Overview

When the North American Free Trade Agreement (NAFTA) was negotiated more than two decades ago, textiles and apparel were among the industrial sectors most sensitive to the agreement's terms. NAFTA, which was implemented on January 1, 1994, has encouraged the integration of textile and apparel production in the United States, Canada, and Mexico. For example, under NAFTA's yarn-forward rule of origin, textiles and apparel benefit from tariff-free treatment in all three countries if the production of yarn, fabric, and apparel, with some exceptions, is done within North America. The United States maintains a bilateral trade surplus in yarns and fabrics with its NAFTA partners. In 2016, the United States had a $4.1 billion surplus in yarns and fabrics and a positive balance of around $720 million in made-up textile products (such as home textiles and furnishings) with Canada and Mexico. U.S. exports of yarns and fabrics shipped to Mexico and Canada were valued at close to $6 billion last year. In apparel, the United States had a trade surplus with Canada of $1.4 billion and a trade deficit with Mexico of $2.7 billion in 2016. On May 18, 2017, the Trump Administration notified Congress of its intent to renegotiate the agreement. In July 2017, the Administration announced specific goals for textiles and apparel among its renegotiating objectives, which include improving competitive opportunities for U.S. textile and apparel products, but also taking into account U.S. import sensitivities. Also germane to textiles and apparel are several other renegotiating objectives, such as enhancing customs enforcement to prevent unlawful transshipment of these goods from outside the region and ensuring that requirements for use of domestic textiles and apparel in U.S. government purchases primarily benefit producers located in the United States. NAFTA renegotiation started in August 2017. There is widespread support for continuation of the agreement among U.S. textile and apparel producers, although there are significant differences of opinion with respect to certain provisions. In particular, U.S. textile manufacturers generally favor eliminating all exceptions to NAFTA's yarn-forward rule, whereas U.S. retailers and apparel groups oppose tightening the rule. If the United States were to exit NAFTA, imports of textiles from Mexico and Canada would face U.S. tariffs as high as 20%, and imports of apparel would have tariff rates of up to 32%. U.S. exports of textiles and apparel could face higher tariff rates entering Canada and Mexico. One possibility is that U.S. withdrawal from NAFTA could lead U.S. retailers and apparel brands to source more of their goods from Asia, which could reduce demand for U.S.-made yarns and fabrics within the NAFTA region.

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