NAFTA: The Textile and Apparel Sector
Eric Barry and Elizabeth Siwicki Canadian Textiles Institute
Two Different Industries
ANTICIPATING THAT "TEXTILES" ISSUES WOULD be contentious, the three NAFTA
participants established a separate negotiating group to deal with them. In the
negotiations, the term "textiles" is a broad label covering issues affecting
both the textile manufacturing industry and the clothing manufacturing industry. This
verbal shorthand blurs the fact that these are different industries with different
economic characteristics and structure and that "textile" negotiations can
affect them in different ways. The textile manufacturing industry
includes producers of man-made fibres plus producers of yarns, fabrics, and textile
products. The clothing manufacturing industry produces clothing. Statistics Canada's
Standard Industrial Classification groups textile manufacturers under SIC 18, Primary
textiles industry; SIC 19, Textile products industry; SIC 3257, Motor vehicle fabric
accessories industry. Clothing manufacturers are in SIC 24, Clothing industries.Note
Canada's textile manufacturing industry has been transformed in the last 15 years. The key
to its transformation has been substantial and sustained capital investment which has made
it modern, efficient, decreasingly labour intensive and increasingly capital intensive,
with rapidly growing productivity and better than average profitability. Industry, Science and Technology Canada 1991, Industrial Competitiveness;
A Sectoral Perspective: Textiles, p. 111-118.Note
Shipments by Canadian textile manufacturers in 1989 were over $7.7 billion, making it the
largest year in the industry's history. While shipments have declined since then because
of the recession, the industry is well positioned to participate in the economic recovery.
While much new technology has appeared in clothing manufacturing, it is still essentially
a labour intensive industry with relatively low capital investment.
Key statistics on both the textile and clothing industries are presented in table 1.
Click here to view Table 1: Key Statistics
As might be expected, the U.S. textile industry is a bit more than ten times the size of
its Canadian counterpart. Shipments by American textile manufacturers in 1991 were valued
at US$64.1 billion. Similarly, estimated shipments by U.S. clothing manufacturers in 1991
were valued at U.S.$52.9 billion.
The size of the Mexican textile industry is more difficult to gauge. An unpublished report
by a leading consulting firm has estimated the value of 1988 shipments to be approximately
Can$3 billion expressed in constant 1980 Can$ or about half of 1988 shipments by Canadian
textile manufacturers measured the same way. No estimate was made of the value of Mexican
Textile and Clothing Trade
Table 2 presents an overview of Canadian trade in textiles and clothing in 1991. Imports
are substantially larger than exports for both industries but there is an important
difference in import sources.
Click here to view Table 2: Canadian Textile and Clothing Trade Data Overview (1991)
In value terms, about 73 percent of textile imports come from developed countries (56
percent from the U.S. alone) with 27 percent coming from developing or
"low-wage" countries. By contrast, nearly 80 percent of clothing imports come
from developing countries and only 10 percent from the U.S.
Again in value terms, textile manufacturers export three times as much as clothing
manufacturers with 64 percent of textile exports and 86 percent of clothing exports going
to the U.S.
Trade with Mexico has been tiny. In 1991 only 1 percent of textile imports originated in
Mexico and over half of these entered Canada duty-free. Only 0.5 percent of clothing
imports came from Mexico. Textile and clothing exports to Mexico were even smaller.
Imports of textiles into the U.S. in 1991 were US$7.3 billion. Textile imports account for
a much smaller proportion of the U.S. market than is the case for textile imports into
Canada. Textile imports from Mexico into the U.S. for the same year were US$206 million or
2.8 percent of all imports. With U.S. 1991 textile exports to Mexico totalling $536
million the U.S. enjoyed a positive textile trade balance with their southern neighbour.
Imports of clothing into the U.S. in 1991 were US$27.7 billion and occupied a share of
market roughly similar to that occupied by clothing imports into Canada. Clothing imports
from Mexico were only 2.4 percent of the U.S. total.
The Canada-U.S. Free Trade Agreement
It became apparent very early in the NAFTA negotiations that the Americans were taking
advantage of them to renegotiate the FTA rules of origin for textiles and clothing.
Therefore, a brief review of these is essential background for what happened in NAFTA.
The American textile and clothing industries opposed the FTA. The price they exacted from
their government for their forced participation was a set of rules of origin designed to
limit the use of third-country inputs in textiles and clothing that would qualify for FTA
rates of duty.
For example, a fabric can be woven, dyed and finished in Canada but will not qualify
unless it is made from Canadian or American yarn. Similarly, a garment can be cut and sewn
or otherwise assembled in Canada but will not qualify unless it is made from Canadian or
American fabric. Of course, the same rules apply to U.S. textile and clothing
manufacturers. A more detailed comparison of the FTA rules of origin and how they were
changed in NAFTA is presented later in this chapter.
Canadian textile and clothing manufacturers rely more on inputs from the rest of the world
than do their U.S. competitors. In partial recognition of this, the FTA included
exceptions to the rules of origin in the form of three tariff rate quotas or TRQs. These
permit non-wool fabrics made from imported yarns or apparel made from imported fabrics to
be exported to the U.S. at FTA rates of duty subject to the following annual limits:
For non-wool fabrics and made-up textile articles
(such as sheets or towels) up to 25,083,900 million square metre equivalents
For non-wool apparel up to 41,806,500 million square metre equivalents
For wool apparel up to 5,016,780 million square metre equivalents
There are important differences in the relief provided to
the Canadian textile and clothing industries by these TRQ exceptions.
First, the review mechanisms are different. The non-wool fabrics and made-up textile
articles TRQ provides for a review of its "quantitative elements" before the end
of 1992, while the two apparel TRQs remain in place at least until the end of the FTA
transition period or January 1, 1998. Second, the fabrics and made-up textile articles TRQ
level was set at a fraction of actual export levels, while the apparel TRQs represented a
multiple (about six times) of apparel exports at the time.
The rates at which the TRQs have been utilized tell the story (see table 3). Textile
manufacturers have heavily utilized their TRQ.
Click here to view Table 3: TRQ Utilization
Clothing manufacturers, on the other hand, have not heavily utilized the non-wool apparel
TRQ so that their ability to import non-FTA fabrics, make garments, and export these
garments to the U.S. at FTA rates of duty has not been impeded at all. Clothing
manufacturer usage of the wool apparel TRQ has been heavier although even in this area
nearly half of the quota remains unutilized.
Different NAFTA Positions
The Minister for International Trade was advised in September 1990 by the Canadian
Textiles Institute that, if NAFTA was to happen, the textile industry and Canada needed to
be part of it.
The textile industry did not perceive any short term threat or advantage stemming from
free trade with Mexico but quickly reached the view that it was in its best long-term
interests to participate in a trilateral NAFTA agreement. In September 1991, the Canadian
Textiles Institute sent a detailed confidential submission to the International Trade
Minister setting out the industry's NAFTA objectives.
The textile industry perceives its major challenge to be adjusting to the Canada-U.S. Free
Trade Agreement. As the NAFTA negotiations got underway in late 1991, it became clear that
the U.S. move to make the FTA rules of origin even more restrictive would impair the
Canadian industry's access to the U.S. market. Canadian efforts to resist these U.S.
initiatives, which were being supported by Mexico, were limited by our lack of negotiating
leverage. Once it became obvious that the rules would be the way the Americans and
Mexicans wanted them, Canada's efforts focused on seeking "compensation" in the
form of expanded and extended tariff rate quotas.
The clothing industry took a different view which is best summed up in the official
position of the Canadian Apparel Federation which opposed the U.S. demands for changes to
the FTA rules of origin and urged the government:
. . . to pursue a triangular strategy for textiles and
apparel in the North American Free Trade Negotiations, by signing a bilateral agreement
with Mexico, and keeping the provisions of the Canada-U.S. FTA, with some modifications Canadian Apparel Manufacturer, September/October 1992, p.10.Note .
Canadian officials raised the possibility of a triangular
approach for apparel at the negotiating table, but very much as a "last resort,"
preferring instead to continue to pursue a mutually acceptable trilateral agreement. The
broader view was and remains that both industries are better off "in" the NAFTA
agreement than "out" of it given the integration of the North American market
and future prospects for an expanded "hemispheric" free trade area.
The end result was an agreement that makes everyone at least a little unhappy. This, at
least in the trade policy bureaucracy, appears to indicate a successful negotiation.
The deal as it applies to textiles and apparel is complex and must be assessed not by
looking at each of its specific elements, but, rather, by looking at the overall
"package." For each sector, and for each partner, there are good things and
there are bad things, but it is the balance of what has been achieved that is relevant.
The following pages describe the key NAFTA provisions applicable to textiles and clothing
and highlight some of the areas where these differ from the FTA.
Rules of Origin and Tariff Preference Levels (TPLS)
The NAFTA rules of origin applicable to textiles and apparel are spelled out in detail in
Annex 401 of the text. The relevant section is "XI: Textiles and Textile
Articles" (HS "HS" refers to the Harmonized Commodity
Description and Coding System (Harmonized System).Note Chapters 50-63).
While most importers and exporters would consider the Tariff Preference Levels (TPLs)
(explained and described in more detail later in this chapter) an integral aspect of
determining which goods do or do not qualify for NAFTA rates of duty, these TPLs are
actually described and itemized in an Appendix to a separate section of the text,
"Annex 300-B: Textile and Apparel Goods," which is part of NAFTA Chapter 3.
Rules of Origin
Textiles and textile articles qualify for NAFTA rates of duty if they undergo specific
manufacturing processes which are described by reference to a change in HS classification.
Importers or exporters simply look up the HS heading or sub-heading under which the goods
in question are classified to find the applicable rule.
Here is a simplified summary of the rules governing some commonly traded textile and
apparel goods, along with an indication of where TPLs apply. The
term "domestic" is used to denote materials produced in Canada, Mexico or the
U.S.; the term "imported" is used to denote materials imported from outside the
free trade area.Note
Yarns (HS Chapters 50-55)
Silk, wool/hair or vegetable fibre yarns qualify if they are produced in the free trade
area, regardless of the origin of the input fibres.
Cotton or man-made staple fibre yarns qualify if they are spun in the free trade area from
domestic cotton or man-made fibres.
Man-made filament yarns qualify if they are extruded domestically.
TPLs apply in the case of cotton or man-made staple fibre yarns made from imported cotton
or man-made staple fibres.
Woven Fabrics (HS Chapters 50-55)
Silk or flax (linen) fabrics qualify if they are woven in the free trade area regardless
of the origin of the input yarns.
All other fabrics qualify if they are woven in the free trade area from domestic yarns.
TPLs apply to cotton or man-made woven fabrics classified in HS Chapters 52 through 55
containing imported yarns.
Knitted Fabrics (HS Chapter 60)
Knitted fabrics qualify if they are knitted in the free trade area from: domestic man-made
filament yarns; domestic cotton or man-made staple fibre yarns spun from domestic cotton
and man-made staple fibres; domestic wool/hair yarns (regardless of the origin of the
wool/hair fibres); domestic vegetable fibre yarns (regardless of the origin of the
vegetable fibres); or imported flax (linen) or silk yarns.
TPLs apply to cotton and man-made fibre fabrics knitted in the free trade area from
Nonwoven Fabrics (HS Chapter 56)
Nonwoven fabrics, including felts, qualify if they are made in the territory from: cotton,
wool/hair or vegetable fibres regardless of their origin; or domestic man-made staple
fibres or filaments.
Coated Fabrics (HS Chapter 59)
Most coated fabrics incorporating a woven substrate qualify if they are made in the free
trade area from domestic woven fabrics. Coated fabrics incorporating a knitted substrate
qualify even if this substrate is imported.
The main exceptions are tire cord fabric (HS 59.02) and belting (HS 59.10), which, in
addition to the above requirements, also require input fabrics to be made in the free
trade area from domestic man-made filament yarns or from domestic man-made staple fibre
yarns made from domestic man-made staple fibres.
Carpets (HS Chapter 57)
Carpets qualify if they are woven, tufted or otherwise produced in the free trade area
from domestic yarns. Jute yarns and jute woven fabrics (the latter used as carpet
backings) can be imported. Other types of carpet backings must be domestic in order for
the carpets to qualify.
However, there is a different rule applicable to some carpets traded between the U.S. and
Mexico (detailed in an Appendix to "Annex 300-B"). This requires man-made fibre
tufted carpets to be made from domestic man-made fibre yarns made from domestic man-made
staple fibres, and felt carpets and carpet tiles to be made from domestic man-made staple
fibres in order to qualify for NAFTA rates of duty.
Other Textile Made-Up Articles (HS Chapter 63)
Other textile made-up articles (such as sheets, blankets, towels, etc.) qualify if they
are made from: domestic wool, cotton, man-made filament or most vegetable fibre fabrics
made from domestic yarns; or domestic man-made staple fibre fabrics made from domestic
yarns made from domestic fibres. Woven silk or linen fabrics, coated fabrics, or nonwovens
can be imported.
TPLs apply to cotton or man-made fibre made-up textile articles made from non-originating
Apparel (HS Chapters 61 and 62)
Generally, apparel must be both cut (or knit to shape) and sewn or otherwise assembled in
the free trade area from domestic fabrics made from domestic yarns. But there are
Bras can be made from imported fabrics and still qualify. Man-made fibre sweaters traded
between the U.S. and Mexico must be produced in the free trade area from domestic yarns
made from domestic man-made staple fibres. In addition, there are several input fabrics
which can be imported without disqualifying the garments. These include woven silk and
linen fabrics; Harris tweeds; some cotton velveteens and corduroys; batiste fabrics; a
variety of shirting fabrics; some circular knit fabrics; coated fabrics; and nonwovens.
TPLs allowing the use of imported fabrics, domestic fabrics made from imported yarns, or,
in the case of knit-to-shape garments, imported yarns, apply to almost all apparel.
While a summary is helpful in providing an overview of the rules, importers or exporters
should inform themselves of the specific rules covering the products they are trading as
there are various technicalities not mentioned here that might apply.
Tariff Preference Levels (TPLs)
It is impossible to judge whether or not textiles or apparel goods qualify for NAFTA rates
of duty simply by looking at the rules of origin. Importers or exporters must also
consider the various "exceptions" that permit specified levels of textiles and
apparel not meeting the rules of origin to also qualify for NAFTA rates of duty. These are
referred to in NAFTA as Tariff Preference Levels (TPLs) and in the FTA as Tariff Rate
TPLs are detailed in Appendix 6.0 (B) "Annex 300-B: Textile and Apparel Goods."
Specific levels apply to specific products traded between Canada and the U.S.; Canada and
Mexico; and the U.S. and Mexico.
Two sets of TPLs cover apparel. One covers cotton and man-made fibre apparel (knitted and
woven); the second covers wool apparel (knitted and woven). Details are provided in tables
4 and 5.
Click here to view Table 4: Cotton or Man-Made Fibre Apparel
Click here to view Table 5: Wool Apparel
As mentioned previously, there are a number of apparel items traded between the U.S. and
Mexico that do not have access to the TPLs. These are apparel made from denim, oxford
cloth and some circular knit fabrics, and man-made fibre sweaters. These apparel items
must either meet the applicable rules of origin or pay regular MFN rates of duty. This
exception does not apply to these apparel items traded between Canada and Mexico, or
Canada and the U.S.
Also covered by a TPL are goods imported into the U.S. from Mexico under U.S. tariff item
9802.00.80.60 (more commonly known as U.S. 807) up to a level of 25,000,000 SMEs. This TPL
covers apparel made from fabrics which are cut in the U.S., sewn or otherwise assembled in
Mexico, and returned to the U.S. with duty payable only on the Mexican value-added.
Another set of TPLs cover cotton and man-made fibre knitted and woven fabrics and made-up
textile articles of HS Chapters 52 through 55, 58, 60 and 63. These allow up to the
specified amounts of fabrics and made-up textile articles made from non-originating inputs
to still qualify for NAFTA rates of duty. Details are provided in table 6.
Click here to view Table 6: Fabrics and Man-Made Textile Articles
Finally, there is a "spun yarn" TPL, which allows up to the specified amounts of
yarns classified in HS headings 52.05 through 52.07 or 55.09 through 55.11 spun in the
free trade area from imported cotton or man-made staple fibres to still qualify for NAFTA
rates of duty. Details are provided in table 7.
Click here to view Table 7: Cotton and Man-Made Fibre Spun Yarns
All TPLs applicable to imports into the U.S. from Canada are subject to an annual growth
rate for 5 years starting in 1995. These are: 2 percent for spun yarns, fabrics and
made-up textile articles, and apparel made from domestic fabrics made from imported yarns
or knit to shape from imported yarns; and 1 percent for wool apparel and for cotton or
man-made fibre apparel made from fabrics imported from outside the free trade area.
Finally, there is a provision for a review, after 5 years, of the TPLs and of any
applicable growth factors.
How NAFTA Rules Differ from the FTA Rules
The concepts are identical. In both agreements, textile and apparel goods
"originate" if they undergo specific manufacturing processes in the free trade
area. In both agreements, there are exceptions (albeit called by different names: TPLs in
NAFTA; TRQs in the FTA) to the rules that allow "non-originating" goods to
qualify for preferential rates of duty up to specified levels.
The main changes from the FTA origin rules are NAFTA requirements:
that cotton or man-made fibre spun yarns (HS Chapters
52 and 55) be made from domestic fibres. The FTA allowed imported fibres
that knitted cotton fabrics (HS Chapter 60) be made from domestic yarns made from
domestic fibres. The FTA allowed imported cotton fibres
that tire cord fabrics (HS 59.02) and belting (HS 59.10) be made from domestic
man-made filament yarns or domestic man-made staple fibre yarns made from domestic fibres.
The FTA allowed imported yarns
that textile articles (HS Chapter 63) be made from domestic pile and terry fabrics
as well as domestic knitted fabrics. The FTA allowed these to be imported
that apparel be made from domestic fabrics made from domestic yarns or knit-to-shape
from domestic yarns. The FTA allowed the yarns to be imported
While these changes require more domestic processing in
order for goods to "originate," there are also changes that provide for more
liberal rules for certain products, mainly in the apparel area. These include previously
described exceptions for apparel made from a variety of specified fabrics as well as an
exception for one yarn type used in sheer curtains.
As for TRQs/TPLs, the basic challenge for Canada in the negotiations was to achieve
adjustments to the FTA TRQ levels covering its exports to compensate for what are
generally regarded as more restrictive rules of origin in NAFTA as compared to the FTA.
For example, FTA apparel TRQs covering "non-wool" apparel have been replaced
with higher NAFTA TPLs to accommodate trade potentially affected by the rule changes. A
spun yarn TPL was introduced to compensate for the new rule covering cotton or man-made
staple fibre yarns. An increased fabrics and made-up textile articles TPL level is the
result of a combination of factors, including rule changes and an FTA provision calling
for renegotiation of the FTA TRQ level covering these goods before the end of 1992.
Other changes include growth factors for TPLs covering Canadian exports to the U.S.;
specific review clauses covering rules of origin and TPLs; new provisions allowing rules
of origin exceptions for goods that are mutually agreed to be "in short supply;"
and new provisions allowing changes to TPL access for goods that are deemed to be "in
Under the FTA, most exporters using imported (from third countries) inputs had been
scheduled to lose duty drawback after January 1, 1994. There are only two exceptions:
citrus fruits and apparel exported at MFN rates of duty.
NAFTA represents an improvement over the FTA as far as duty drawback is concerned. The new
agreement extends the period during which full duty drawback will be available for two
years beyond the FTA expiry (i.e. to January 1, 1996) for Canada/U.S. trade and allows for
full duty drawback on trade with Mexico until January 1, 2001.
It also provides for continued duty drawback beyond these dates on the basis of a formula
that permits exporters to draw back the lesser of (a) duties paid on non-NAFTA inputs used
in the production of goods exported to another NAFTA country, or (b) duties paid to that
NAFTA country on the exported product. In other words, an exporter cannot get more
drawback on inputs than is paid on the exports in which they are incorporated.
The "lesser of" formula effectively means that exporters will not be able to
claim drawback on inputs used in "originating" NAFTA exports once these become
duty-free at the end of their respective transition periods. However, they will continue
to be able to claim either full or partial drawback on inputs used in
"non-originating" exports, as these will still be dutiable at regular MFN rates
Tariffs on textiles and apparel traded between Canada and the U.S. will continue to be
reduced as scheduled under the FTA.
Some textiles and apparel traded between the U.S. and Mexico will become duty-free
immediately. Most tariffs will be reduced over a 6-year period, and some (but not many)
over a longer period.
Most tariffs on textiles traded between Canada and Mexico will be reduced to zero over an
8-year period, as follows: a 20 percent reduction in the first year; no reduction in the
second year; five 10 percent annual reductions; and a final 30 percent reduction in the
last year. Some textile tariffs will reduce over 6 years; others (mostly those
already-accelerated under the FTA) will go to zero immediately. Clothing tariffs will be
reduced over a 10-year period.
As was the case in the FTA, NAFTA contains an "acceleration" clause which will
permit a faster phase-in period for goods mutually agreed between two or more of the
Also as in the FTA, there is a "tariff snapback" provision (Section 4 of
"Annex 300-B: Textile and Apparel Goods") which allows a party to temporarily
suspend the NAFTA rate of duty (i.e. return to MFN rates of duty) for specific products
under specific conditions. Such actions require compensation (normally these would be
equivalent tariff reductions on other products) to the affected Party by the Party taking
Quotas, or Quantitative Restraints
The U.S. has agreed to eliminate its MFA "MFA" refers to
the Multifibre Arrangement.Note quotas on "originating" imports from
Mexico immediately. There is a phase-out period for quotas covering
"non-originating" goods. These provisions are detailed in Schedule 3.1.1 in
Appendix 3.1 to "Annex 300-B: Textile and Apparel Goods."
Canada has no existing quotas with Mexico.
NAFTA also contains a provision (Section 5 of "Annex 300-B: Textile and Apparel
Goods") allowing the imposition of temporary quantitative measures as an
"emergency action." This permits the U.S. or Canada to take an action against
Mexico, or Mexico to take an action against the U.S. or Canada. However, any actions by
the U.S. against Canada or vice versa remain governed by Article 407 of the FTA, which is
commonly interpreted as precluding quantitative restrictions. The NAFTA Section 5
safeguard applies only to "non-originating" goods; no quantitative safeguards
are permitted on "originating" goods.
What Lies Ahead?
Agreements of the magnitude of the FTA and NAFTA set forces in motion and experience
indicates that the outcome is usually surprising.
The successful negotiation of the Canada-U.S. Free Trade Agreement was a watershed for the
textile manufacturing industry. Up to 1989, the industry exported about 8 percent of what
it made. About half went to the U.S. and the remainder went all over the world.
The reality of the FTA and the need to adapt acted as a psychological trigger and firms
began to look beyond the domestic market. In 1990, with a recession in Canada and the U.S.
with textile duties down by only two-tenths, and with a high Canadian dollar, textile
exports to the U.S. increased by 28 percent. In 1991, exports held that gain and increased
by another 15 percent. In 1992 they increased by yet another 30 percent.
In 1989 Canadian textile exports to the U.S. were $464 million. In 1992 they approached
$900 million. In 1993 they will pass the $1 billion mark.
Many Canadian textile companies have set as an export target 50 percent of what they make.
Some reached that goal in 1992. A few are exporting as much as 80 percent of their
production. The growth has resulted almost entirely from exports to the U.S. but firms
have begun to venture into non-North American markets for the first time.
Most of these firms could probably have been successful in U.S. markets without the FTA
but generally they hadn't tried. The FTA was the psychological trigger necessary for them
to make the effort.
In 1987, no one would have forecast increased Canadian textile exports to the U.S. of the
magnitude that have occurred. In fact the FTA has caused textile trade between the two
parties to grow to the benefit of both parties.
On the clothing side, it was widely assumed in 1987 that the Canadian market would be
flooded with U.S. garments. This has not happened. Canada had a positive balance of
clothing trade with the U.S. before the FTA. Since the FTA this positive balance has
continued to grow at an increasing rate.
Textile and clothing trade between the U.S. and Canada began to increase before the FTA
was really in effect. Interestingly enough this phenomenon is repeating itself with NAFTA.
Exports of textiles from Canada to Mexico have grown by 85 percent in the first half of
1992 while exports of clothing have more than doubled. Imports of both textiles and
clothing from Mexico have begun to increase too. While the absolute numbers are still
tiny, NAFTA is giving early indications of a trade expanding effect even before it has
come into existence.
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.
Last Modified: Wednesday, October 20, 1999.