U.S. Textile and Apparel Industry Responds to Trump’s Tariff Announcement against China

FOREIGN201708211521000183597989940

On June 15, 2018, the Trump Administration announced to impose a 25% punitive tariff on a list of Chinese goods based on the results of its Section 301 investigation, which targeted against China’s unfair trade practices related to the forced transfer of American technology and intellectual property. The additional duty will first apply to 818 lines of products on July 6, 2018, which cover approximately $34 billion worth of imports from China. Office of the U.S. Trade Representative (USTR) said it would issue a final determination on the second set of 284 proposed tariff lines, which cover approximately $16 billion worth of imports from China shortly. The total 1,102 tariff lines targeted by USTR generally focuses on products from industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy, which include industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles.

In response to the U.S. action, China’s Ministry of Commerce (MOFCOM) quickly announced its proposed countermeasures, including a 25% punitive tariff on approximately $34 billion worth of U.S. soybean, autos, and fruits effective July 6, 2018. China is also ready to impose the punitive tariff on another list of products, which cover approximately $16 billion worth of medical device, chemicals and energy imports from the United States.

The U.S. textile and apparel industry keeps a close watch on the U.S.-China trade dispute since as much as 36% of U.S. textile and apparel imports come from China. In an announcement released on June 16, 2018, the American Apparel and Footwear Association (AAFA) called a victory that no textile and apparel products are subject to the punitive tariff proposed by USTR. The June 15 USTR list also removes the majority of the textile machinery initially on the retaliation product list back in April 2018. However, U.S. fashion brands and apparel retailers remain deeply concerned about Trump’s tariff action and its potential negative economic impacts on the apparel sector.

In contrast, the U.S. textile industry, presented by the National Council of Textile Organizations (NCTO) praised the Trump administration’s tariff announcement. NCTO also called on the Trump administration to include finished textile and apparel products on any future lists of imports from China to be made subject to Section 301 tariffs.  Not surprisingly, NCTO’s proposal is opposed strongly by AAFA and the U.S. Fashion Industry Association, representing U.S. fashion brands and apparel retailers. As argued by USFIA, the U.S. tariff rates on apparel and fashion products are already the highest among manufactured goods, reaching 32 percent for man-made fiber apparel and 67 percent for footwear. Any additional tariff would constitute a huge, regressive tax increase and have a negative impact on the American jobs.

Appendix: Timeline of U.S. Section 301 Investigation against China

June 15, 2018: The Trump Administration announced to impose a 25% punitive tariff on a list of Chinese goods based on the results of its section 301 investigation

June 4, 2018: Secretary of Commerce Wilbur Ross concluded his two-day trade negotiation with China in Beijing. A White House statement said “the meetings focused on reducing the United States’ trade deficit by facilitating the supply of agricultural and energy products to meet China’s growing consumption needs, which will help support growth and employment in the United States. The United States officials conveyed President Donald J. Trump’s clear goal for achieving a fair trading relationship with China.” While the announcement didn’t mention the next round, it says that the delegation will “receive guidance on the path forward.”

May 29, 2018: President Trump suddenly announced that the United States will impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology, including those related to the “Made in China 2025” program.  The final list of covered imports will be announced by June 15, 2018. The announcement also said that the U.S. Trade Representative Office (USTR) will continue WTO dispute settlement against China originally initiated in March to address China’s discriminatory technology licensing requirements. Additionally, the United States will implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology. The list of restrictions and controls will be announced by June 30, 2018.

May 19, 2018: A joint statement released by the White House said that the United States and China had led to an agreement for China to buy more goods and services, including “meaningful increases in U.S. agriculture and energy exports.” The statement also said that both sides attach importance to intellectual property protections, agreed to encourage two-way investment and to strive to create a fair, level playing field for competition, and agreed to engage at high levels on trade and investment issues. Additionally, the statement said that the United States would send a team to China to work out the details of the agreement. However, the statement did not contain a specific target for reducing the $375 billion trade deficits.

April 5, 2018: President Trump announced that he has instructed the Office of the U.S. Trade Representative (USTR) to consider $100 billion additional retaliatory tariffs on China, in response to China’s own retaliation against the Section 301 tariffs announced in late March. In a statement released the next day, USTR confirms the proposed new measures. USTR also says that any additional tariffs proposed will be subject to a similar public comment process as the proposed tariffs announced on April 3, 2018. No tariffs will go into effect until the respective process is complete. 

April 3, 2018: USTR released the proposed list of Chinese products to be subject to the retaliatory tariff under the Section 301 action. The proposed list covers approximately 1,300 separate tariff lines and will undergo further review in a public notice and comment process, including a hearing (scheduled at around May 15, 2018). The USTR statement says it will make a final decision on whether to implement the proposed tariff action after the whole process. 

March 26, 2018: USTR filed a WTO case against China’s discriminatory technology licensing requirements (DS542). The US claimed that China’s measures appear to be inconsistent with Articles 3, 28.1(a) and (b) and 28.2 of the Trade-Related Intellectual Property Rights Agreement (TRIPS). As of April 8, 2018, the European Union, Japan, Ukraine and Saudi Arabia have requested to join the dispute as third parties. According to the WTO rule, China shall enter into consultation with the US no later than April 26, 2018. If the dispute is not resolved by May 25, 2018 (i.e., 60 days after the request for consultation), the United States may request a WTO panel. As of June 17, 2018, the case is still in consultations.

March 22, 2018: President Trump announced his decisions on the actions the Administration will take in response to China’s unfair trade practices covered in the USTR Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation. U.S. Trade Representative Robert Lighthizer initiated the investigation in August 2017 at the direction of President Trump. In the Memorandum he signed, President Trump directed the US Trade Representative to level tariffs on about $50 billion worth of Chinese imports. 

January 2018: the U.S. Trade Representative Office submitted its annual report on China’s WTO Compliance to U.S. Congress. The report says that “It seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-orientated trade regime.”

August 14, 2017: President Trump issued a memorandum directing the USTR to determine if China’s policies regarding IPR theft and forced technology requirements “may be harming American intellectual property rights, innovation, or technology development,” and thus warrant USTR action under Section 301of the 1974 Trade Act.

Related reading: The Section 301 Investigation against China Divides the U.S. Textile Industry and U.S. Fashion Brands and Retailers

USITC Report: AGOA and the Third-country Fabric Provisions Critical for U.S. Apparel Sourcing from sub-Saharan Africa

usitc AGOA

A newly released report by the U.S. International Trade Commission (USITC) suggests that the African Growth Opportunity Act (AGOA) and the third-country fabric provision are critical for U.S. Apparel Sourcing from sub-Saharan Africa (SSA). Specifically:

U.S. apparel imports from SSA grew faster than the world average. During 2010–16, U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 4.5 percent (compared with 2.1 percent CAGR of all countries), from $795.2 million in 2010 to over $1.0 billion in 2016. However, SSA overall remained a small apparel supplier to the U.S. market, accounting for only 1.2 percent of the market shares in 2016 (lower than 2.7 percent in 2004, but higher than 1.1 percent in 2010).

U.S. apparel imports from SSA remain uneven across countries. Kenya, Lesotho, Mauritius, and Madagascar accounted for over 90 percent of all apparel imports from SSA in 2016. Ethiopia and Tanzania experienced the fastest growth rates during the period—63.8 percent and 33.3 percent, respectively

The duty-free preferences awarded under AGOA and the liberal rules of origin available for apparel under the “third-country fabric provision”* are the key competitive advantages of SSA serving as apparel sourcing destination for U.S. companies. Due to limited yarn and fabric production in SSA, the third-country fabric provision remained critical for SSA exports of apparel to receive duty-free entrance to the United States. Notably, nearly all (97.3 percent) U.S. imports of apparel from SSA countries entered under AGOA, and of these imports, virtually all (96 percent) used the third-country fabric provision in 2016.

Further, the USITC report used Madagascar as an example to illustrate the significance of AGOA and the third-country fabric provision in particular to SSA countries’ apparel exports to the United States. As noted by USITC:

  • Madagascar were evidenced by the sharp decline in its apparel exports to the U.S. after the country lost its AGOA eligibility in 2009. Without duty-free access to the United States, the average duty rate for U.S. imports of apparel from Madagascar rose to 19.6 percent, and apparel exports to the United States from Madagascar fell from over $211 million in 2009 to only $40 million in 2011.
  • Madagascar’s AGOA benefits were reinstated in 2014, and in 2016, U.S. apparel imports from Madagascar bounced back to one-half of the 2009 level.

The USITC report also argues that the long-term renewal of AGOA and the third-country fabric provision was critical to instilling confidence in U.S. firms deciding to invest in or source from SSA countries. The report says that “because apparel production lead times are generally 6 to 9 months, U.S. apparel companies that source from the region import basic cut-and-sew garments that can be ordered months in advance and have steady U.S. demand, such as five-pocket denim jeans, uniform tops and bottoms, and T-shirts. This long lead time on orders makes long-term AGOA renewal particularly important to the apparel industry.”

Additionally, the USITC report believes that China’s declining competitiveness as an apparel producer (caused by its increasing labor cost) benefited the second- and third-largest suppliers to the United States, Vietnam and Bangladesh, but also helped smaller suppliers in SSA.

Last but not the least, the USITC report suggests that Kenya, Madagascar, and Ethiopia may have the most potential for apparel export growth in the future. However, the report doesn’t think apparel exports from South Africa will grow much because the country does not qualify for third-country fabric provisions under AGOA. Similarly, USITC believes that should SSA countries like Tanzania lose their AGOA benefits, due largely to its recent import ban on used clothing, the United States will likely see significant decreases in apparel imports from these countries too.

*About the African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to US imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen US trade and investment ties with the region.

Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA. Particularly, the “third country fabric provision” under AGOA allows US apparel imports from certain SSA countries to be qualified for duty free treatment even if the apparel use yarns and fabrics produced by non-AGOA countries/regions (such as China, South Korea and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology intensive textile products.

On 29 June 2015, the Obama Administration signed a new bill to extend the AGOA (including the third country fabric provision) for another ten years (until 30 September 2025). The new law simplifies the AGOA rules of origin; gives the president the ability to withdraw, suspend or limit benefits (rather than just terminate eligibility) if designated AGOA countries do not comply with the eligibility criteria; adds notification and reporting requirements; and improves transparency and participation in the AGOA review process.

In 2016, US apparel imports from the AGOA region totaled US$260m, of which US$255m were under the agreement (or 98% utilisation rate).

About the “Third-Country Fabric” provision under AGOA

This is a “Special Rule” for lesser-developed SSA countries (LDCs) under AGOA. According to the rule, these SSA LDCs can enjoy duty-free and quota-free access to the U.S. market for apparel made from fabric originating anywhere in the world. In comparison, the regular AGOA rules of origin more restrictively require that apparel qualify for duty-free treatment must meet one of the following conditions:

  • apparel made of U.S. yarns and fabrics;
  • apparel made of SSA (regional) yarns and fabrics, subject to a cap;
  • apparel made in a designated lesser-developed country of third-country yarns and fabrics (also subject to a cap);
  • apparel made of yarns and fabrics not produced in commercial quantities in the United States;
  • textile or textile articles originating entirely in one or more lesser-developed beneficiary SSA countries;
  • certain cashmere and merino wool sweaters; and
  • hand-loomed/handmade/or folklore articles and ethnic printed fabrics