CCN Guide to the USMCA

I. INTRODUCTION.

Textiles and apparel are key industries for the economies of each Party and account for significant trade among the Parties. Chapter 6 of the USMCA is dedicated to textile and apparel goods and includes new provisions to incentivize greater North American production of textiles and apparel. Chapter 6 also strengthens customs enforcement and facilitates broader consultation and cooperation among the Parties to the USMCA.

II. EXECUTIVE SUMMARY

The USMCA strengthens existing North American supply chains for textiles and apparel and opens new opportunities for exports of U.S. yarns, fabrics, and apparel, through four main avenues:

1. Revised rules that incentivize the use of regional outputs, requiring the sourcing of sewing thread, narrow elastic fabrics, pocketing, and coated fabrics from within North America.
2. Restructured tariff preference levels, to ensure that this limited exception to the rules of origin is not overused pursuant to the USMCA, at the expense of regional supply chains.
3. Updated rules of origin that provide flexibility, allowing manufacturers to use textile inputs not generally available in North America.
4. New robust customs enforcement provisions to prevent circumvention and fraud.

Chapter 6 contains the agreements and provisions related to specific rules of origin established for textile and apparel goods, to determine the applicability of the tariff and non-tariff-based benefits that the USMCA offers, including the following topics:

1. Rules of Origin and related matters;
2. Handmade, traditional folkloric, or indigenous handicraft goods;
3. Special Provisions applicable to certain textile and apparel goods;
4. Review and revision of Rules of Origin;
5. Cooperation;
6. Origin verification;
7. Denial of preferential tariff treatment determinations; and
8. Committee on Textile and Apparel Trade Matters.

III. LEGAL DISCUSSION

Below is a summary of the most significant articles of Chapter 6:

Article 6.1: Rules of Origin and Related Matters. The USMCA states that the Rules of Origin and Origin Procedures established in Chapters 4 and 5 apply to all textile and apparel goods except as specifically provided in Chapter 6.  Particularly, to be considered as originating, textile goods with both originating and non-originating materials classified in Chapters 50-60, or heading 96.19, may not have more than 10 percent of the total weight of the good made up of non-originating materials (elastomeric content may not exceed 7 percent).  Likewise, to be considered as originating, textile goods classified in Chapters 61-63 with both originating and non-originating fibers/yarns in the component that determines their classification may not have more than 10 percent of the weight of such component made up of non-originating fibers/yarns (elastomeric content may not exceed 7 percent).  Also, the value of goods packaged in sets for retail sale must correspond to originating goods by at least 90 percent. (Rules to calculate the value of goods and sets are set out in Chapter 4).

Article 6.2:  Handmade, Traditional Folkloric, or Indigenous Handicraft Goods. Duty-free treatment by the importing Party shall be given to hand-loomed fabrics of the cottage industry, hand-made cottage industry goods made of such fabrics, traditional folklore, or indigenous handicraft goods.

Article 6.3: Special Provisions. Article 6.3 refers to the Annex 6-A Special Provisions, which contain special provisions applicable to certain textile and apparel goods, as summarized below:

1. The "yarn-forward" rules of origin are maintained, which means that fibers may be produced anywhere, but each component starting with the yarn used to make the apparel garments must be formed within the USMCA region. This rule requires that the spinning of the yarn or thread, weaving or knitting of the fabric, and assembly of the final apparel garments must all occur within the USMCA region. However, it is important to note that the USMCA also maintains most of the exceptions to the “yarn-forward” rule allowed by the North American Free Trade Agreement (NAFTA), which allows manufacturers to use some textile inputs not generally available in North America.
2. The USMCA will continue offering duty-free treatment for goods assembled in Mexico using fabrics that are wholly formed and cut in the United States (commonly known as the 807A provision), exported from and reimported into the United States under Chapters 61 to 63 of the Harmonized System.
3. The Parties shall apply the preferential treatment applicable to originating goods, to goods classified in Chapters 61-62 of the Harmonized System that are both cut and sewn, or otherwise assembled in the USMCA region from yarn/fabric obtained outside the USMCA region that meet other conditions for preferential treatment. It is important to mention that several tariff items are ineligible for preferential treatment between Mexico and the United States, and include i) blue denim; ii) fabric woven on plain weave where two or more warp ends are woven as one (oxford cloth) of average yarn number less than 135 metric number; iii) goods composed chiefly of circular knit fabric of yarn equal to or less than 100 metric number and iv) goods as parts of ensembles.
4. The Parties shall apply, with respect to fabric and made-up goods, the preferential treatment to cotton or man-made fiber fabric or goods woven/knit in a Party from yarn/fabric from outside the USMCA region that meet all other conditions.
5. For trade between the United States and Canada, numbers of Square Meter Equivalents (SME) counted against Tariff Preference Levels (TPL) are as follows: non-originating goods with 50% or less by weight of materials of that good - 50% of the SME for that good; Non-originating goods with more than 50% by weight of the materials of that good - 100% of the SME for that good.
6. Preferential Tariff Treatment is applied with respect to spun yarn up to annual quantities in Appendix 3 to certain headings of cotton/man-made fiber yarns, produced/obtained outside the USMCA region that meet other conditions.
7. For trade between the United States and Canada, the Parties shall also apply preferential tariff treatment to goods classified under heading 56.05 of the Harmonized System that are formed in the territory of a Party, with fibers from outside the USMCA region, that meet other applicable conditions.
8. The following special provisions apply to goods entering under the TPL provisions:

• For goods imported under a TPL set out in Annex 6-A, the United States may not apply the Merchandise Processing Fee for Canadian goods. Provisions regarding claims that apply to other textiles also apply to these goods, notwithstanding that goods subject to TPL are not originating.
• Trade goods referred to in Annex 6-A shall be monitored by the Parties, which shall consult to ensure that TPLs are administered effectively, including responding to time-sensitive requests.
• The TPLs shall be managed on a first-come, first-served basis, calculating quantities on the basis of imports.
• The Parties shall publish online: i) procedures for allocation of TPLs with summary documents explaining the procedures, and changes to procedures; ii) annual amounts/utilization of TPLs and monthly updates; and iii) information on the allocation/utilization of TPLs starting from the date the USMCA enters into force.
• Importing Parties may require a document issued by a competent authority to track allocation and use of a TPL to grant duty-free treatment. (The Parties shall notify the other Parties if it requires a certificate of eligibility or other documentation and provide the minimum data elements required).
• Importers may claim duty-free treatment for a good under TPL for at least one year after importation.
• The Parties shall consult on adjusting annual TPLs for supplies of fibers/yarns/fabrics at the request of a Party. Adjustments shall require mutual consent and are subject to domestic approval procedures.

Article 6.4: Review and Revision of Rules of Origin. The USMCA allows Parties to initiate a consultation to consider if certain goods should be subject to different rules of origin, regarding the supply of fibers, yarns, or fabrics, provided that the requesting Party demonstrates substantial production in its territory for that particular good, which means proving its domestic producers can timely supply commercial quantities of the good in question. An initial assessment shall be made within 90 days, to the extent possible.  If the Parties agree that the fiber/yarn/fabric is not commercially available, they shall work on a proposal for a rule change and proceed with domestic implementation of such within 60 days of initial assessment. An agreement by the Parties will supersede any prior rule.

Article 6.6: Verification. The Article 6.6 provisions allow the Parties to conduct, through their customs administrations, a verification regarding textile goods to verify qualification for preferential treatment, or through a request for a site visit.  Site visits may be requested to verify the qualification of a good for preferential treatment or customs offenses regarding textile/apparel goods, allowing Parties to request access to records and facilities relevant to the claim or to the offenses, as applicable.  For a site visit, the importing Party shall provide the host Party with the following information at least 20 days before the planned site visit: i) proposed dates; ii) the number and location of exporters and producers to be visited; iii) whether assistance is requested; iv) the suspected offenses to be verified; and v) whether the importer claimed preferential treatment. The host Party shall acknowledge receipt of a site visit notification and may request information to facilitate the site visit.

Some rules that the importing Parties must follow when conducting site visits are set out in Article 6.6.7:

1. Officials of the customs administration of the host Party may accompany and assist the importing Party officials.
2. Each Party must limit communication to government officials and not inform any person outside the government who could undermine the effectiveness of the visit.
3. Access to records/facilities must be requested from the exporter or producer (or the person with capacity to consent for them) before or at the time of the visit. If access is denied, the site visit will not occur.
4. If the exporter or producer is not able to receive the importing Party for the site visit, it will be conducted on the next working day, unless the importing Party agrees otherwise or a valid reason acceptable to the importing Party is substantiated; otherwise, permission for the visit is considered denied. The importing Party must consider any reasonable alternatives.

Upon completion of the site visit, the importing Party must, if requested by the host Party, inform the host Party of its preliminary findings, and within 90 days of a request, provide a written report of the results (reports to exporters/producers shall be provided upon request as it pertains to each one).  If a Party intends to deny preferential tariff treatment as a result of a site visit, it shall provide notice of such intent to the importer/exporter/producer with information of the preliminary results of verification at least 30 days in advance, allowing them to submit additional information to support the claim. It is important to note that an importing Party may not reject claims for preferential treatment on the sole grounds of lack of assistance or information.

Additionally, Article 6.6.11 states that if verifications indicate a pattern of conduct by exporters/producers of false/unsupported representations that a certain good qualifies for preferential treatment the importing Party may withhold preferential treatment for identical goods of that person until it is demonstrated that goods do qualify for such treatment.

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Article 6.7:  Determinations. Article 6.7 states that preferential treatment may be denied: a) for reasons established in Article 5.10 (Determinations of Origin); b) if it has not received sufficient information to confirm that the good qualifies for preferential treatment; or c) if the importing Party is unable to conduct site visits because access to facilities or relevant records is denied, or if the importing Party is otherwise prevented from completing the site visit.

Article 6.8:  Committee on Textile and Apparel Trade Matters. Article 6.8 provides for the creation of a Textiles Committee to review the implementation of Chapter 6, which will function as a consultative committee on technical or interpretive difficulties that may arise under Chapter 6, and to discuss ways to improve the effectiveness of cooperation under Chapter 6.

Additionally, the Textiles Committee shall assess the benefits and risks of restrictions on trade, including business and employment matters, and the market for textile goods of each Party, and shall consult before amendments are made to the Harmonized System in order to prepare proposed updates to Chapter 6.

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IV. CONCLUSION

In comparison to the NAFTA, the USMCA incentivizes the production of textiles and goods within the USMCA region by strengthening customs enforcement and facilitating broader consultation and cooperation among the Parties. Nevertheless, it also maintains and relaxes some provisions related to non-originating materials used in the production of textile and apparel goods, such as increasing the de minimis content of non-originating fibers and yarns from 7 percent to 10 percent of the weight of the good. Chapter 6 is expected to favorably impact the textile and apparel industries in the USMCA region, and to result in an increase of textile and apparel exports by the Parties.

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