Thursday, October 10, 2013

If Baby Makes Her Blue Jeans Talk, What Do They Say About Trade and American Manufacturing?

Next week I'll be in Washington for the SPESA 2013 Executive Conference, where much of the talk will be of "reshoring," that is manufacturing jobs coming back to the U.S. Equally interesting is the concept of "near-shoring," that is manufacturing returning to the Americas, under a hybrid, U.S.-F.T.A. partner, model. A few days before the partial government shutdown, when trade data were still available from the Department of Commerce and the International Trade Commission, I pulled together some numbers to illustrate, for a CNCB reporter (see story here), how near-shoring works. The example I use is blue jeans, an iconic, American-invented product, but which has little current U.S.A. production.

In 2012, the total value (landed, duty-paid) of all U.S. imports of denim trousers was $4.4 billion. That equates to 41,1 million dozen pair of trousers. The bulk of those were subject to the full 16.6 percent rate of duty and were mostly imported from Asia, in particular, China. However, 36 percent of all imports were duty-free under the provisions of a free trade agreement or trade preference program. Two programs in particular are of interest: the North American Free Trade Agreement ("NAFTA") and the Dominican Republic-Central America Free Trade Agreement ("DR-CAFTA").

Combined NAFTA (Canada and Mexico) and DR-CAFTA (Costa Rica, Dominican Republic, El Salvador, Gautemala, Honduras, and Nicaragua) accounted for over a quarter of all U.S. imports of denim trousers. Both agreements have what is called a "yarn forward" rule of origin, which means that jeans imported into the U.S. duty free under the terms of the agreement must be made of fabrics woven in one or more of the partner countries of yarn spun in one or more of the partner countries. Each agreement has loop-holes that allow some use of third country fabric, but a look at the trade data suggests that they are using a substantial amount of regional fabric, and that is helping U.S. denim fabric makers.

How so? Well, to start off, our DR-CAFTA partners have little if any local production of denim. Mexico produces denim, as does the U.S. Therefore, not counting the loopholes that let some third-country fabric to be used, free trade in jeans under the NAFTA or DR-CAFTA must use fabric made in the U.S. or Mexico (Canada is not a significant producer of denim).

So what do the data show?

Free Trade AgreementU.S. Imports of Denim Trousers (in Dozens)U.S. Exports of Denim Fabric (Square Meters Converted to Dozens at a Rate of 14.9 m2 = 1 Dozen)

What jumps out is that the amount of denim fabric the U.S. makes and exports to our DR-CAFTA is sufficient to account for 95% of the jeans we import from those partners. In the case of NAFTA, U.S. fabric can account for 42% of the jeans we import duty-free under that trade agreement, which is rather high considering that Mexico has its own denim production. We must be careful with these numbers. The commodity codes for exports and imports are not precisely the same, and there is a single conversion number for all "trousers" which could encompass everything from the skimpiest "Daisy Dukes" to the largest plus-size trousers. However, when you see, in the case of DR-CAFTA, nearly 100% alignment of U.S. fabric exports and U.S. trouser imports, you know the true correlation, while perhaps not 94.5 percent, must be very high.

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