MEXICO’S FAST TRIP TO THE TOP
Byline: Jim Ostroff
WASHINGTON — Mexico’s swift ascent to become — if only by a small margin — the U.S.’s leading supplier of imported apparel and textiles is no fluke.
In September — the latest tally — Mexico’s combined shipments squeaked past China, which has held the top spot most of the last decade. Trade experts contend Mexico’s fundamental strengths in the trade arena — fortified by the two-year-old North American Free Trade Agreement — will only further solidify its sourcing importance, at least into the start of the 21st century. Only some “unforeseen catastrophe,” they say, can derail the Mexican juggernaut until then.
But what may eventually upset the trend, some analysts point out, is the final fadeout of the Multi-Fiber Arrangement, which happens in 2005, taking with it the quota system that has long governed international trade. Then, it will be a new ball game, and China, with its vast low-cost labor supply — lower than Mexico’s — may be in a position to hit new home runs in a quotaless world.
Meanwhile, the potential for Mexican growth is reflected in the fact that its surge in apparel imports centers around a handful of basic products. An expanding range of goods could further swell Mexico’s shipments, experts say, although some added that the fabric limitations imposed for free trade benefits under NAFTA will probably keep Mexican production mostly linked to basics.
Also, there’s still considerably more shifts of sourcing that can take place into Mexico from the Far East. Mexico’s apparel shipments alone, even with the combined textile-apparel preeminence reached in September, still ranked third, behind China’s and Hong Kong’s. In textiles alone, Mexico came in second, below Canada, which for some time has been the top textile shipper, heavily skewed by industrial fabrics.
As Carlos Moore, executive vice president of the American Textile Manufacturers Institute, views the situation, NAFTA “has provided the incentive for U.S. garment producers and retailers to shift production to Mexico because of reduced or zero duties.”
“We believe this change is real and here to stay,” he said.
“This absolutely is not a short-term phenomenon,” echoed Jim Langlois, executive director of the National Apparel and Textile Association, a Seattle-based importer group. “The duty breaks will continue to cause a shift away from the Far East to Mexico, at least for certain apparel products, and the demand for Quick Response by retailers will only make Mexico more attractive as the source for imported apparel.”
The September import figures, released late last month by the Commerce Department, showed that Mexico shipped 141 million square meters equivalent in textiles and apparel to the U.S., against China’s 140 million SME. The report capped a 21-month period of fast growth for Mexican shipments, a period that began in January 1994 when NAFTA took effect. That month, Mexico ranked seventh as a U.S. supplier of imported apparel and textiles, shipping 52.8 million SME, far behind China’s 188.7 million SME. Against that month, Mexico’s figures for September add up to an increase of 167 percent, while China’s showed nearly a 26 percent drop.
Mexico’s September shipments comprised 67 million SME of apparel, a 42.3 percent increase from a year earlier, and 75 million SME of textiles, up 53.3 percent.
With NAFTA, Moore pointed out, U.S. import duties for many types of Mexican apparel went from 17 percent to zero. Mexican sourcing got a strong boost, too, he said, from U.S. retailers’ demands for shorter lead and delivery times than could be obtained from Far Eastern suppliers.
While imports traditionally have not been embraced by domestic textile makers, Moore acknowledged they are benefiting directly from a growing reliance on Mexico. NAFTA’s yarn-forward origin rule has virtually dictated that all Mexican apparel be made from U.S. fabrics cut in the U.S. and then shipped south for assembly. This is due to the fact NAFTA gave immediate duty elimination to apparel that was made in Mexico under the U.S.’s Special Regime program, requiring the use of U.S.-cut-and-formed fabrics. Moreover, under NAFTA, duties will end Jan. 1, 2000, on all Mexican-made garments that use materials originating and cut anywhere in North America.
In the first nine months of 1995, Moore noted, Commerce estimates U.S. textile mills shipped to Mexico 600 million more SME of fabrics as cut parts for apparel assembly than they did in the same period in 1993.
Clearly, though, Mexico has gained popularity as a U.S. textile source, as well. Its textile mills shipped 554 million SME of fabrics and yarns to the U.S. in the first nine months of this year, up nearly 61 percent from a year ago. Many of these exports, such as blue denim, cotton yarns and cotton twill fabric, posted triple-digit percentage increases during this period,
The analysts’ consensus is that these shipments to the U.S. will continue their strong growth during the next few years due to a complex series of economic considerations. Chandri Navarro-Bowman, an attorney in the Washington office of Sandler, Travis & Rosenberg, a Miami-based trade law firm, explained that NAFTA created incentives for U.S. textile companies to begin production in Mexico of fabrics that could be used in apparel assembly there, or perhaps for shipment to the U.S. as cut parts for assembly in this country.
In addition, Navarro-Bowman — who also is executive director of the U.S. Apparel Industry Council, which focuses on Caribbean apparel trade — noted that “U.S. textile companies, setting up either wholly owned mills in Mexico or joint venture projects, realize that since Mexico has free trade agreements with several Latin American nations, by producing in Mexico they can find new markets for their products using that nation as an export platform.”
She noted that Hoechst Celanese, DuPont, Cone Mills and Guilford Mills have set up textile facilities in Mexico. In fact, a Cone spokesman noted a new joint venture facility with Cipsa SA went on line this month in Parras, Mexico and should produce 26 million linear meters of denim annually, or about 40.9 million SME.
The ATMI’s Moore asserted that rising U.S. imports of Mexican textiles do not mean these are replacing traditional American textile production.
“Mexico always has been a strong exporter of twill fabrics, which include denim, and so this is not new,” he said. Moore noted that the lion’s share of U.S. imports of Mexican textiles are in categories that include items like polypropylene, specialty home textiles and surgical products, which ironically are made from special U.S. fabrics assembled in Mexico, but counted as textiles when shipped to the U.S.
“With respect to nonapparel items, a lot of the growth in these imports seems to be in man-made fiber filament yarns, and we’re looking into this more closely to figure out what’s going on,” he said.
Guilford Mills, which has a 75 percent stake in the Mexico City fabric mill American Textil, reported that at least 60 percent of its production — and production at some other U.S. and Mexican joint fabric producing ventures — is devoted to automotive textiles. Most of these fabrics are installed in autos made in Mexico for export to the U.S., where the fabrics used in them are then counted as textile imports, the spokesman said.
Returning to the surge in U.S. apparel imports from Mexico, Moore, an economist and one-time U.S. trade official, dismissed Mexico’s peso devaluation of a year ago as a significant factor in boosting apparel production there, contending that the effective reduction in wage rates in its maquiladoras is offset by higher costs to import U.S. cut textiles and machinery.
“Besides, South Korea has for years engaged in ‘competitive devaluation’ of [its currency] to encourage exports, but there has not been a surge in shipments to anywhere in the world,” he said.
Most of Mexico’s growth as an apparel exporter “clearly has come at the expense of the Far East, although there is no denying that there’s been some shift in production from the U.S. to Mexico,” Moore said. This shift is a touchy subject with domestic makers, and the American Apparel Manufacturers Association declined to even discuss it or the long-term prospect for Mexican apparel sourcing.
“Our strategy in supporting NAFTA is, rather than lose a customer when a garment-making operation shifts to the Far East,” Moore said, “we maintain or gain a customer if production shifts to Mexico.”
Moore said he expects QR demands will only boost U.S. apparel imports from Mexico. This in turn will be facilitated by the construction of the so-called Textile City being built in Cuernavaca, where apparel workers will be trained and facilities and infrastructure established to facilitate world-class turnaround in apparel production. Partners in this joint venture are Guilford, DuPont and Mexican industrial holding company Alfa SA de CV.
Meanwhile, Langlois said, Mexican apparel exports to the U.S. would likely grow “beyond what we can now imagine,” noting that the export boom to date has been fueled by a few categories: men’s and women’s cotton pants, cotton and manmade fiber underwear, and men’s and women’s cotton and man-made fiber knit shirts.
“Much of this production expanded because by tradition, that’s what was done [in the maquiladoras] under Special Regime,” he said. “But there’s no reason why men’s and women’s woven cotton and manmade fiber shirts could not be made in Mexico using U.S. fabrics. This would cut the U.S. import duty rate from 12 percent to zero immediately, compared with 16 percent for the rest of the world.”
Langlois said this is not done today probably because of the inability to offer a full-package program for this apparel as well as the requirement that U.S. fabric must be cut in the U.S. to get zero duties. But he noted that in 2000, when the requirement ends so that the fabric can be sourced and cut anywhere in North American for free trade benefits, Mexican apparel production will soar beyond today’s relatively astronomical levels.
Laura Jones, executive director of the U.S. Association of Importers of Textiles and Apparel, also maintained that Mexico would continue its steady growth as the top U.S. apparel and textile source but said this would be led by U.S. apparel firms continuing to expand production in Mexico. Moreover, she predicted the output would continue to center around basic products, such as jeans and shirts.
Elaborating on this, Robin Lanier, an International Mass Retail Association vice president, said NAFTA’s fabric origin rule largely will preclude Mexico from being a source of higher margin apparel.
“Retailers want something different than what they can buy off the rack in the U.S. Price is important, but they want — they demand — exclusivity for their private brands,” Lanier said. “The fact is that many times when you’re dealing with a hot item or fabric, it’s not available or in short supply in the U.S., and to import this fabric from elsewhere into Mexico and get NAFTA benefits you face a paperwork nightmare.
“And if it’s not a short supply situation, you often can’t get a special or short run of fabric in the U.S. In the final analysis with much apparel, even with NAFTA’s benefits, retailers find the guys in China still can do it cheaper,” she added. “So by going along with the U.S. rules of origin, Mexico assured its growth in the future would be large, but it could have been much bigger yet.”
Seth Bodner, president of the National Knitwear and Sportswear Association, noted that Mexico’s apparel firms and their U.S. suppliers and owners may also run into some heightened competition nearby, should the Caribbean Basin Initiative nations — already key suppliers under 807 programs — be granted trade parity with Mexico under NAFTA. The proposal has long been pending in Washington but as yet has failed to get through Congress. However, should it happen, Mexico still would have logistical advantages since apparel can move from there to the U.S. by truck, Bodner added.
For Robert Antoshak, president of Trade Resources Inc., “The fundamental shifts toward sourcing out of Mexico are solid and will withstand fluctuations in the peso” and competition from elsewhere. But Antoshak, whose Alexandria, Va.-based firm often advises domestic apparel makers, said his “big, overriding concern, is the elimination of the Multi-fiber Arrangement, along with all quotas,” come Jan. 1, 2005.
“For the next few years China may stand still with its quotas [that grow about 1 percent annually] filling each year earlier and earlier,” he said. “My big fear is that China eats everyone for lunch when the quotas end.” — Fairchild News Service