Regional Pacts Produce New Trade Patterns

Multilateral trade pacts may grab headlines, but regional trade pacts are having the greatest impact on corporate bottom lines.

Late this month, many international trade experts and globally minded businesses will have their eyes focused on the activities of the world's trade ministers, who are gathering in Seattle, WA, Nov. 30 to Dec. 3 to discuss the launching of a new round of multilateral trade negotiations.

However, all indications are that, particularly for textile and apparel products, regional trade arrangements, such as the North American Free Trade Agreement (NAFTA), are playing a far more significant role in business decisions and sourcing patterns than multilateral trade agreements, such as the 1994 Uruguay Round Agreement.

A review of NAFTA and the Uruguay round and coinciding trends in U.S. textile and apparel imports reveals how both agreements have impacted global sourcing decisions.

NAFTA Upstages Uruguay Round

The Uruguay Round Agreement, which involved about 100 countries and took eight years to complete, was not an insignificant accomplishment. After all, among its achievements was the negotiation of the Agreement on Textiles and clothing (ATC), under which the members of the world Trade Organization (WTO) have agreed to eliminate quotas on textile and apparel products among members as of Dec. 31, 2004. In the meantime, though, those quotas continue to apply to most textile and apparel trade and to hold back significant expansion of trade in these products.

Outside of quota elimination for WTO members, the Uruguay Round Agreement included minimal concessions for lowering apparel and textile duty rates. During the Uruguay Round negotiations, those against tariff reductions argued that the ATC's elimination of quotas ought to provide enough trade liberalization for the industry. As a result, the minor duty reductions included in the agreement will only lower most U.S. textile and apparel duty rates by 6 percent to 11 percent -- and less in some categories. For example, the duty rate on a pair of cotton woven trousers will be 16.6 percent by 2004, compared with 17.7 percent in 1994, while the duty on a wool pullover will be set at 16 percent in 2004, compared with 17 percent in 1994. (See Chart One.)

(As a general rule, in the developed countries, including the United States, the European Union, Canada and Japan, the duty rates for textiles and apparel remain about three times the levels of those on other products.)

NAFTA, on the other hand, has ushered in significant trade liberalization right out of the gate, although it was implemented only one year before the Uruguay Round Agreement and involved only three countries -- the United States, Canada and Mexico. The agreement soon will have eliminated most U.S. quotas on Mexican textile and apparel products (Canadian imports already enter the United States quota-free). More importantly, tariffs are being phased out quickly for qualifying products made in and moving among the three countries. [*] In many instances, such as for non-wool apparel, zero duty rates already are in place.

In the time the Uruguay Round Agreement and NAFTA have been in effect, it's clear that NAFTA has changed the course of U.S. market sourcing decisions. While neither Canada nor Mexico were major U.S. textile and apparel suppliers in the 1980s, now they are the No.1 and No. 2 largest suppliers, respectively. (See Chart Two and Chart Three.)

More than a Matter of Quotas

The absence of quotas on Canadian products and the limited number of quotas on Mexican products alone cannot explain this phenomenon. Their status as the top suppliers to the U.S. market is first and foremost testimony to the importance of duty rates.

All shipments of qualifying products from Canada are duty-free, and since Jan. 1, 1999, many textile and apparel products from Mexico are also duty-free. For all other suppliers of these products to the U.S. market, the average duty rate, on a trade-weighted basis, is still about 16 percent, and will only go down to about 15 percent in the next four years. That 15 percent or 16 percent spread is clearly a strong incentive for U.S. importers to look to our next-door neighbors for their sourcing needs.

The fact that these two suppliers share a land border with the United States, thereby reducing transportation costs and permitting short turnaround times on production and delivery, also plays a role. Mexico and Canada also did not get caught in the confusion and instability of the Asian financial crisis.

Another region with relatively few quotas, or at least relatively few quotas that "bite," is the Caribbean. Yet while the Caribbean Basin Initiative (CBI) countries, in the aggregate, still supply much more apparel to the U.S. market than Mexico does, they are losing market share annually to Mexico. While the disasters wreaked by Hurricanes Georges and Mitch in the past year are partly to blame, there can be little doubt that the CBI region is losing market share because of the duty preference available to Mexican-made goods.

That explains the increasingly strident press for NAFTA parity legislation in the United States. Without the passage of legislation to provide preferential duty rates for Caribbean apparel products, many analysts anticipate that Mexico will eventually supply more apparel than the Caribbean countries.

Meanwhile, the United States' expanded trade with NAFTA suppliers is not a one-way story. Mexico and Canada are the No. 1 and No. 2 export destinations for U.S. textile and apparel exports, with almost 50 percent of all U.S. textile and apparel exports going to these two NAFTA countries.

Regionalism Rules the Day... and the Decade

For textile and apparel suppliers that have been waiting for 2005 -- and the scheduled end to quotas -- to finally be able to realize their true potential, NAFTA and the regionalism it represents may highlight a significant obstacle. In five years, the roots set down by NAFTA may be difficult to displace, especially given the wide disparity in duty rates. Thus, quota elimination may mean a realignment of trade among the countries previously limited by those quotas, but will not permit them to better compete with suppliers unencumbered by high duties.

The issue is compounded by the fact that NAFTA is not the only regional arrangement in place today. The European Community is itself a customs union in which goods move freely among the member countries. The Europeans also have a free trade arrangement with the Nordic countries. Mexico, too, has wisely associated itself with a number of preferential arrangements, including the Group of Three agreement (with Venezuela and Colombia), and agreements with Costa Rica, Bolivia and Chile. Mexico also is in negotiations with El Salvador, Guatemala and Honduras, as a group, and with Ecuador, Peru, Panama, the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay), the European Union and Israel. As a consequence, the incentives for a producer to set up operations in Mexico as a means for competitively accessing multiple markets are considerable.

Meanwhile, the prospect for additional regional arrangements in the Western Hemisphere, such as with Chile, the Caribbean and the Andean countries, looms larger over the next five years, with the United States continuing to engage in discussions to establish a Free Trade Area of the Americas agreement. Clearly, it is Asian suppliers who have the most to lose from these regional arrangements.

Under these circumstances, it is not surprising that many developing countries are alarmed about the rise of regionalism. Regional preference agreements mean that those not included are, effectively, discriminated against. Many are therefore looking to multilateral forums, such as the WTO, to address this discrimination. Multilateralism should mean that everyone is on equal footing, providing no advantages for anyone, other than natural advantages, such as lower wage rates and availability of resources. Regionalism is clearly upsetting that balance.

The Seattle Ministerial and the next round of multilateral trade negotiations offer an opportunity for multilateral tariff reductions that would lower the differential between normal rates and preferential arrangement rates (duty-free status, in most cases). With textile and apparel products still among the highest peaks in the U.S. tariff schedule, they clearly offer plenty of room for movement. However, the competitive advantages offered by regional arrangements may make those benefiting from regionalism strongly opposed to diluting those benefits.

While the battle is fought over whether to negotiate lower textile and apparel duties multilaterally, and if so, over what period of time, regional programs will continue to offer businesses substantially greater benefits. And so long as that is the case, multilateral liberalization, including quota elimination, should continue to play a far smaller role in business planning.

Brenda A. Jacobs is Counsel in the Customs and Trade Group of the law firm of Powell, Goldstein, Frazer & Murphy LLP in its Washington, D.C., office. She may be reached at tel.: 202-347-0066, by e-mail at bjacobs@pgfm.com or on the Web at www.pgfm.com.

(*.) There are a few U.S. quotas on textile and apparel imports from Mexico, but they only apply to goods that do not meet NAFTA's special preferential rules of origin. Still, many of these products are permitted to enter the United States at preferential tariff rates applicable under NAFTA.

                 Comparative Tariffs by Selected Products
Product                    United States          European Union
                              Pre-URA    Post-URA    Pre-URA     Post-URA
Knit trousers, WG, Wool        17.0%      14.9%       14.0%       12.0%
Knit trousers, WG, Cotton      16.7%      14.9%       14.0%       12.0%
Knit trousers, WG, MMF         30.0%      28.2%       14.0%       12.0%
Knit shirts, MB, Wool          17.0%      14.9%       13.0%       12.0%
Knit shirts, MB, Cotton        21.0%      19.7%       13.0%       12.0%
Knit shirts, MB, MMF           34.6%      32.0%       13.0%       12.0%
Woven trousers, MB, Cotton     17.7%      16.6%       14.0%       12.0%
Woven trousers, MB, MMF        29.7%      27.9%       14.0%       12.0%
Product                    Canada
                           Pre-URA Post-URA
Knit trousers, WG, Wool     25.0%   18.0%
Knit trousers, WG, Cotton   25.0%   18.0%
Knit trousers, WG, MMF      25.0%   18.0%
Knit shirts, MB, Wool       25.0%   18.0%
Knit shirts, MB, Cotton     25.0%   18.0%
Knit shirts, MB, MMF        25.0%   18.0%
Woven Irousers, MB, Cotton  22.5%   17.0%
Woven trousers, MB, MMF     25.0%   18.0%
Source: World Trade Organization (WTO), Uruguay
Round of Multilateral Trade Negotiations, Legal
Instruments Embodying the Results of the Uruguay Round
Notes: URA = Uruguay Round Agreement, which calls
for the elimination of quotas between WTO
members as of Dec. 31, 2004.
MMF = man-made fiber.
WG = women's and girls' apparel.
MB = men's and boys' apparel.
                     U.S. Textile and Apparel Imports
     Comparison for Years Ending (YE) July 31, 1999, and Dec. 31, 1994
            Data in Millions of Square Meters Equivalent (SME)
                          YE 7/31/99                      YE 12/31/94
Country                      Rank     SME   Percent share    Rank      SME
World [*]                            27,033                           17,286
Mexico                        1      3,882      14.36          5       977
Canada                        2      2,675      9.90           2      1,318
China (People's Republic)     3      1,901      7.03           1      2,042
Pakistan                      4      1,400      5.18           7       679
China (Taiwan)                5      1,279      4.73           3      1,237
South Korea                   6      1,165      4.31           6       865
India                         7      1,140      4.22           8       677
Hong Kong                     8      1,027      3.80           4      1,023
Thailand                      9      1,021      3.78           9       662
Indonesia                     10      892       3.30          12       516
Dominican Republic            11      881       3.26          10       608
Philippines                   12      880       3.22          11       534
Bangladesh                    13      870       3.16          13       487
Honduras                      14      853       2.20          20       220
Turkey                        15      595       2.08          14       341
Country                   Percent Share
World [*]
Mexico                        5.65
Canada                        7.62
China (People's Republic)    11.81
Pakistan                      3.93
China (Taiwan)                7.16
South Korea                   5.00
India                         3.92
Hong Kong                     5.92
Thailand                      3.83
Indonesia                     2.99
Dominican Republic            3.52
Philippines                   3.09
Bangladesh                    2.82
Honduras                      1.27
Turkey                        1.97
Sources: U.S. Department of Commerce, Office of Textiles and Apparel, Major
Shippers Reports
(*.)Indicates overall U.S. imports of textiles and apparel from all
countries.
                U.S. Apparel Imports: Ranking by Volume and
                    Value for Year Ending July 31, 1999
                             Data in Millions
                          Volume                  Value
Country                    Rank   Square Meters   Rank    U.S. Customs
                                 Equivalent (SME)       Value in Dollars
World [*]                            13,477                 49,457
Mexico                      1         2,201         1        7,163
China (People's Republic)   2          896          2        4,368
Hong Kong                   3          846          3        4,279
Honduras                    4          841          7        1,995
Dominican Republic          5          837          4        2,358
Bangladesh                  6          745         10        1,592
China (Taiwan)              7          622          6        2,000
El Salvador                 8          523         16        1,224
South Korea                 9          501          5        2,016
Philippines                 10         501          8        1,785
Source: U.S. Department of Commerce, Office of Textiles and Apparel, Major
Shippers Reports
(*.)Indicates overall U.S. imports of textiles and apparel from all
countries.
                           U.S. Apparel Imports
              Comparison of Market Share by Volume for Years
             Ending 12/94, 9/97 and 7/99 Data Based on Volume
                     in Square Meters Equivalent (SME)
Country            Percentage of Percentage of Percentage of
                   Imports 12/94 Importa 9/97  Imports 7/99
Mexico                 5.72         13.04         16.33
China                 11.09          8.93          6.65
Dominican Republic     6.48          6.93          6.21
Hong Kong             10.26          6.62          6.28
Honduras               2.53          6.25          6.24
Bangladesh             5.11          5.81          5.53
Taiwan                 7.73          5.48          4.62
Philippines            4.88          4.09          3.72
El Salvador            1.92          3.65          3.88
Indonesia              3.33          3.44          3.19
Canada                 1.20          1.60          1.89
Source: U.S. Department of Commerce, Office of
Textiles and Apparel, Major Shippers Reports

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