What Will Happen to the U.S. Textile and Apparel Industry if NAFTA Is Gone?

According to the New York Times, President Trump is likely to sign an executive action that would begin the process of withdrawing the United States from the North American Free Trade Agreement (NAFTA).

Since its taking effect in 1995, NAFTA, a trade deal between the United States, Mexico, and Canada, has raised heated debate regarding its impact on the U.S. economy. President Trump has repeatedly derided NAFTA, describing it as “very, very bad” for U.S. companies and workers, and he promised during his campaign that he would remove the United States from the trade agreement if he could not negotiate improvements.

The U.S. textile and apparel (T&A) industry is a critical stakeholder of the potential policy change, because of its deep involvement in the regional T&A supply chain established by the NAFTA. Particularly, over the past decades, trade creation effect of the NAFTA has significantly facilitated the formation of a regional T&A supply chain among its members. Within this supply chain, the United States typically exports textiles to Mexico, which turns imported yarns and fabrics into apparel and then exports finished apparel back to the United and Canada for consumption.

So what will happen to the U.S. T&A industry if NAFTA no longer exists? Here is what I find*:

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First, results show that ending the NAFTA will significantly hurt U.S. textile exports. Specifically, the annual U.S. textile exports to Mexico and Canada will sharply decline by $2,081 million (down 47.7%) and $351 million (down 14%) respectively compared to the base year level in 2015.Although U.S. textile exports to other members of the Central America Free Trade Agreement (CAFTA-DR), will slightly increase by $42 million (up 1.5%), the potential gains will be far less than the loss of exports to the NAFTA region.

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Second, results show that ending the NAFTA will significantly reduce U.S. apparel imports from the NAFTA region. Specifically, annual U.S. apparel imports from Mexico and Canada will sharply decrease by $1,610 million (down 45.3%) and $916 million (down 154.2%) respectively compared to the base year level in 2015 (H2 is supported). However, ending the NAFTA would do little to curb the total U.S. apparel imports, largely because U.S. companies will simply switch to importing more apparel from other suppliers such as China and Vietnam.

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Third, ending NAFTA will further undercut textile and apparel manufacturing in the United States rather than bring back “Made in the USA.” Specifically, annual U.S. textile and apparel manufacturing will decline by $1,923 million (down 12.8%) and $308 million (down 3.0%) respectively compared to the base year level in 2015 (H3 is supported). Weaker demand from the NAFTA region is the primary reason why U.S. T&A manufacturing will suffer a decline.

These findings have several important implications. On the one hand, the results suggest that the U.S. T&A will be a big loser if the NAFTA no longer exists. Particularly, ending the agreement will put the regional T&A supply chain in jeopardy and make the U.S. textile industry lose its single largest export market—Mexico. On the other hand, findings of the study confirm that in an almost perfectly competitive market like apparel, raising tariff rate is bound to result in trade diversion. With so many alternative suppliers out there, understandably, ending the NAFTA will NOT increase demand for T&A “Made in the USA,” nor create more manufacturing jobs in the sector. Rather, Asian textile and apparel suppliers will take away market shares from Mexico and ironically benefit most from NAFTA’s dismantlement.

*Note: The study is based on the computable general equilibrium (CGE) model developed by the Global Trade Analysis Project (GTAP). Data of the analysis came from the latest GTAP9 database, which includes trade and production data of 57 sectors in 140 countries in 2015 as the base year. For the purpose of the study, we assume that if NAFTA no longer exists, the tariff rate applied for T&A traded between NAFTA members will increase from zero to the normal duty rate (i.e. the Most-Favored-Nation duty rate) in respective countries.

by Sheng Lu

Gail Strickler, Former Assistant US Trade Representative for Textiles, on Trump’s Trade Policy

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Gail Strickler, Assistant U.S. Trade Representative for Textiles (2009-2015), who negotiated the textile chapter under the Trans-Pacific Partnership (TPP), visited UD on April 13 and delivered a public lecture on The Global Apparel Industry – Style and Substance. The event is part of the Fashion and Diplomacy Lecture Series sponsored by the Institute for Global Studies and the Department of Fashion and Apparel Studies.

During the talk, Gail made a few comments regarding trade policy in the Trump administration:

First, Gail believes that the existing U.S. free trade agreements (FTAs), trade preference programs (PTAs) and the U.S. commitments at the World Trade Organization (WTO) are unlikely to be undone by President Trump because retaliatory actions from other trading partners would be inevitable.

Second, regarding the North American Free Trade Agreement (NAFTA), Gail doesn’t think the proposed renegotiation would threaten the benefits presently enjoyed by the U.S. textile and apparel industry. Gail also thinks the Central America Free Trade Agreement (CAFTA-DR) is a lifeline for the U.S. domestic textile manufacturing sector. Notably, NAFTA and CAFTA-DR together account for almost 70% of U.S. yarn and fabric exports.

Third, as observed by Gail, Wilbur Ross, the Commerce Secretary, has been given an expanded role in trade in the Trump Administration. Gail believes Ross’s appointment is likely to bode well for NAFTA and CAFTA-DR on textiles because Ross until recently owned the International Textile Group (ITG), which has significant investments in Mexico and relies heavily on CAFTA-DR for its textile sales.

However, Gail doesn’t think concentrating on trade deficits to define trade policy is a very “good method” of navigating the trade world. Interesting enough, last time when the U.S. trade deficit significantly shrank was during the 2008 financial crisis.  

Gail is also a strong advocator of sustainability in the textile and apparel sector. She believes that trade programs can play a vital role in encouraging sustainable development, improving labor practices and facilitating sustainable regional supply chains. According to Gail, powerful the labor provisions in trade programs can be if strong incentives are coupled with a credible threat of rapid enforcement – little evidence of effectiveness if only one (or fewer) of these conditions is met. However, comparing with enforcing labor provisions, Gail finds promoting and enforcing environmental sustainability standards through trade agreements is much more complex in the textile and apparel sector and will require creativity and strong participation from private sectors and consumers.

Before the public lecture, Gail visited FASH455 and had a special discussion session with students on topics ranging from the textile and apparel rules of origin in TPP, NAFTA renegotiation, AGOA renewal and state of the U.S. textile and apparel industry.

 

Sourcing Trends of U.S. Fashion Companies: Discussion Questions from FASH455

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The following questions are proposed by students in FASH455 (Spring 2017) based on the 2016 U.S. Fashion Industry Benchmarking Study. Please feel free to join the online discussion (please mention the question # in your comment).

#1 With many bricks and mortar stores closing and profits decreasing in many of these stores, why do you think that 92% of respondents are optimistic or somewhat optimistic about the fashion industry over the next five years? Do you believe that there is a technological advance or a change in organizational structure that is coming in the future that is keeping them hopeful?

#2 U.S. fashion companies today have a very diversified sourcing base. For example, overall 52% of respondents report sourcing from more than ten different countries. However, it seems quite challenging to ensure all the factories they are sourcing from are up to the company’s standards. Do you think with increased pressure to become more sustainable as well as have ethical working conditions across their supply chain, U.S. fashion companies will source from fewer countries in the future?

#3 According to the survey, controlling sourcing and production cost remains one of the top business challenges for U.S. fashion companies. Does it imply that it is unrealistic to expect companies to make commitments to sustainability and social responsibility at the sacrifice of their profit?

#4 U.S. apparel imports from Vietnam has been growing rapidly in recent years. Why do you think Vietnam has been able to expand as a garment exporter so quickly, outperforming most of its Asian competitors?

#5 As optimism continues to create new demand for human talent, more specifically for fashion designers, buyers and merchandisers, sourcing specialists, and social compliance specialists how can the fashion department at the University of Delaware further prepare us to excel at these positions? Any specific suggestions?

#6 What other sourcing and trade topics do you think the benchmarking study could include?

State of the U.S. Textile and Apparel Industry: Output, Employment and Trade (Updated March 2017)

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The size of the U.S. textile and apparel industry has significantly shrunk over the past decades. However, U.S. textile manufacturing is gradually coming back. Value added of U.S. textile manufacturing reached $17.98 billion in 2015, which was the highest level since 2009.

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Nevertheless, the share of U.S. textile and apparel manufacturing in the U.S. Gross Domestic Product (GDP) dropped to only 0.16% in 2015 from 0.57% in 1998.

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The U.S. textile and apparel manufacturing is also changing in nature. For example, textiles had accounted for nearly 70% of the total output of the U.S. textile and apparel industry as of 2015, up from 58% in 1998. Meanwhile, clothing had only accounted for 12% of the total U.S. fiber production by 2012, suggesting non-apparel textile products, such as industrial textiles and home textiles have become more important part of the industry.

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Manufacturing jobs are NOT coming back to the U.S. textile and apparel industry. From January 2015 to December 2016, U.S. textile manufacturing (NAICS 313 and 314) and apparel manufacturing (NAICS 315) lost 8,300 and 9,200 jobs respectively. However, improved productivity is one important factor behind the job losses.

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U.S. remains a net textile exporter and a net apparel importer. However, the U.S. trade surplus in textiles significantly dropped to only $68 million in 2016 from $347 million a year earlier. More U.S.-made textiles are now exported than a decade ago. Meanwhile, the U.S. trade deficit in apparel reached $81,754 million in 2016, which was slightly smaller than $86,311 million a year earlier.  

Sheng Lu

Additional readings:  The Pattern of U.S. Textile and Apparel Imports

Discussion questions:

#1 Is the state of the U.S. textile and apparel industry consistent with the stage of development theory? Please specify your answer.

#2 Based on the statistics, do you think textile and apparel “Made in the USA” have a future? Please explain.

#3 Based on the statistics, what is the impact of trade on the development of the U.S. textile and apparel industry: positive, negative, mixed or you need more information (please specify) to evaluate?

#4 Overall, do you think the U.S. textile and apparel industry is in good shape? Why or why not?

Are US Textile and Apparel Imports Using Free Trade Agreements? (Updated February 2017)

Free trade agreements (FTAs) are arrangement among two or more countries under which they agree to eliminate tariffs and non-tariff (NTB) barriers on trade among themselves (Cooper, 2014). Theoretically, companies shall be interested in increasing imports from FTA regions because of the duty free treatment (i.e. trade creation effect). Particularly not paying import tariff duty can be a great cost advantage for textile and apparel (T&A) companies given the fact that the average US import tariff rate was still as high as 8% for textiles and 11.6% for apparel in 2016 (WTO, 2017).

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Despite the potential benefit of using FTAs, data from the Office of Textiles and Apparel show that 85.7% of US T&A imports came from non-FTA regions in 2016. Interesting enough, although more FTAs have taken effect in the United States, T&A imported under FTA as a percent of total T&A imports dropped from 15.1% in 2008 to 14.3% in 2016.

Among the FTAs in force, the North American Free Trade Agreement (NAFTA) and the Dominican-Republic-Central America Free Trade Agreement (CAFTA-DR) altogether accounted for 75.9% of the value of total U.S. T&A imports under FTAs in 2016.

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Statistics further reveal that sometimes companies did not claim duty free benefits of FTAs even though they imported T&A from the FTA region. For example, in 2016 about 29.9% of U.S. T&A imports from South Korea, 24.3% from CAFTA-DR and 16.3% from NAFTA and 12.9% from Columbia did not enjoy the duty free treatment granted by the respective FTAs.

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Some industry experts say the complex T&A rules of origin is a major factor why US T&A companies are not using FTAs enough. According to the Office of Textiles and Apparel (OTEXA), there are more than 20 different tariff lines dealing with various T&A rule of origin situations under respective FTAs.

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Additionally, U.S. T&A importers seem to use the “short supply list” mechanism–an exception to the yarn forward rules of origin under FTAs, more actively. For example, in 2016 around 2.4% of US T&A imports under FTAs took advantage of the “short supply list” mechanism, increased from only 1.2% in 2008. Similarly, a record high of 6.2% of U.S. T&A imports under the CAFTA-DR used the short supply list in 2016.

Sheng Lu

International Trade, Globalization and the U.S. Economy: Discussion Questions Proposed by FASH455 Students

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The following questions are from students in FASH455 (Spring 2017). Please feel free to leave your comments and engage in our online discussion. Please mention the question # in your comment.

#1 Based on the readings, how do you see the relationship between “Made in the USA” and international trade today?

#2 What is your evaluation of President Trump’s proposal to levy 45% punitive tariffs on Chinese imports? Will the proposal bring back more jobs to the United States?

#3 It is said that globalization creates both winners and losers. From the readings, why do you agree or disagree with the statement?

#4 One of Donald Trump’s main campaign points was that he was going to bring jobs back to America and push for companies to move their factories out of countries such as Mexico and China. What role can international trade play in this effort?

#5 As we mentioned in the class, international trade is more than a purely economic issue. So what are the other non-economic impacts of trade? Can you provide any specific examples from the readings?

#6 As a result of globalization and trade, nature of the labor market is quickly changing, which has led to many workers without a college degree lost their jobs. In a market economy like the United States, is the government responsible for reeducating these workers or does the government bear no major responsibility?

#7 Is creating jobs in the United States a major responsibility for U.S. companies like Apple and Nike in today’s global economy? Why or why not?

How Americans Knew about Textile and Apparel Trade: New Survey Results

The following results are preliminary findings from the Cooperative Congressional Election Study (CCES) 2016 survey. The survey was administrated by YouGov/Polimetrix and conducted from September to October 2016.

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Acknowledgement:

Thanks to the University of Delaware Office of the Provost, Social Science Data Analytics Initiative, and Center for Political Communication in support of the data collection. For questions about the data, please contact Dr. Sheng Lu (shenglu@udel.edu).