Textiles

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NAFTA and the Textile Sector

The North American Free Trade Agreement (NAFTA) came into effect January 1, 1994. The overall objective of this Agreement is to promote employment and economic growth by expanding trade and investment opportunities in the North American free trade area and by enhancing the competitiveness of Canadian, Mexican and U.S. companies in global markets. NAFTA provides Canadian manufacturers of textiles with continued preferential access to U.S. markets and new preferential access to Mexico.

To make the most of these opportunities, manufacturers should first understand how the Agreement affects their business operations. Second, they should assess their strategic business plans and determine whether and how their production and marketing practices might need to be altered as a result of NAFTA. This booklet highlights key aspects of the Agreement for the Canadian textiles sector including manufacturers of fibres, yarns, fabrics and made-up textile articles. It provides product-specific information on tariff rates, tariff phase-outs and rules of origin, and it describes other provisions of the Agreement relevant to manufacturers and distributors of these products. It provides an overview of the textiles market in North America and highlights potential new market opportunities in Mexico.

Scope and coverage for textiles

Textile goods under NAFTA are those goods listed in Annex 300-B, Appendix 1.1 of the Agreement and include those items listed in chapters 50 to 60, chapter 63, most of chapters 65 and 66, and specific items of chapters 30, 39, 42, 64, 70, 87, 88, 91, 94, 95, and 96 of the Harmonized Commodity Description and Coding System (HS). Apparel goods, which are also covered in Annex 300-B, are defined in HS chapters 61 and 62. To help you locate information on specific topics in the North American Free Trade Agreement, a reference guide is provided in Annex A of this booklet.

Définitions

For the purpose of this document, the following definitions apply:

  • NAFTA free trade area - From any or all member countries domestic, of NAFTA North America(n)
  • Party - A NAFTA country
  • Input or material - Component material(s) used in the manufacture of a good
  • Imported - From a non-NAFTA country, Non-North American
  • Originating - Rrefers to goods that meet the rules of origin of Chapter 4 and Annex 401 of the Agreement for tariff preference purposes Definitions

Tariffs for Textiles

Under NAFTA, virtually all tariffs on originating textiles being traded between Canada, the United States and Mexico will be eliminated by January 1, 2003.

Canada-United-States Tariffs

Trade between Canada and the United States will continue to be governed by the tariff phase-outs negotiated under the provisions of the Canada-United States Free Trade Agreement (FTA). Most originating textile tariffs are being reduced to zero through 10 equal annual instalments. Tariffs have already been reduced by at least 60 percent and will reach zero by January 1, 1998. By mutual agreement, tariffs for some goods were eliminated immediately or reduced more quickly. Through subsequent accelerated tariff reduction exercises, tariffs on several goods were phased out over shorter periods than originally negotiated (e.g., upholstery fabrics).

Canada-Mexico Tariffs

Most tariffs on textiles traded between Canada and Mexico will be eliminated over an eight-year period (known as staging category B+). This phase-out commenced on January 1, 1994 with a 20 percent reduction in the tariff, followed on January 1, 1995 by a 0 percent reduction and a 10 percent reduction on January 1 of each year from 1996 to 2000 inclusive. Originating textile goods subject to this schedule will become duty-free on January 1, 2001. Some textile tariffs will be phased out over five years; this is known as staging Category B. Others, such as those already accelerated under the FTA, were eliminated immediately upon implementation of the Agreement on January 1, 1994. Some textile items for which tariffs between Canada, the United States and Mexico have been eliminated entirely include: 

  • certain woven fabrics of silk, nes (HS 5007.90);
  • denim fabrics of less than 85 percent by weight of cotton mixed with man-made fibres, more than 200 grams per square metre (g/m 2 ) (HS 5211.42); and
  • staple fibres of viscose, not carded or combed (HS 5504.10).

Tariffs on apparel will be phased out in 10 equal steps, over 10 years, becoming zero on January 1, 2003.

United States-Mexico Tariffs

Most textile tariffs between the United States and Mexico will be phased out over six years. Tariffs on some textiles and apparel were eliminated immediately, on January 1, 1994, while a few will be phased out over a longer time period.

Schedule of NAFTA Phase-Outs

Annex F contains a product-specific listing of the Canadian and Mexican tariff elimination schedules for some selected textile items. The full listing is contained in the country-specific NAFTA Tariff Schedules.

Accelerated Duty Elimination

As with the FTA, there is an acceleration clause in NAFTA. Tariffs for textiles may be phased out faster than originally negotiated if the textile industries in the three countries request such action. If only two countries agree to such a phase-out, acceleration occurs only between those two. The Government, however, will negotiate only those requests that enjoy broad support in the textile industry.

5 Rules of origin for textiles

As of January 1, 1994, the new NAFTA rules of origin completely replaced the FTA rules. These new rules are intended to be clearer and more predictable than those of the FTA. While each member country of NAFTA maintains its own external tariff, for example, the Most Favoured Nation (MFN) tariff, the NAFTA preferential tariff is extended only to goods originating from a member country. NAFTA provides preferential tariff treatment for all originating North American goods traded between Canada, the United States and Mexico.

Rules of origin are used to determine whether or not a product qualifies as a good originating in North America. They are also used to ensure that the NAFTA benefits are available only for goods that meet specific rules of transformation. For apparel, the rules of origin are generally more stringent under NAFTA than they were under the FTA. For example, they require that the yarn, fabric and garment be made in North America in order to qualify for the NAFTA preferential duties. Thus, goods produced in any or all of the three NAFTA countries, with components and materials that are wholly sourced or manufactured in any of the three countries, qualify as originating goods entitled to preferential tariff treatment.

Goods using non-North American input materials must meet the requirements set out in the NAFTA Rules of Origin to determine whether they are originating. Where inputs are imported from out-side North America, they must be processed in a NAFTA country to such an extent that they undergo a specified change or tariff shift in the Harmonized System (HS) of tariff classification for the resulting product to receive NAFTA tariff status.

NAFTA adopts an objective, rules-based approach to substantial transformation. For textiles and apparel, this involves a change in tariff heading. Producers are informed of the exact changes that must occur to an imported material for the good to be substantially transformed. These required changes are prescribed on the basis of the chapters, headings and subheadings of the Harmonized System of tariff classification. The requirements set out by the rules are described here.

  1. General Rule For most products, the rule of origin is yarn forward, which means that the textile and apparel product must be produced from yarns made in a NAFTA country to qualify for full NAFTA benefits. Exceptions to the General Rule are covered by the Specific Rules.
  2. Specific Rules Certain products are required to meet a stricter fibre forward rule of origin. The fibre forward rule applies to products such as cotton and man-made staple fibre yarns and threads (HS chap-chapters 52 and 55), which means that the yarn or thread must be produced from fibre made in a NAFTA country. Man-made filament yarns must be composed of filaments that are extruded in a NAFTA country, but petrochemical or cellulosic feedstock may be sourced from non- NAFTA countries. Fibre forward also applies to certain woven and knit fabrics of cotton or man-made staple fibres, and to non-woven fabrics of man-made filament or man-made staple fibres.

A less strict fabric forward rule applies to some textiles, such as coated fabrics using a woven substrate fabric.

Most apparel will have to be made from North American fabrics manufactured from North American yarns (known as triple transformation). However, apparel cut and sewn in one or more of the NAFTA countries from certain imported fabrics, which the Parties agree are in short supply in North America, can qualify for preferential tariff treatment. This is referred to as single transformation. Annex B of this booklet provides an overview of the product specific rules of origin applicable to apparel produced in Canada and Annex C gives more detail about Short Supply Fabrics.

The De Minimis Rule

The Agreement provides a de minimis rule. A textile good containing non-originating fibres or yarns can qualify for full NAFTA benefits if the total weight of the non-North American fibres or yarns does not exceed 7 percent of the total weight of the component of the good that determines the tariff classification of the textile good being exported. The de minimis rule, on a weight basis, applies only to textile goods of HS chapters 50 to 63. Other textile goods outside these chapters have access to the value-based de minimis rule (see Chapter 4, Article 405 of NAFTA). To summarize, a good qualifies as originating if the foreign content is 7 percent or less by weight of the component that determines the tariff classification.

How to Use the Rules of Origin

Canadian exporters to the United States or Mexico may find the following steps useful in verifying whether their products qualify for NAFTA tariff preference: 

  • Step 1. If the good is manufactured in Canada using inputs wholly manufactured in North America, it qualifies as originating and is entitled to preferential tariff treatment when exported to the United States or Mexico.
  • Step 2. If the good uses non-North American inputs, the tariff classification must be identified for both the good and its non-North American inputs.
    Exporters should note that some inputs purchased from North American suppliers may have been produced or imported from non-North American sources. For assistance in determining the tariff classifications of inputs and/or goods, contact the appropriate customs agencies identified in this booklet.
  • Step 3. The exporter should consult NAFTA to identify the specific rule of origin for a specific good (see Chapter 4, Annex 401, Section B Specific Rules of Origin, Section XI: Textiles and Textile Articles).

    As the rules mention tariff chapters, headings, subheadings and items, some understanding of the tariff classification is necessary. Under the Harmonized System (HS), a tariff item has eight digits. The first two digits identify its chapter, the first four digits the heading,
    and the first six digits the subheading of the good.

    For example:

    5407.60.10.00

    Chapter (54) - Man-made filaments
    Heading (5407) - Woven fabrics of synthetic filament yarn
    Subheading (5407.60) - Other woven fabrics, containing 85 percent or more by weight of non-textured polyester filaments
    Tariff item (5407.60.10) - Solely of polyester, of single yarns measuring not less than 75 decitex but not more than 80 decitex, having 24 filaments per yarn and a twist of 900 or more turns per metre

    Note: The first six digits are consistent internationally.

  • Step 4. In most cases, a rule will indicate what changes in tariff classification must occur between each of the non-North American inputs and the finished good. It will read something like, a change to heading (AAAA) from any other heading, except heading (BBBB). The first code refers to the good, the second code to excluded inputs, meaning inputs that must also be produced in North America. As long as all non-North American inputs come from permitted headings, or subheadings, the good qualifies as originating. If the good is made from non-North American inputs, those inputs that are considered in the tariff change requirements must each meet the rules of origin for the good to be considered originating. If there is any ineligible non-North American input, the good is considered to be non-originating (unless it meets the de minimis rule). It will be subject to a duty rate according to the MFN or the NAFTA rate of duty if the Tariff Preference Level (TPL) is available. The TPL is explained in more detail in a following section.

An Example

A Canadian-produced woven cotton blend fabric (falling within the range of tariff headings 52.08 through 52.12) is made with a blend of North American cotton spun yarn (falling within the range of tariff headings 52.05 through 52.06) and imported polyester staple fibre yarn (falling within the range of tariff headings 55.09 through 55.10).

The rules of origin must be applied to determine if that fabric will be accorded preferential tariff treatment if or when it is exported to another NAFTA country. Since some non-North American inputs are being used, the fabric does not automatically qualify as originating-ing. The product-specific rule must be used for the fabric and the non-originating inputs. The rule of origin here requires a change to heading 52.08 52.12 (the fabric) from any other heading except from heading 52.05 through 52.06 and 55.09 through 55.10 (man-made staple fibre yarns). Consequently, this particular fabric would not qualify as originating because the exception, the polyester staple fibre yarn, must also be produced in North America.

As a non-originating product, the fabric would be subject to the MFN duty rate or the NAFTA duty rate if the TPL is available. However, should the fabric meet the de minimis rulerule, then it would qualify for the NAFTA preferential tariff rate.

Rules of Origin Review

A five-year general review of all the rules of origin for the textiles and apparel sectors must occur before January 1, 1998. This review will take into account the effect of increasing global competition and the implications of integrating textile and apparel goods into GATT pursuant to the phasing-out of the Multi-fibre Arrangement (MFA). In the interim, however, member countries may consult on whether specific goods should be subject to revised rules of origin, after considering the availability of supply within the free trade area. They may also review items eligible for TPL access as well as the appropriateness of an individual TPL, although there is no provision for review of the TPLs for goods from Canada to the United States for the first five years.

Additional Information

More detailed information on theNAFTA rules of origin is contained in the following brochures, which should be obtained by all textile firms exporting to the United States or Mexico: 

Guide to Rules of Origin and Customs Procedures for Canadian Exporters to the U.S. Market , available through InfoEx at 1-800-267-8376.

Trilateral Customs Guide to NAFTA, and NAFTA Rules of Origin A Step by Step Guide , available from Revenue Canada, Customs Infoline (613) 941-0965 or Fax (613) 941-8138.

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