by Lawrence A. Ward and Dave Townsend
The textile trade has long been complicated, requiring careful attention to the source and production methods throughout the supply chain to determine whether imports were allowed under quotas or what tariff rate applied to the imports. Although the Trump administration has a fundamentally different policy toward international trade than prior U.S. presidents, textiles remain subject to their own unique and complex rules.
In addition, the textile sectors of Iran and North Korea are now targets for U.S. and international sanctions, the intended effect of which is to discourage non-U.S. companies from carrying out transactions with those countries. There have been significant developments in textile trade under the Trump administration; it’s useful to consider some of the developments in an historical context.
The agreements: continuity and change
Since the creation of the North American Free Trade Agreement (NAFTA) in 1994, U.S. regional trade agreements have aimed to increase U.S. and regional manufacturing of inputs to textile products. NAFTA established a “yarn-forward” rule of origin conditioning preferential tariff rates on sourcing NAFTA-originating yarn and fabric. Likewise, the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) also included similar yarn-forward requirements to receive preferential tariff rates.
In addition, both NAFTA and CAFTA-DR include detailed product-specific rules of origin that must be met to receive preferential treatment. Combined, NAFTA and CAFTA-DR create significant incentives for supply chains to draw on North and Central American production of textile products.
Companies involved in the textile sector should, if they have not already, review the United States-Mexico-Canada Agreement (USMCA) rules of origin to see how they differ from NAFTA. The USMCA as a whole preserves the status quo under NAFTA, with expected gains under USMCA being only a small boost to U.S. economic growth of 0.35 percent relative to NAFTA, according to the U.S. International Trade Commission (ITC). But USMCA also creates more stringent rules of origin for some products to encourage production in USMCA countries, to the exclusion of non-USMCA sources.
For example, in apparel, USMCA requires certain products to use USMCA-sourced thread, elastic, pockets or coatings to receive preferential USMCA tariffs. At the same time, USMCA expanded the de minimis standard under which non-USMCA sourced material is ignored for purposes of calculating whether a particular product meets minimum regional content thresholds. The USMCA also revises specific rules of origin for products, including many textile products, for purposes of tariffs and country-of-origin labeling.
The USMCA also includes specific chapters on digital trade, intellectual property, financial services and labor enforcement that the Trump administration touts as “state of the art” provisions to be replicated in future agreements. The Trump administration expects that much of the USMCA will be a starting point for negotiating with U.S. trade partners. Thus, the USMCA is intended to be a template for other trade agreements that the U.S. is negotiating, such as with the U.K., as well as future bilateral negotiations that the administration may initiate.
Tariffs’ impact on textiles
The Trump administration has also raised tariffs on significant volumes of imports, particularly from China. As a result of an investigation of China’s intellectual property practices, the United States currently imposes tariffs on $370 billion worth of annual imports from China. Many tariffs on imported non-apparel textile goods went into effect on Sept. 18, 2018, initially at 10 percent, and now at a rate of 25 percent. In addition, select apparel items from the European Union (EU) now are subject to 25 percent tariffs as a result of a World Trade Organization (WTO) dispute concerning subsidies to EU aircraft maker Airbus.
Although these tariffs do not directly affect the textile sector, the Trump administration has also imposed national security-related tariffs on imports of steel and aluminum from all sources, subject to select exceptions for countries (most notably, Canada and Mexico). Similar tariffs may apply to automobiles and automotive parts, although the Trump administration has to date refrained from imposing such tariffs.
Accordingly, although the Trump administration’s actions amount to a flood of new trade actions, textile imports are largely in the same position as they were when President Obama left office. Although USMCA changes some of the rules for textiles, textile manufacturers in USMCA countries now can count on continued market access under the USMCA, something that was doubted when President Trump threatened to terminate NAFTA.
The major exception, of course, is with respect to China, in which case textile imports face higher duties. Other than imports from China, and a small amount of apparel imports from the EU, U.S. imports of textiles remain subject only to tariffs established for all WTO countries in the Harmonized Tariff Schedule of the United States.
Looking ahead, textiles could become subject to new trade actions, particularly antidumping and countervailing duty (AD/CVD) investigations brought by U.S. manufacturers interested in targeting specific products. This occurred in 2018, for example, when U.S. producers of certain polyester staple fibers sought and succeeded in imposing increased tariffs on imports from South Korea, India and China.
For U.S. industries seeking to raise the price of competing imports, AD/CVD cases, unlike the broader trade actions described above, can strike with precision, covering only well-defined and narrow classes of goods. For importers, AD/CVD cases can be devastating or, depending on the market, a mere nuisance.
Changes in non-U.S. textile trade
Since President Trump took office, important changes relating to sales of textiles outside of the United States have come into effect. First, because of the Trump administration trade actions summarized above, U.S. exporters of textiles are subject to increased or proposed increases in tariffs for sales to non-U.S. markets. In addition, recent national security-related actions have targeted the textile industries of Iran and North Korea, creating new compliance challenges.
In 2017, the United Nations Security Council passed Resolution 2375 which, among other things, prohibits U.N. members from buying, transporting or receiving textiles originating from North Korea. This resolution means that trafficking in North Korean-origin textiles could carry severe penalties under each U.N. member’s domestic laws, including U.S. and non-U.S. jurisdictions.
The U.S. government has also issued advisories warning the private sector that North Korean joint ventures, international labor arrangements and other deceptive practices can cause supply chains to inadvertently purchase North Korean textiles or those illicitly made with North Korean labor. Companies that source raw materials from China in particular were singled out as at risk of violating the U.N. (and related U.S. domestic) legal prohibitions on sourcing items from North Korea.
On Jan. 20, 2020, the Trump administration imposed so-called secondary sanctions on Iran’s textile sector, among other Iranian industries. These sanctions are intended to deter non-U.S. persons (including corporations) from having significant transactions with Iran. U.S. law has long prohibited U.S. persons from transacting with Iran, including with the textile sector.
Under the new Iranian secondary sanctions, non-U.S. persons face severe penalties, including being blacklisted by the U.S. government, for having significant transactions with Iran’s textile sector. Such a blacklisting would prevent the target from accessing the U.S. market or U.S. financial institutions, and the mere threat of such sanctions deters non-U.S. persons from engaging in transactions with Iran.
The net effect of all of these actions will be greater demands for transparency in the textile supply chain, both in private contracts and from regulatory authorities. We expect that the compliance burdens, from both an import and an export perspective, will continue to grow in scope and complexity for the textile sector, creating new challenges for businesses.
Lawrence A. Ward is a partner with Dorsey & Whitney LLP in Dorsey’s Seattle, Wash., office (email@example.com).
Dave Townsend is counsel with Dorsey & Whitney LLP in Dorsey’s Minneapolis, Minn., office (firstname.lastname@example.org).