Renegotiating NAFTA Could Cripple Canadian Apparel Manufacturing, Hurt U.S. More Than You'd Think

NAFTA discussions are still happening, but Canadian apparel companies are worried about what a new NAFTA could mean for the industry. | Credit: Wikimedia commons by Nicoguaro

The renegotiation of the North American Free Trade Agreement (NAFTA) has been a topic of conversation since the 2016 presidential election leading into President Trump's first year in office. President Trump has repeatedly stated that the U.S. needs to renegotiate the agreement with Mexico and Canada, citing a trade deficit with Mexico as one of his main concerns.

From the perspective north of the border, however, the ability to manufacture apparel is a primary concern, as potential changes to parts of the agreement could not only affect Canadian apparel and textile companies, but also the U.S.'s apparel industry.

When NAFTA came into effect in 1994, the Canadian apparel industry took a hit, as the terms of the agreement specified that only garments made domestically (in Canada, U.S. or Mexico) were considered eligible for free trade across the border. Because of this, Winnipeg-based Western Glove Works slashed its Canada workforce from 1,200 to 100 that year, according to CBC.

The problem for companies like Western Glove Works is that there is no Canadian manufacturer of denim, so Canadian companies manufacturing denim products have to go abroad to source it.

"The reason there was such a bad negotiation or bad disadvantage for Canada is that there were so little textiles available in Canada," Bob Silver, president of Western Glove Works, told CBC. "So what we would be doing as Canadians under NAFTA was buying fabric from the United States, making it in Canada and shipping it back to the United States—not the greatest formula for success."

This would point to Canadian apparel manufacturers wanting to renegotiate NAFTA, but that would be an oversimplification. There is one current part of the agreement that helps them stay afloat.

Thanks to the agreement's Tariff Preference Levels (TPL), wool, cotton and other man-made apparel made from imported textiles can be exported duty-free to the U.S. That means that Canadian apparel manufacturers can source materials from places like Bangladesh or Sri Lanka, make the products in Canada, and still reap NAFTA's benefits when exporting duty-free to the states.

This is where Trump and the U.S. comes in, because if NAFTA is fully reorganized or revoked, as the president has threatened to do, the rug keeping Canadian apparel companies competitive could be pulled out from under them.

"It won't be as disastrous for Western Glove Works because we don't manufacture here," Silver said. "But it's the United States again using their textile base to move these negotiations forward. It will change the playing field, and what it might mean is that more Canadians who are proudly making goods in Canada would then either make goods in the United States or make goods off-shore and further perpetuate the decline of manufacturing in Canada."

These are two wildly different outcome scenarios: Apparel companies would either relocate to the U.S., where they would still manufacture and export within the countries in NAFTA, or they would further rely on countries like China to be able to source material and sell it at a price that allows them to stay in business. Either way, this would involve manufacturing to move away from Canada.

While it might sound beneficial for the U.S., as on paper it would indicate more domestic manufacturing, removing the TPL would prevent U.S. companies from enjoying the duty-free shipment of products made with internationally-sourced materials. Really, the only ones who would benefit would be companies that both source and manufacture domestically. And while those companies exist, even mainstays of domestic manufacturing like American Apparel (by way of its new owner, Gildan) have started outsourcing recently.

Talks between the U.S., Canada and Mexico regarding the reorganization of NAFTA started in August, but haven't gone far. The next round of negotiation is set for November, but the CBC said that its sources expect the negotiations to continue past the new-year deadline the U.S. and Mexico aimed for.