NAFTA: The Canadian View

Just when the North American Free Trade Agreement seemed to be fully integrated into continental commerce, along came Democratic presidential candidates...

Appeared In
Special Issue
WWD Sourcing Horizons issue 05/13/2008

MONTREAL — Just when the North American Free Trade Agreement seemed to be fully integrated into continental commerce, along came Democratic presidential candidates Barack Obama and Hillary Rodham Clinton with calls to renegotiate the treaty.

This story first appeared in the May 13, 2008 issue of WWD.  Subscribe Today.

Political posturing or not, the debate has caught the attention of politicians on this side of the border. The federal government has asked provincial cabinet ministers from across Canada to lobby their U.S. contacts to convince them of the importance of NAFTA.

Michael Wilson, Canada’s ambassador to the U.S., has stepped up efforts to convince American politicians of the folly of reopening the trade deal. International Trade Minister David Emerson said Americans tend to blame NAFTA for problems that have nothing to do with the trade pact, such as the loss of jobs to China.

Bob Rae, a Liberal member of parliament, said working as a lawyer in the softwood lumber industry for nearly a decade taught him there is no more protectionist body than the U.S. Senate, so the debate could carry on long after President Bush has left office.

As for the Canadian apparel industry, NAFTA was considered a textile agreement that catered to the U.S. and the textile industry that was still going strong at the time of implementation in 1994.

“The basic rules of origin are that for apparel to be traded duty free between Canada and the U.S., everything from the yarn forward needed to be originating in the region, which meant American,” Rae said. “So you have to think how much that gives a preference to yarn spinners located in the southern U.S.”

Bob Kirke, executive director of the Ottawa-based Canadian Apparel Federation, said the Canadian apparel industry fought NAFTA with its “ridiculous rules of origin.”

“You could have 6 percent imported yarn, but not 8 percent, as an example,” Kirke said. “The whole thing was biased toward yarn spinners and, guess what, we don’t have any left or at least very few. They’ve all moved to Asia and other places.”

There are some provisions to allow a certain amount of clothing to be considered North American even if it doesn’t meet the rules of origin. For example, suits can be made of Italian fabric up to a certain limit under an export quota. But they’re small loopholes in the general rule of origin, said Kirke.

Since NAFTA was signed, the U.S. has signed a number of free trade agreements with several other countries and most of them contain ways to get around the rules of origin or make it easier to add or subtract fabrics that are in short supply than does NAFTA.

“Amendments can take as little as 60 days, whereas under NAFTA, it can take up to a year and a half and it’s extremely complicated,” said Kirke. “It would be very smart to amend certain rules or expand the short supply list simply to make trade easier. And in the 13 or 14 years since NAFTA was signed, we should look at what the Americans have done in other trade agreements.”

Kirke also pointed out that tariffs on imported garments from China will be down around 5 percent in the next five years, the same percent as U.S. imports currently, versus 18 percent today.

“So why do we have these cumbersome rules of origin, since the advantage of a free trade agreement is to give you some sort of preference over people outside,” he said. “For NAFTA to remain meaningful going forward, we have to make it simpler to reflect reality, such as a diminished fabric supply base in NAFTA.”

For example, Peter Nygård is closing its last Winnipeg manufacturing facility this week, affecting 250 workers, due to a shortage of fabric. A company spokeswoman said the fabric needed for Nygård’s “Feathertouch” pants is no longer being manufactured in North America. The company is now looking for an offshore supplier and will manufacture the pants outside the continent.

Nygård will continue to employ about 900 people in Winnipeg in design, retail and IT operations. Nygård stores and tailoring shops will also remain open.

While Mexico is a NAFTA partner, it is not a major trading partner of Canada’s and therefore it shouldn’t be involved in Canada-U.S. relations, said Kirke.

“Our trade concerns with the U.S. are not the same as their trade concerns with Mexico and therefore we shouldn’t be lumped together,” he said. “Amending NAFTA requires three signatures and we’ll never get the Mexico one. So we’ll have to make amendments bilaterally, which has already been done in some cases.”

Kirke was echoing the sentiment of Derek Burney, who is heading a panel reviewing the Canada-U.S. cross-border relationship. Burney said Canada gets little out of meetings like the one recently held in New Orleans between Canada, the U.S. and Mexico and should instead develop a more direct relationship with the U.S.

Burney, who helped negotiate the free trade agreement and served as Canada’s ambassador to the U.S., said that while he continues to support NAFTA, there are many other issues in which the three countries have such different views that little gets done.

Stephen Lamar, executive vice president of the American Apparel & Footwear Association, agreed with Kirke on several points, including that NAFTA was essentially a textile trade agreement, but believes for the most part that NAFTA has been beneficial for his members.

“It has allowed us to source from Mexico, and while a lot of members view themselves as importers, others are manufacturers who do some importing to remain competitive,” Lamar said.

While apparel jobs have been lost to Mexico, it has created a big market for American fabrics and yarns, although textile shipments to Mexico have declined in the last two years due to a drop in apparel production in that country, a victim of the China syndrome itself.

Lamar also agreed with Kirke that the rules of origin need to be revisited.

“While NAFTA was a benefit initially, it has been eroded because it has not grown with the industry,” he said. “It’s like the computer you had on your desk in 1993. It’s outdated technology.”

He also cautioned about renegotiating the deal as suggested by Clinton and Obama.

“You hear the debate in the U.S. that NAFTA has to be renegotiated,” Lamar said. “But nobody here has contemplated that Mexico and Canada might want to implement their own changes that might make it more beneficial to them.”

While some AAFA members feel NAFTA hasn’t worked, he said they are the ones who were not ready to compete and that NAFTA was successful in creating a North American textile and apparel trading area, although some irritants remain.

“We’re starting to look at the short supply clause and try to get some modification,” he said. “Everyone agrees the current system doesn’t work.”

One point that Lamar can’t agree on is Kirke’s desire to see Mexico cut out of some trade talks between Canada and the U.S.

“We need to try to find opportunities where all three countries can work together,” he added. “We shouldn’t avoid making improvements just because Mexico may not sign off on some of them.”