According to the U.S. International Trade Commission, Mexico became the United States' fastest-growing supplier of textiles and apparel (by volume) in 1994. Growth, measured by volume, surpassed that of China, Hong Kong, Taiwan, and South Korea. China remained the biggest supplier of textiles and apparel, but the volume of its exports to the United States dropped for the first time since 1988. U.S. imports from Hong Kong, Taiwan and South Korea also dropped. Mexico ranked fifth following South Korea.

Last year, U.S. exporters of textiles and apparel to Mexico performed well. The increase of U.S. textile exports (categorized under SIC code 22) to Mexico from 1993 to 1994, the first full year of Nafta, was 130% more than the increase from 1992 to 1993. The increase of U.S. apparel exports (categorized under SIC code 23) to Mexico from 1993 to 1994 was 17% more than the increase from 1992 to 1993.

U.S.-Mexican Textile and Apparel Co-production to Increase at an Accelerated Pace

Apparel production, which is labor intensive, requires few skills and is difficult to automate, has continually moved to developing countries where labor rates are lower than in the United States. Consequently, U.S. production has declined.

According to a U.S. International Trade Commission report released in January, the U.S. apparel production index declined from its base of 100 in 1987 to a low of 92.2 in 1990. It increased to 95.0 in 1992 before declining slightly in 1993 to 94.9. Over the last 10 years, U.S. imports of apparel grew by 90% to $34 billion.

This trend is not unique to the United States. Stated in the Commission report, from 1980-1993 apparel output decreased by 24% in developed countries but increased by 39% in developing countries. During this period, employment in this sector fell by 19% in developed countries and rose by 110% in developing countries.

The United States is one of the world’s largest and most efficient producers of textile mill products. However, over the years domestic output has dropped. This is primarily due to a reduction in apparel production in the United States -- the single largest market for the textile industry. Thus, East Asian producers of apparel, major suppliers to the United States, source their textiles in East Asia, not in the United States.

In an attempt to sustain remaining domestic market share, U.S. apparel producers have expanded their co-production operations in Mexico and the Caribbean -- benefiting from the lower wages and tariff preferences. This activity also benefits the U.S. textile industry.

Permitted under U.S. tariff classification 9802.00.80, formerly 807 of the old U.S. tariff code, co-production, also known as production sharing, has allowed U.S. textiles sewn and made into apparel in Mexico, or in other foreign countries, to be shipped back to the United States incurring duty only on the non-U.S. material and foreign labor. This has allowed some apparel manufacturing processes to be conducted in Mexico and in other low-cost labor markets.

Under Nafta, a new U.S. tariff code (9802.00.90) now allows U.S. imports of Mexican apparel made with 100% U.S. textile content to enter the United States duty free -- entirely omitting duty once applied to the value associated with Mexican labor.

According to the U.S. International Trade Commission, between 1989 and 1992, U.S. imports of textiles, apparel and footwear under tariff code 9802.00.80 increased by 95%, to almost $5.4 billion. Analysts predict that U.S.-Mexican apparel co-production will increase at a faster rate as a result of the Mexican peso devaluation and use of the new tariff code 9802.00.90. This will benefit both countries as North America becomes more globally competitive with East Asia and other regions of the world.

Approximately 80% of Mexican exports of apparel to the United States is produced in Mexico's roughly 300 maquiladora plants employing about 45,000 workers. Of all countries exporting textile and apparel to the United States under 9802.00.80, Mexico and the Caribbean account for almost all activity.

Some of the new maquiladora production anticipated is expected to result from a shift in existing manufacturing from East Asia to Mexico. And because Mexican maquiladoras utilize about twice as much U.S. material in their finished products as do producers in Asia's newly industrialized countries, U.S. producers of textiles will benefit.

Reportedly, rising labor costs in the Far East helped initiate the shift of apparel production to the Caribbean region about four years ago. Nafta has further influenced this shift away from the Far East to Mexico. Note that the United States Congress is considering legislation that would give the Caribbean region the same duty treatment now given to Mexico under Nafta.

Mexico Raises Textile and Apparel Duties on Non-Nafta Countries

In March, the Mexican Government formally notified the World Trade Organization that it would increase tariffs to protect its apparel industry. The announced tariff increase, from an average of about 20% to 35%, will apply to apparel imports from non-Nafta countries.

Since Mexico significantly reduced its trade barriers as a result of joining GATT in 1986, it has experienced much difficulty in competing with Asian apparel imports. Thus, in 1985 Mexico's tariffs on apparel averaged nearly 50% and all imports were subject to import licenses. By the end of 1987, Mexico's average tariff on apparel dropped to 20% and import licenses were eliminated.

As a result of the steep tariff decline, Mexican imports of apparel increased 74% from 1991 to 1993. During the same period Mexican domestic production grew just 3% in volume, not keeping pace with growing demands for higher volume, better quality and lower prices.

U.S. retailers operating in Mexico, whose inventories include Asian imports, have reportedly criticized the tariff increase. U.S.-based apparel importers who re-export a portion of their inventory to Mexico also predict they will be hurt by the Mexican move. U.S. producers of inexpensive apparel may be able to take advantage of the market void left by Asian apparel imports whose prices are made more expensive by the higher tariffs.

Industry Projections

The U.S. textile industry was expected to benefit with the passage of Nafta. Mexico's economic crisis, which began last December, will temporarily reduce these benefits until Mexican consumer spending increases.

Due to origin requirements under Nafta, it is likely that almost all Mexican apparel will be made from yarn and textiles that are produced in the United States. And if importing under 9802.00.90, all textiles must be sourced from the United States in order to comply with the new ruling.

Under Nafta, U.S. apparel producers of long-run standard commodities were anticipated to be hurt, but less so for U.S. producers of fashion-sensitive garments. Post-crisis projections remain the same. Mexican apparel producers of long-run standard commodities, especially the maquiladoras, will benefit the most -- and more so due to the lower-valued peso and the use of 9802.00.90. As noted above, U.S. textile producers and jobs will benefit from this.

As U.S. and Mexican firms team-up in the co-production of textiles and apparel, North America will become more competitive internationally benefiting North American firms and workers.

This article appeared in The Exporter, August 1995.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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