Congress Urges Preservation of CAFTA-DR’s Yarn Forward Rule of Origin
A bipartisan group of legislators have come together in support of the preservation of the rules of origin that govern textile and apparel trade.
Thirty-eight congressional lawmakers co-signed a letter to Commerce Secretary Gina Raimondo last week, urging her to maintain the yarn forward rule of origin that ensures that each step of garment production, from yarn spinning onward, must take place in a free-trade country.
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Specifically, they are pushing back against lobbying from importers doing business under the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), who assert that their growth has been inhibited by the unavailability of certain fibers and materials in their countries of business. Officials on both sides of the aisle believe that amending the rules of origin would open a “backdoor entrance” to non-free-trade countries, allowing them to access the trade agreement’s benefits while asserting undue influence over trade taking place between the U.S. and its partners.
“The rules of origin governing textile and apparel production and trade under CAFTA-DR have clear benefits and have strengthened our regional supply chains by fostering a stable business environment where American and regional manufacturers can thrive,” the letter said. “We strongly urge you to continue following the longstanding CAFTA-DR short supply list process, which requires requestors to submit public petitions for review, and reject requests to circumvent it.”
The current FTA system encourages importers to apply for limited exceptions to the yarn-forward rule. The process allows for the sourcing of certain materials and inputs from third parties, while still maintaining FTA benefits for finished goods. According to the lawmakers’ letter, CAFTA-DR’s short supply list is “considerably more expansive” than any other U.S. free-trade agreement, with 150 items approved for use.
“Bypassing the existing short supply petition and review system could result in non-signatory nations gaining a backdoor entrance to CAFTA-DR benefits. We fear that the People’s Republic of China (PRC), as the dominant global supplier of yarns and fabrics, would be the major winner under this proposal,” they wrote. The letter was sent in advance of the Senate Finance Subcommittee hearing titled, “Economic Cooperation for a Stronger and More Resilient Western Hemisphere,” which took place Tuesday. Lawmakers spoke to the importance of preserving and strengthening free-trade agreements with partners in the face of growing influence from China.
“The CAFTA-DR trade agreement’s textile rules are working and have been an incredible success in the 18-plus years since it took effect,” National Council of Textile Organizations (NCTO) CEO and president Kim Glas told Sourcing Journal, noting that it is responsible for “fostering a vibrant textile and apparel co-production chain that facilitates $15.1 billion in two-way trade and supports more than one million workers.”
According to Glas, “Weakening this trade agreement’s textile rules through so-called ‘flexibilities’”—like expanding the short supply list, as a certain group of importers have proposed—”would jeopardize more than $2 billion in new investments and open the door to a flood of cheap Chinese inputs.” The impact could be grim for both U.S. and Central American textile companies and their thousands of workers, she believes, and it could damage the industry of U.S. trading partners throughout the hemisphere. The trade agreement has thus far meaningfully supported cross-purposes with U.S. initiatives around nearshoring and onshoring “aimed at addressing the root causes of outward migration from Central America,” she added.
Changes would have the effect of “destabilizing the integrated CAFTA-DR co-production chain,” all while rewarding “China’s aggressive, predatory trade practices that have afforded the country its dominant position” as a global sourcing superpower.
In reality, a vocal contingent made up of a “select few importers” is pushing to change the CAFTA-DR short supply process, Glas said. “In the event that there is not availability among the signatory countries for a specific item, we encourage the use of the CAFTA-DR short supply mechanism which provides a transparent, negotiated, quick-response process for adding products that are determined to be unavailable,” but there have been “very few petitions actually filed for review.”
“As a result, one can only speculate whether the main concern around short supply is that of product availability or that of unit price,” she added.
There is a significant amount of congressional support for maintaining the rules as they are. “Preserving the integrity and intent of our trade agreements is essential to protecting American jobs and American manufacturing,” said Rep. Bill Pascrell, Jr., following the congressional letter’s public release. “If we fail to adhere to the letter and intent of the agreements with our international partners, a trade deal isn’t worth the paper it’s printed on.”
U.S. Trade Representative Katherine Tai voiced her desire to maintain the current CAFTA-DR short supply list procedure at NCTO’s annual meeting in late March. “Make no mistake—we know how important the yarn-forward rules of origin are for the success of our trade partnership with the region,” Tai said at the time. “Those rules provide the certainty that companies need to invest in and expand operations, which also creates good-paying jobs both in the United States and in Central America.”
Glas said the CAFTA-DR agreement has yielded a multitude of fruitful relationships between U.S. and Central American suppliers, creating a strong co-production chain with “enormous capacity to produce a wide variety of fibers, yarns, and fabrics.” The hemisphere is now engaged in developing diverse product offerings at “tremendous capacity”—like more than 8,000 different items for the military, including mission critical gear, high performance athletic wear, and other products, each year. The agreement’s strength also shone when it “pivoted overnight to reconstitute onshore and nearshore PPE supply chains, including with CAFTA-DR producers.”
The proof is in the numbers, Glas said. U.S. government trade statistics show that apparel imports from the region grew 22 percent last year, following a 39-percent rise in 2021. Notably, U.S. exports to CAFTA-DR countries, mostly consisting of textile inputs used by regional manufacturers to make products, increased by 15 percent in 2022, and 39 percent in 2021.
“It’s reasonable and achievable to double the trade out of CAFTA-DR to the U.S. in the coming years,” Glas said. Research conducted by Werner International last year revealed that doing so would equate to additional investments totaling $6 billion, creating 180,000 jobs in the U.S. textile industry and 2.17 million jobs in the CAFTA-DR region, “producing even more resilient supply chains in this critical sector.”