New North American trade deal has minor impacts on textiles, apparel and agriculture, says Baker Institute expert

Jeff Falk
713-348-6775
jfalk@rice.edu

New North American trade deal has minor impacts on textiles, apparel and agriculture, says Baker Institute expert

HOUSTON – (Oct. 23, 2019) – Changes coming to the textiles, apparel and agriculture sectors under the United States-Mexico-Canada Agreement (USMCA) are relatively minor, although they reflect somewhat greater protectionism, particularly with textiles and apparel, according to a report from the Center for the United States and Mexico at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

“In terms of the agriculture industry, the USMCA modestly liberalizes U.S. dairy market access to Canada, and U.S. wine growers receive greater access to Canadian markets,” wrote report author David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute.

“The United States-Mexico-Canada Agreement: Textiles, Apparel and Agriculture” summarizes the most significant related provisions of the USMCA and compares them with its predecessor, the North American Free Trade Agreement (NAFTA). It also addresses agricultural biotechnology and geographical indications on agricultural products.

The USMCA has been signed by the three parties but not yet ratified by the U.S. and Canada.

“Wine and cheese exporters to Mexico also receive significant protection from limitations on the use of common geographical indications in Mexico as a result of Mexican negotiations with the European Union on a revised free trade agreement,” Gantz wrote.

In the USMCA, Mexican fruit and vegetable producers also benefit from beating back U.S. efforts to make it easier to restrict such imports under U.S. dumping laws, although the benefits for tomato exporters were largely nullified by subsequent Commerce Department restrictions, Gantz said.

For North American agricultural producers, particularly those in the U.S. and Mexico, the provisions of the USMCA are overshadowed, at least through 2020, by the risk that the Trump administration will impose penalty tariffs on Mexican imports, Gantz said.

“This risk was reflected in the administration’s threat to impose additional tariffs on all imports from Mexico to force greater cooperation in stemming the flow of illegal immigrants from Central America to the U.S.,” he wrote. “While the tariffs have not been applied as of this writing, they remain a risk at least in the short term. This risk has been mitigated both by Mexico, which has responded positively to U.S. pressures to more actively discourage Central American immigration, as well as the belief that further U.S. sanctions could jeopardize U.S. congressional approval of the USMCA. Similarly, the USMCA by no means insulates Mexican produce suppliers from ‘unfair’ trade actions brought by the U.S.”

“In agriculture, the major takeaway is likely a broad feeling of relief for U.S. and Mexican traders of agricultural products,” Gantz said. “In terms of the more severe tomato import restrictions, it would be inaccurate to blame the USMCA. One simply needs to understand that a) about half of the tomatoes grown in the U.S. are grown in Florida, and b) Florida’s 29 electoral votes are important in the upcoming 2020 presidential election.”

Despite these tomato restrictions, the truly free agricultural trade that is vital to all three NAFTA parties, and to the interests of their consumers, was largely untouched in the USMCA, Gantz said. “While some Canadian restrictions remain, U.S. dairy farmers modestly increased access to the highly regulated Canadian market for milk solids,” he wrote. “It thus seems highly likely that under the USMCA, as under NAFTA, Canada and Mexico remain among the largest markets for U.S. agricultural exports. Given the threats to continued U.S. agricultural exports to China as a result of the current trade war, the USMCA results provide one of the few bright spots for American agriculture today.”

Textile and apparel ‘most protected’

Despite the relatively small volume of apparel production in the U.S. (constituting about 3% of the U.S. market), the textile and apparel industry remains one of the most protected sectors, along with steel, Gantz said.

“The textile and apparel sector received extensive protection under NAFTA, with a ‘yarn forward’ rule that stated in order to be treated as originating in North America and receive tariff-free trading benefits, the formation of yarn, weaving or knitting of fabric, and cutting and sewing of a garment must occur in North America,” he wrote. “Typically, this meant that apparel and other textile goods used fabric produced in the U.S., while the sewing and other required steps for garment and textile production took place in Mexico.”

Protections for the U.S. textile industry increased under the USMCA, Gantz said. “In the USMCA, reliance on low-cost fabrics from Asia is discouraged, and duties on non-originating yarn and fabric (‘tariff preferential levels’ or TPLs) are limited to 10% by volume of North American garments to qualify for duty-free treatment,” Gantz wrote. “In addition, other changes under the USMCA require that 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 and thus subject to duty-free treatment.”

In addition to the substantive restrictions on the use of non-originating fabrics, additional record-keeping requirements mandated by the USMCA are likely to further increase the costs and complexities of apparel manufacturing in North America, Gantz said. “Spokespersons for the industry have suggested that such increased costs are likely to discourage North American producers from taking advantage of the potential tariff benefits of the USMCA, leading to greater outsourcing of apparel manufacturing to lower wage countries in Asia,” Gantz wrote. “This would lead to a potential reduction in sales of fabrics and thread in the U.S.”

Given that about half of all U.S.-manufactured yarn and fabric is exported to NAFTA countries for apparel manufacturing, demand for these products would decrease if the production of apparel decreases further in the region. “Of course, U.S. producers of thread, coated fabrics and the like applauded the USMCA changes because of the positive impact they may have on U.S. sales of such products,” he wrote.

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For more information or to schedule an interview with Gantz, contact Jeff Falk, associate director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.

Related materials:

Report: bakerinstitute.org/media/files/files/29e60e2b/bi-report-102119-mex-usmca-6.pdf

Gantz bio: bakerinstitute.org/experts/david-a-gantz

Follow the Baker Institute via Twitter @BakerInstitute.

Follow the Baker Institute’s Center for the United States and Mexico via Twitter @BakerCtrUSMEX.

Follow Rice News and Media Relations via Twitter @RiceUNews.

Founded in 1993, Rice University’s Baker Institute ranks among the top three university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blog.bakerinstitute.org.