USMCA Takes Effect - What It Means For Textiles and Apparel

By SPESA

Today, July 1st, officially marks the implementation of the new United States-Mexico-Canada Agreement (USMCA) meant to support “mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America,” according to the U.S. Government. The new agreement replaces and aims to modernize the former North American Free Trade Agreement (NAFTA), which formalized free trade among the three countries in 1994.


Note: the new trade agreement is referred to as CUSMA (Canada-United States-Mexico Agreement) in Canada and T-MEC (El Tratado entre México, Estados Unidos y Canadá) in Mexico.


Skipping over the 30-year ongoing argument of whether NAFTA was “perhaps the worst trade deal ever made,” as U.S. President Donald Trump has repeatedly stated or “integral to the continued growth of the American economy, and those of Canada and Mexico,” as proffered by the Embassy of Canada, the agreement has undeniably made a significant impact on all three countries and USMCA will as well.


That being said, the financial implications of USMCA will be less noticeable than that of NAFTA as the latter agreement already eliminated tariffs in most sectors. In a 2019 report, the U.S. International Trade Commission (USITC) predicted that the overall impact to the U.S. GDP would likely be positive, but moderate, estimating that increases to the U.S. GDP would be on par with estimates if NAFTA remained in place. However, the agency predicted USMCA would increase U.S. trade with both USMCA partners, by about 5%, and with the rest of the world by a smaller percentage. As a result, U.S. trade with Mexico and Canada would represent a larger share of total U.S. trade.


The USITC report also indicated that U.S. manufacturing exports would experience the largest percentage increase from USMCA, and, while the new agreement would have a positive impact on employment in agriculture, services, and manufacturing, the greatest increase would be found in the manufacturing sector. Across the board, USITC estimated U.S. workers would see increases in wages of approximately 0.27% on average.


A similar economic impact report produced by the Canadian government in February 2020 estimated the implementation of the agreement would secure GDP gains of $6.8 billion CAD (US$5.1 billion) for Canada, which would have been lost if the United States withdrew from NAFTA without an alternative agreement in place. The report also estimates the new agreement secures 38,000 Canadian jobs.


The most significant developments to be found in USMCA are related not to tariffs, but to rule changes, including liberalizing specific non-tariff barriers to trade and strengthening regulatory practices. In regard to apparel and textiles, USMCA eases the requirements for duty-free treatment for certain products while tightening the requirements for others.


Among the key industry changes, USMCA:

  • Allows manufacturers to use some textile inputs not generally available in North America (such as rayon fibers and visible lining fabric).

  • Modifies the chapter rules for goods classified in HTS chapters 61 and 62.

  • Increases the de minimis percentage of non-originating inputs allowed in qualifying goods from 7% to 10%.

  • Requires sewing thread, pocketing fabric, narrow elastic bands, and coated fabric used in the production of apparel be made in North America in order for those products to be treated as originating.

  • Establishes a separate textiles chapter, including textile-specific customs enforcement language.

  • Reduces some tariff preference levels for U.S. imports from Canada and Mexico while substantially increasing tariff preference levels for U.S. exports to Canada of apparel and other finished textile goods.

Support for USMCA can be found across the industry, even by groups that don’t always agree when it comes to trade, such as the National Council of Textile Organizations (NCTO) and the American Apparel & Footwear Association (AAFA). NCTO specifically highlighted what it sees as improvements in creating the separate textiles chapter, establishing stronger rules of origin for sewing threads, etc., and fixing the Kissell Amendment Buy American loophole. For its part, AAFA noted USMCA’s power to ensure stability in the North American supply chain and provide businesses with the ability to invest confidently in the region.


Stability and predictability created by the new agreement should also help the Mexican textile and apparel industries rebound after seeing a decline in the past two years amid uncertainty surrounding the negotiations. Former U.S. Ambassador to Mexico, Antonio Garza, noted that with USMCA “Mexico has a stronger investment framework and more transparency, clarity, and protections for businesses operating in the country.” The agreement could also help improve Mexico’s labor rights and practices.


Canada’s interest in renegotiating NAFTA — which was seen as a generally positive economic driver for the country — was largely related to threats from the United States to withdraw from NAFTA along with the imposition of U.S. tariffs on steel and aluminum imports and U.S. threats to impose tariffs on automobiles and auto parts. After negotiations were finalized, Global Affairs Canada stated that, while the new agreement contains some offsets, specifically those related to rules of origin for automobiles which may increase the cost of production, overall it “preserves the important benefits of NAFTA, modernizes the agreement’s disciplines, and makes it easier for Canadian companies to benefit from preferential access to the U.S and Mexican markets.”


Only being a few hours old at this point, the tangible results of USMCA are yet to be seen. However, there is no doubt its impact will be debated as hotly and extensively as was its predecessor’s.

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