NCTO Advisory to the Trade — March 28, 2019 The USMCA, Side-by-Side Comparison with NAFTA

The USMCA, Side-by-Side Comparison with NAFTA

Background

In talks launched in August 2017, the Trump administration initiated a renegotiation of the North American Free Trade Agreement (NAFTA) with the aim of improving the deal to better serve American manufacturing interests. NCTO supported the renegotiation effort as a means to modernize the 24-year-old agreement and make common sense updates designed to bring more employment, production, and investment back to U.S. manufacturing sectors such as textiles. Specifically, NCTO advocated for the following improvements as part of the NAFTA renewal negotiation.

Maintain yarn forward as the fundament rule-of-origin for our sector
Eliminate tariff preference levels (TPLs) on apparel, non-apparel sewn products, fabrics & yarn
Require use of NAFTA-origin components beyond the “essential character” of the fabric – i.e. sewing thread, pocketing & narrow elastics
Strengthen buy American laws for Dept. of Homeland Security textiles & clothing by closing the Kissell Amendment loophole for Canada & Mexico
Strengthen customs enforcement

We are pleased that the majority of our stated objectives were accomplished in the agreement reached between the parties late last year under what has come to be known as the United States-Mexico-Canada Agreement (USMCA). Especially the fact that the basic yarn forward rule was preserved as the origin requirement for duty-free treatment.

What Does This Means for the U.S. Textile Industry?

The USMCA was signed by all three countries on November 30, 2018. Before it can take effect the legislative bodies of each of the three nations must enact it into law. In anticipation of USMCA going into effect, a number of NCTO member companies have inquired how the new agreement may affect their current regional manufacturing and trading arrangements. The side-by-side presentation below addresses some of the topics of most direct interest to U.S. textile manufactures. It is not intended to be an exhaustive analysis of all the changes from NAFTA to USMCA.

1. General Rules of Origin

NAFTA	USMCA
1. The rule of origin for textile and apparel products is “yarn forward” meaning yarn must be extruded or spun in the region and all subsequent processes to the finished article must be done in the region. The yarn forward rule applies to only the component that determines the tariff classification of the finished good. This is also known as the “essential character” rule.	1. The yarn forward rule is unchanged, as it relates to the essential character fabric.
2. Certain visible linings (as defined in the agreement) must originate in the region and are under a fabric forward rule.	2. The visible lining rule is eliminated. Linings may be sourced outside the region
3. Narrow elastic fabric in apparel (Chapter 61 & 62) is exempt from the rules of origin	3. Effective 18 months from the date of entry into force of the agreement, apparel containing narrow elastic fabrics of subheading 5806.20 or heading 60.02 is originating only if such fabrics are both formed and finished from yarn in the territory of one or more of the Parties
4. Sewing thread used in the assembly of apparel (Chapter 61 & 62) is exempt from the rules of origin.	4. Effective 12 months from the date of entry into force of the agreement, apparel containing sewing thread of heading 52.04, 54.01 or 55.08, or yarn of heading 54.02 used as sewing thread shall be considered originating only if such sewing thread is both formed and finished in the territory of one or more of the Parties.
5. Pocketing fabric in apparel (Chapter 61 & 62) is exempt from the rules of origin.	5. Effective 18 months from the date of entry into force of the agreement, if apparel contains a pocket or pockets, the pocket bag fabric must be formed and finished in the territory of one or more of the Parties from yarn wholly formed in one or more of the Parties. NOTE, that for Blue Jeans the transition period is 30 months.
6. Coated or laminated fabrics used in the assembly of textile made-up articles (Chapter 63) are exempt from the rules of origin. Note that this exemption related to only fabrics that meats the tariff schedule definition of coated or laminated.	6. Requires coated fabrics classified under heading 5903 to originate in one of the parties on a fabric-forward basis for Chapter 63 articles, with the exception of the following headings and subheadings: 6305 – Bags, 6306.12 – Tarpaulins, awnings, and sunblinds of synthetic fibers, 6306.22 – Tents of synthetic fibers, and Miscellaneous made-up articles of subheading 6307.90 that are not surgical towels or national flags.

2. Tariff Preference Levels (TPLs)

NAFTA	USMCA
Cotton and MMF Spun Yarn
Canada to U.S., 11.8 million kgs Mexico to U.S., 1 million kgs	Canada to U.S. 6 million kg (49% reduction) with 3 million kg sub-limits for acrylic and non-acrylic yarns eachMexico to U.S. 700,000 kg (30% reduction)
Cotton and MMF Fabric and Made-up TPL
Canada to U.S., 38.6 million sme knit Canada to U.S., 38.6 million sme wovenMexico to U.S. 18 million sme knit Mexico to U.S. 6 million sme woven	Canada to U.S. 38.6 sme knit Canada to U.S. 38.6 sme woven (both unchanged)Mexico to U.S. 18 sme knit (unchanged) Mexico to U.S. 4.8 sme woven (20% reduction)
Cotton and MMF Apparel TPL
Canada to U.S. 88.3 million sme Mexico to U.S. 45 million sme	Canada to U.S. 40 million sme (55% reduction)Mexico to U.S. 45 million sme (unchanged)
Wool Apparel TPL
Canada to U.S. 5.3 million sme with a 5 million sme sub-limit for suitsMexico to U.S. 1.5 million sme	Canada to U.S. 4 million sme (25% reduction) with a 4 million sme sub-limit for suits (24% reduction)Mexico to U.S. 1.5 million sme (unchanged)

3. De Minimis: For textile and apparel goods classified in Chapters 50 through 63, the de minimis amount for non-qualifying fibers and yarns was increased from 7% under NAFTA to 10% under the USMCA by weight of the component of the good that determines its tariff classification. Within the overall 10% cap, the total weight of elastomeric content may not exceed 7%.

4. Other Changes

(a) The three countries agreed to amend the rules of origin under the USMCA to allow for the use of viscose rayon staple and filament and yarns of jute and hemp from outside the USMCA region due to lack of availability from North American producers.

(b) USMCA closed the Kissell Amendment loophole allowing textiles and clothing purchased by the Transportation Security Administration (TSA) to be made in Mexico. Under the new agreement, these goods will have to be assembled in the United States with 100% U.S.-made inputs, including all fiber, yarn, and fabric.