NCC Comments on NAFTA Negotiating Objectives
The NCC was joined by the American Cotton Shippers Association and AMCOT on comments submitted June 12, 2017 to the Federal Register regarding the Administration’s negotiating objectives in the North American Free Trade Agreement (NAFTA) with Canada and Mexico.
Comments on Negotiating Objectives Regarding Modernization of
the North American Free Trade Agreement with Canada and Mexico
National Cotton Council of America
American Cotton Shippers Association
AMCOT – America’s Cotton Marketing Cooperatives
Docket No. USTR-2017-0006
The three undersigned cotton industry organizations thank you for the opportunity to submit comments on the negotiating objectives regarding the modernization of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. NAFTA has been a success story for the U.S. cotton industry, in large part due to the duty-free trade in raw cotton and cotton textile products. Maintaining its benefits is crucial to the industry’s long-term survival. Any effort to modernize NAFTA must first recognize its crucial importance to the vitality of the U.S. cotton industry.
The National Cotton Council of America (NCC) serves as the central organization of the U.S. cotton industry. Its members include producers, ginners, cottonseed processors and sellers, merchants, marketing cooperatives, warehousers, and textile manufacturers. The American Cotton Shippers Association (ACSA) is the leading trade association representing the private merchants of U.S. raw cotton. AMCOT is the singular trade association representing the combined interests of America's true marketing cooperative cotton grower-members.
The majority of the U.S. cotton industry is concentrated in seventeen states across the southern half of the country, from the Pacific Ocean to the Atlantic. Downstream manufacturers of cotton apparel and home furnishings are located in nearly every state. The annual U.S. cotton crop is valued at more than $6 billion at the farm gate. Overall, farms and businesses directly involved in the production, distribution and processing of cotton employ approximately 125,000 workers and generate direct annual revenue of more than $21 billion. Including the indirect economic impact, the U.S. cotton sector supports the employment of more than 280,000 people with economic activity in excess of $95 billion.
The U.S. cotton industry is heavily dependent on access to export markets. On average, roughly 75% of U.S. cotton production is sold to foreign buyers as raw cotton fiber, while another 20-25% is exported as textile products, whether in the form of yarn, thread, or fabric. In other words, approximately 95% of U.S. cotton is exported in some form. Thus, the stability and openness of international markets are especially important.
Due to the heavy reliance on exports, global market factors can exert significant influence on the economic health of the U.S. cotton industry. China and India are the two largest producers and spinners of raw cotton, accounting for approximately 50% of global production and mill use. China is also the largest producer and processor of manmade textile fibers, principally polyester, that are substitutable for cotton fiber. In fact, demand for U.S. cotton continues to face significant headwinds from increased competition from manmade fiber, which is characterized by significant overcapacity. In recent years, the U.S. textile industry has also faced a surge in competition from textile industries in Vietnam, Bangladesh and Indonesia. In the global market, U.S. cotton exporters feel the effects of competition from growths originating from countries/regions such Australia, Brazil, West Africa and Central Asia.
In light of these global conditions occurring outside of North America, the U.S. cotton and textile industry relies on NAFTA for stability. The ongoing success of an integrated North American textile and apparel supply chain through NAFTA has helped ensure reliable demand for U.S. raw cotton and cotton textile products.
A quick look at the scale of trade flows with Mexico and Canada underscores the critical importance of NAFTA to the U.S. industry. Overall, the North American market accounted for just over $2 billion in annual U.S. exports of raw cotton fiber and cotton textile products during the most recent three-year period, from 2014-2016.
Mexico is the fifth-largest foreign destination for U.S. raw cotton, annually purchasing almost a million bales, which is about 9% of total U.S. cotton exports. Mexico also ranks second among U.S. cotton textile and apparel export customers, accounting for 15% of total U.S. exports. Canada accounts for another 6% of U.S. cotton and textile exports, making it the fourth-largest market. In turn, the U.S. market accounts for $3 billion annually in cotton textile imports from Mexico and Canada.
Among U.S. states, Texas is the largest source of cotton exports, earning approximately $540 million a year, between 2014-2016, in exports of cotton fiber and textile products to Mexico and Canada. California exported an average of $436 million per year in cotton and textile products, while exports from North Carolina, Tennessee, and Georgia were each worth more than a $100 million per year.
In short, the current NAFTA has been a source of strength for the U.S. cotton industry. Any weakening of NAFTA’s current provisions or erosion of current benefits would threaten the health of the U.S. industry and the jobs of the 125,000 Americans employed by it. In addition, the integrated textile supply chains fostered under the current NAFTA are not only a source of employment in the United States, but in the other two participating countries as well, with textile jobs being of particular importance in Mexico. Thus, the general objectives of U.S. negotiators should be to preserve NAFTA’s current benefits while encouraging further regional integration of the cotton and textile supply chain. This could be achieved through improvements to measures affecting trade in textiles and apparel, particularly the textile rules of origin.
The general purpose of the rules of origin is to ensure an agreement’s benefits accrue to its parties. For textile and apparel products, NAFTA uses a yarn-forward rule of origin that has boosted growth in regional trade and facilitated regional integration to the benefit of our industry. Unfortunately, NAFTA also includes exceptions that weaken the effectiveness of the yarn-forward rule of origin. A modernized NAFTA would reassess these exceptions and consider their elimination.
First, U.S. negotiators should seek the elimination of all tariff-preference levels (TPLs) from NAFTA. TPLs allow certain fabrics and yarns to enter a NAFTA country from a third country, be processed into a finished textile product and still receive duty-free treatment under the agreement.
The United States should also assess the effectiveness of three additional measures, including the “single transformation” rule, the “special regime” based on the 9802 concept, and exemptions for specific textile components. Single transformation provides duty-free treatment based solely on the assembly stage for specific apparel items. The United States should revisit this exception to the yarn-forward rule of origin and determine whether its revision or elimination would provide greater benefits to the U.S. textile sector. Similarly, the United States should review the effectiveness of the special regime through which certain apparel or made-up articles may enter duty-free if the fabric is formed in the United States. In such instances, the goods receive duty-free treatment regardless of the yarn’s country of origin. NAFTA also currently exempts from the yarn-forward rule of origin certain components, such as sewing thread, pocketing, and narrow elastics. The United States should reassess whether those exemptions are still warranted or even whether they should be revised.
The United States should also explore whether the NAFTA modernization effort provides an opportunity to close an exemption for products assembled in Mexico or Canada from application of the buy-American requirements of the Kissell Amendment. That statute requires the U.S. Department of Homeland Security to purchase only textile products with 100% U.S. content, with limited exceptions. Unfortunately, DHS does not apply the Kissell Amendment to purchases by the Transportation Security Administration, since the United States failed to notify Mexico and Canada, per NAFTA’s terms, of a reservation for TSA from the Government Procurement Agreement. The Kissell Amendment is an important part of the U.S. “Buy American” policy. U.S. negotiators should look for ways to strengthen its application with respect to Mexico and Canada.
Finally, the parties should consider the establishment of a customs enforcement task force to combat duty evasion and other forms of textile-related customs fraud. Customs enforcement in the textile and apparel trade is especially important since U.S. imports in the sector account for approximately 40% of all U.S. duty revenue and involve 20% of all U.S. importers.
On behalf of the U.S. cotton industry, thank you again for the opportunity to express our views concerning the modernization of NAFTA. We look forward to continued growth in the NAFTA relationship and the further development of a strong, integrated regional cotton and textile supply chain.