Critics say NAFTA is failing to keep pace with globalization and that a "modernized" agreement is needed to restore regional competitiveness. Yet updating NAFTA could also imply a politically costly renegotiation—something the administrations of both Mexico and the United States seem to have ruled out. If under current scenarios the NAFTA text is immune to revision, what if any improvements can be made to the agreement or to its functionality? Or does the goal of strengthening regional competitiveness lie largely beyond the NAFTA framework?

Enrique Dussel Peters argued that NAFTA should be updated to improve North America's competitiveness in apparel manufacture. Since 2000, regional producers have seen U.S. market share slip to cheaper imports from Central America and China. To reverse this trend, Dussel proposed that NAFTA loosen its domestic content standards and harmonize them with those of DR-CAFTA. Currently, the Central American agreement allows manufacturers in its member countries to stitch finished goods using a greater proportion of extra-regional fabrics. This permits the higher use of cheaper Asian textiles, implying an advantage over Mexico-based manufacturers, which must abide by more restrictive rules of origin. Alternatively, Dussel proposed a "1-to-1" program whereby of two pieces of apparel, one must comply with existing domestic content standards with the other granted an exemption—to stimulate apparel manufacture while maintaining North American fabric demand.

Dussel discussed the challenges facing Mexican manufacturers. In the past decade, Mexican apparel makers have seen U.S. market share slip to Asian competitors across a range of products. In spite of Mexico's geography, the country's manufacturers have failed to match Chinese goods on price, and, except for the heaviest garments, per-unit transportation costs are higher for Mexico than they are for China. There are many reasons for this, Dussel said. Mexico manufacturers have failed to offer the logistical services that buyers increasingly demand, while burdensome customs procedures and congestion at U.S. land ports incur extra costs. Slipping competitiveness has led the Mexican yarn-textile-garment (YTG) chain to shed jobs at a fast rate, from employing more than 650,000 in 2000 to employing fewer than 300,000 at 2009—a drop coinciding with China's overtaking Mexico in U.S. market share for many apparel goods.

To improve its position, Dussel said that Mexico must capitalize on its proximity to the U.S. market, improve transportation efficiencies, and pursue new cross-border rail opportunities. Mexico apparel makers must also offer logistical services and meet faster delivery times for buyers, possibly forcing structural changes on longtime domestic fabric suppliers. Mexico customs officials also must more aggressively lobby U.S. counterparts to combat the importation of counterfeit Asia-made goods and enforce against relabeling schemes, which take goods, give them "Made in U.S.A." tags, and export them duty-free as NAFTA merchandise, he said.

Sidney Weintraub critiqued Dussel's paper, saying that relaxing domestic content standards on apparel amounted to an "implicit subsidy." He posed the question, "How would this implicit subsidy benefit both or either country?" He questioned the benefit to the U.S. consumer of Dussel's main recommendation. "Why should the U.S. consumer pay more to help a non-competitive Mexican apparel sector?"

Ralph J. Watkins said that efforts to modify NAFTA rules of origin on textiles could imply a reopening of the treaty. Such a reopening could prove politically costly and could lead to debates on other issues.Tweaking the rules of origin would pay only marginal dividends, he added. Watkins stressed that Mexico should instead focus on sharpening the competitiveness of those products of which Mexico boasts lower transportation costs, such as women's jeans. He added Mexican and U.S. apparel makers may want to consider Central American platforms, given the competitiveness of this region with low labor costs easily provisioned by U.S. and Mexican inputs.

José Sebastián Paz stressed that Mexico must consider China in any discussion on strategies to improve competitiveness. He seconded Dussel's analysis that Mexican apparel makers are failing to keep pace technologically.

Conference attendees agreed that declining output and employment in the NAFTA YTG chain were disturbing trends. But they questioned whether better incentivizing the Mexican apparel sector by enabling its purchase of cheaper Asian inputs represented a benefit for the North American YTG chain as a whole. They also questioned the revision of NAFTA rules of origin, if this ultimately led to a reopening of the agreement text and sparked politically costly debates on other issues. Additionally, DR-CAFTA countries may resist attempts at harmonization with NAFTA, since this would undermine an advantage. Others stressed that before having a conversation on changing NAFTA, member countries should first have settled existing disputes, such as the running U.S.-Mexico trucking dispute. Others stressed that the only real way to enhance North American YTG-chain competitiveness lay in getting China to revalue its currency.

Drafted by Robert Donnelly, Program Associate, Mexico Institute
Andrew Selee, Director, Mexico Institute. Ph: (202) 691-4088