Finding Opportunity in the Trans-Pacific Partnership

It’s an exciting time for U.S. trade policy. Yes, you read that correctly.

After a time marked by an unclear approach to global trade, Washington’s leadership in strengthening the United States’ economic position through global commerce is beginning to gain momentum.

Much of this momentum is spurred by recent remarks Ambassador Michael Froman, President Barack Obama’s newly minted U.S. Trade Representative, made in which he announced the Trans-Pacific Partnership (TPP) was entering the “endgame” following 19 rounds of intense negotiations.

The TPP is a multilateral trade agreement being negotiated by 12 Pacific Rim countries, including the United States. The United States first entered the discussions under former President George W. Bush in 2008. Our role was re-tooled and expanded by President Barack Obama over the past few years as more countries joined the conversation. Upon completion and implementation, the TPP agreement would cover more than 40 percent of global trade.

In my more than 30 years of advocacy experience, I can tell you I have never seen such a dynamic and robust — and sometimes misleading — debate about the proposals put forward by negotiating countries. Unlike past trade negotiations that tended to move under the radar, a variety of stakeholders are directly and visibly engaged in this important public policy dialogue.

Over the course of the negotiations, the U.S. apparel and footwear industry has voiced valid concerns with regards to TPP. As the leading association for the industry, it is our job to build consensus on these difficult issues and propose actionable solutions to meet the industry’s current needs, future expectations and unforeseen circumstances. Herein lies our challenge.

From our long-held pro-trade perspective, the TPP can be used to promote exports, enhance sourcing opportunities, create and sustain jobs, level the playing field for U.S. workers, and provide meaningful opportunities for our vital domestic industries.

With 97.5 percent of apparel and 98 percent of footwear sold in the United States each year being produced outside the United States, it is clear global supply chains provide real value for consumers and drive our industry. What’s more, it takes more than four million U.S. apparel and footwear industry workers, many of whom work unnoticed by consumers along the supply chain, to deliver quality clothes and shoes at affordable prices.

At the same time, the apparel and footwear industry is one of the most regulated industries in the world. Sadly, the regulations that govern business decisions often lag behind the fast-paced nature of the industry.

Simply put, modern supply chains must be flexible and nimble. We believe the government regulations impacting our industry should be the same. Fast fashion requires forward-thinking, innovative regulations that match. That is why we have long advocated for flexible and simple rules in each and every trade agreement, including the TPP.

One of the important rules at the center of the current TPP debate revolves around the agreement’s rule of origin — the rule that determines which inputs and materials have to originate in the TPP countries to enable the final product to receive duty-free access to its destination market. In essence, the rule of origin determines at what point in the supply chain a shirt becomes a shirt eligible to receive the trade benefits outlined in the agreement.

When trade agreements are built on narrow or restrictive rules, trade is stifled. In apparel, the most restrictive rule is known as a “yarn forward” rule of origin. In a trade agreement with a “yarn forward” rule, a shirt becomes eligible only if all the operations from the yarn formation forward — hence the name — originate in the countries that are parties to that trade agreements.

The United States has used the yarn forward approach in most, but not all, trade agreements. Conceived in the early 1990s for trade partnership between the United States and Mexico — at a time of global quotas and for an industry partnership that already existed for these countries — “yarn forward” originally supported trade. But in the intervening decade marked with vast changes in fashion and international trade regimes, yarn forward now serves as a drag on trade. The rise in global supply chains and global markets makes it impossible for yarn forward to work except under very narrow circumstances.

Looking at the constellation of U.S. free trade agreements that contain “yarn forward” rules, it is easy to see this dynamic play out. Since 2005, U.S. exports of yarns and fabrics to those trade partners have increased by only two percent while those exports to the rest of the world have increased 45 percent. The apparel import side of the picture is even starker with apparel imports from those free trade agreements dropping by double digits.

Heeding our leaders’ calls to fashion an agreement that works for the 21st century, we have advocated to move off of the yarn forward approach and instead adopt simple and flexible rules for the TPP. From our view, this is the only way to grow trade, which is the ultimate purpose of trade agreements.
If structured correctly, the TPP represents an important export opportunity for domestic manufacturers that supplements trade with key sourcing partners, including partners within the Western Hemisphere.

Some have argued that TPP is a threat to the valuable and longstanding trade partnerships the U.S. industry has maintained with partners in Central America. This is simply not true. The greatest threat to our trade relationship with Central America is the pending expiration of the Nicaragua tariff preference level, a trade provision from the U.S. –Central America Free Trade Agreement (CAFTA) that continues to drive U.S. textile exports to the Central American region. If it is not renewed well before it expires in 2014, trade with this important region may be damaged beyond repair.

Moreover, we should also find ways of linking CAFTA with the TPP, much as the inclusion of Mexico and Canada as TPP negotiating partners will result in the integration of NAFTA. Trade agreements should build upon past successes and not set up successive silos that force regions and supply chains into artificial competitions. Integrating CAFTA, which is so important for our industry, with the TPP will ensure that Central American partners remain fully engaged in the 21st century.

Trade agreements can also be used to bring about concrete economic reforms that level the playing field for everyone competing in the global market. Trade agreement partnerships with the United States are not given freely. Trade agreements come with high — sometimes ambitious — expectations that trade partners will undertake necessary reforms, such as promoting transparency, advancing the rule of law, reducing erroneous trade barriers and eliminating government subsidies. These reforms help bring trade partners into greater compliance with the rules of the global trading system, something every industry can support as the world grows more competitive every day.

The Vietnamese government, in fact, has identified the TPP as a vehicle through which it can undertake some of these very reforms. But such decisions are difficult. To stay at the table to make these commitments, Vietnam will need to obtain real market access to the United States in the products it cares about the most, such as apparel and footwear. While a “yarn forward” model would have little impact on Vietnam, a simple and flexible approach — coincidentally the very same approach that would actually support U.S. textile exports — would incentivize Vietnam to make those reforms that we are also demanding.

While it is imperative that such trade agreements create opportunities for domestic and international companies alike, regardless of their supply chains, it is equally important that such agreements not erode the delicate protections accorded our defense government contractors through the Berry Amendment, a longstanding provision that requires the military uniforms and combat footwear worn by our troops be made in the United States. AAFA has taken the lead role in ensuring that the Berry Amendment has been included in all past free trade agreements and is playing a similar role with the TPP, a fact that has been acknowledged by our negotiators as well as the Pentagon.

With more than 530 members representing thousands of supply chains and every sector and product category within the U.S. apparel and footwear industry, we have the difficult job of bringing together diverse interests that sometimes conflict with each other. Our mission is simple: create supply chain options for the industry to ensure its continued competitiveness in the global market. Our work is challenging, but we remain committed to building consensus on this complex issue.

The TPP represents one of the most significant market opening opportunities for the U.S. apparel and footwear industry in recent memory. Ignoring it is not an option. That’s why we continue to urge negotiators to follow through on their commitments made in Honolulu in 2011 to achieve a “comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and 21st-century challenges.”

But this effort is all for nothing if you are not directly engaged in the conversation. AAFA and stakeholder organizations host a variety of forums to help the industry learn about the TPP negotiations and the direct impact of the provisions on your business. AAFA is not interested in pursuing an agreement for agreement’s sake. A fast agreement does not work for anyone. We will continue to press the negotiators until we have an agreement from which we can all benefit.

Kevin M. Burke is president and CEO of the American Apparel & Footwear Association (AAFA).
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