” (you can check here for definitions of these terms: https://shenglufashion.wordpress.com/2014/03/16/textile-and-apparel-key-trade-terms/ Second, EU focuses on luxury apparel whereas US more cares about yarns and fabrics for apparel sold in the mass market. There should be some room for negotiation.

  9. I completely agree with all the comments made above. It is great that the United States can benefit from such “yarn-forward” rules in place. Yes, it is important to stay competitive but it also comes to the question of when is enough truly enough? If Europe has decreasing amounts of domestically made yarns only because of U.S. rules, then reevaluations need to be made. On the other hand, if Europe can adapt and are willing to adapt to a different set of rules to where they and the U.S. can benefit from U.S. yarn-forward rules, I see no harm in continuing down this path. We want to stay polite with alliances and there would be no morality in bringing down such a large ally solely for our gain. Global perspective is important, but also keep in mind that adjustments can and should be made if it creates a better end system.

    1. great comment! I agree that there is simple right or wrong answer here… but no doubt, setting right “rules of the game” matters for the textile and apparel industry

  10. The yarn-forward rules of origin have created opposing rules in many organizations. The U.S. mainly benefits from these rules of origin solely because the Western Hemisphere is the largest export market for yarns and fabrics. This is no surprise as the U.S. government has strict policies and initiatives. The yarn-forward adoption by the TPP is strongly encouraged by the AMTAC and RILA as it is a huge opportunity for the United States and other countries.

  11. I understand the yarn-forward rules of origin and understand how it benefits the United States, but I am wondering would the US be willing to give up such benefits in order to help out other nations? I am wondering if other nations adapt this rule, how would it affect us in terms of exporting?

  12. The yarn- forward means that the yarn used to form the fabric much originate in a NAFTA country. I think that this rule is beneficial to the United States, but is not beneficial to the EU because it would then cause a shortage of yarn supply and increase in productions costs in the short term. I feel like this rule is only benefiting the United States, so how is it helping the other nations that are a part of this rule?

  13. I like this article because it explains the importance of the yarn forward rule for the U.S and how all 14 free trade agreements in the U.S. utilize this concept. However, since the U.S is the leading producer of yarn in the world, it clearly states that yarn forward is doing something right. Although it is incredibly beneficial to the U.S, there is an argument for it only helping the US and not the European countries. How can that be changed?

    1. good point!! I would say it depends. For example, under NAFTA and CAFTA, Mexico and countries in Central America also support the “yarn-forward” rules of origin because this can help them compete with apparel exporters from Asia. And business interests shape the position on trade policy. Maybe one day when the US textile industry reaches a certain development stage, they will change their mind as well… remember there is an article in the reading package (page3) about the changing view of the US textile industry on trade?

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