Utilization of US Trade Preference Programs–Why Fashion Companies Make the Sourcing Decisions They Do? (Video recording)

2022 WTO Aid for Trade Conference

Part 1 – Exporting countries and utilization of US Trade Preference Programs: An Overview

Part 2. Case Studies: Why companies make the sourcing decisions they do?

  • Patrick Fox, Senior Director, Customs and Trade Strategy, VF Corporation
  • Cen Williams, Hub Leader for Africa and Middle East region, PVH
  • Greg Poole, Chief Sourcing Officer, The Children’s Place

Background:

Trade preference programs provide duty-free US market access to selected exports of eligible developing countries. Unlike free trade agreements, all preference programs are unilateral, meaning they do not require reciprocal trade concessions.

There are five major trade preference programs enacted in the United States, including:

  • Generalized System of Preferences (GSP), which applies to developing countries as a whole. However, the US GSP program excludes most textile and apparel products due to import competition concerns.  GSP expired on December 31, 2020 and Congress is working with stakeholders to renew the program.
  • Four trade preference programs that target specific regions, including the Andean Trade Preference Act (APTA), the Caribbean Basin Economic Recovery Act (CBERA), the Caribbean Basin Trade Partnership Act (CBTPA), the African Growth and Opportunity Act (AGOA), and the Haitian Opportunity through Partnership Encouragement (HOPE) Act. In 2021, about 2% of US apparel imports came from trade preference partners.
  • US trade preferences reflect both economic development and foreign policy goals. In addition to the economic benefits, eligibility criteria create incentives for beneficiary countries to support objectives such as adopting and enforcing internationally recognized worker rights, reducing barriers to investment, and enforcing intellectual property rights.
  • However, the trade preference program is not without controversies. For example, it is debatable whether the trade preference program effectively enhances the genuine export competitiveness of developing countries. Also, despite preferential duty benefits, US fashion companies often hesitate to source more from trade preference partners due to concerns about a lack of critical infrastructure, limited production capacity, and political instability.

Explore the Recycled Clothing Market in Five European (EU) Countries

Abstract

By leveraging industry sources and a content analysis of companies’ websites, this study explores how retailers carry and sell clothing made from recycled textile materials in the five largest European economies, namely the United Kingdom (UK), Italy, Germany, France, and Spain.

The results show that:

  • The recycled clothing market in the five EU countries has enjoyed fast growth over the past three years. However, recycled clothing remains a niche product. Ultimately, recycled clothing only accounted for 1.5% of clothing launched in the five EU markets as of 2022.
  • EU retailers adopt distinct merchandising strategies for clothing made from recycled textile materials. For example, clothing made from recycled materials concentrates on specific product categories, including outwear, swimwear, and bottoms, but is less likely to be available for categories including tops and dresses.
  • Affected by the recycling technologies and the raw material supply, recycled clothing sold in the five EU countries mainly uses recycled polyester or a combination of two or more recycled fibers. In comparison, it is still rare to see clothing made from 100% recycled cotton (less than 1% of the market total), given the technical difficulty of making recycled cotton strong and durable enough. The unbalanced supply of recycled textile raw materials by fiber types also contributes to the phenomenon that recycled clothing concentrates on specific categories.
  • Recycled clothing looks more “boring” or “dull” than regular new clothing overall–as much as 80% of recycled clothing available in the five EU countries adopted the plain pattern (i.e., the apparel item does not contain any graphics, spots, florals, or other designs) compared to only 60% of regular new clothing.
  • Retailers in the five EU countries generally tend to price recycled clothing lower than regular new clothing in the luxury & premium segment but often higher in the mass & value market. The results reflect the dilemma of pricing recycled clothing: whereas the production costs could be higher, consumers do not often see the value of such product (i.e., unwilling to pay a price premium).

The findings enhance our understanding of the business aspect of recycled clothing, especially from retailers’ perspectives. The results suggest that advancing recycling technologies will be critical to overcoming the physical shortcomings of recycled clothing and diversifying the product offers in the market. Meanwhile, in collaboration with other stakeholders, retailers can do more to help consumers better understand the benefits of shopping for recycled clothing and change their perceptions about its low value and inferior quality.

Short bio: Leah Marsh is a Fashion Merchandising and Management major at the University of Delaware (UD) & 2022 UD summer scholar. She is also a World Scholar, a competitive UD program aiming to offer students with unique global learning experiences and networking. Leah is recently admitted to the 4+1 fashion and apparel studies graduate program at the University of Delaware. Additionally, Leah is a UD BlueHen Social Media Ambassador.

Further reading: Leah Marsh & Sheng Lu (2022). Unleashing the potential of Europe’s recycled clothing market. Just-Style

Patterns of US Apparel Imports in the First Half of 2022 and Key Sourcing Trends

First, US apparel imports enjoyed a decent growth but started to face softening demand.

  • Thanks to consumers’ spending, in the first half of 2022, US apparel imports went up 40% in value and 24% in quantity from a year ago.
  • However, due to US consumers’ weakening demand amid the economic downturn, the speed of import expansion is slowing down quickly. As an alert, the US consumer confidence index (CCI) fell to 54.8 in June 2022 (January 2019=100), the lowest since the pandemic. This result suggests that US consumers were increasingly worried about their household’s financial outlook and would hold back their discretionary clothing spending.
  • The month-over-month growth of US apparel imports dropped to only 2.6% in value and nearly zero in quantity in June 2022 from over 10% at the beginning of the year.
  • As the trajectory of the US economy remains highly uncertain in the medium term, we could expect many US fashion companies to turn more conservative about placing new sourcing orders in the second half of 2022 to control inventory and avoid overstock.

Second, fashion companies struggled with hiking apparel sourcing costs driven by multiple factors.

  • The price index of US apparel imports reached 103.9 in June 2022 (January 2019=100), a 3.1% increase from a year ago and the highest since 2019. USITC data further shows that, of the over 200 types of apparel items (HS Chapters 61 and 62) at the six-digit code level, nearly 70% had a price increase in the first half of 2022 from a year ago, including almost 40% experiencing a price increase exceeding 10 percent.
  • According to the 2022 Fashion Industry Benchmarking Study recently released by the US Fashion Industry Association (USFIA), 100 percent of respondents expect their sourcing costs to increase in 2022, including nearly 40 percent expecting a substantial cost increase from a year ago. Further, respondents say that almost everything has become more expensive this year, from textile raw materials, shipping, and labor to the costs associated with compliance with trade regulations.
  • To make the situation even worse, the more expensive “cost of goods” resulted in heavier burdens of ad valorem import duties for US fashion companies. USITC data shows that in the first five months of 2022, US companies paid $6,117 million in tariffs for apparel imports (HS Chapters 61 and 62), a significant increase of 42.9% from a year ago. Of these import duties paid by US companies, about 30% (or $1,804 million) resulted from the controversial US Section 301 action against Chinese imports. Because of the Section 301 tariff action, the average applied US tariff rate for apparel imports also increased from 17.2% in 2018 to 18.7% in the first half of 2022.
  • Even though the US retail price index for clothing reached 102.7 in June 2022 (January 2019=100), the price increase was behind the import cost surge over the same period. In other words, given the intense market competition and weaker demand, US fashion companies couldn’t pass the sourcing cost increase to consumers entirely.

Third, US fashion companies continued to diversify their sourcing base in 2022, which benefited large-scale suppliers in Asia.

  • The Herfindahl–Hirschman index (HHI), a commonly-used measurement of market concentration, went down from 0.11 in 2021 to 0.10 in the first half of 2022, suggesting that US apparel imports came from even more diverse sources. Similarly, the CS3 index, measuring the total market shares of the top three suppliers (i.e., China, Vietnam, and Bangladesh), fell below 50% in the first half of 2022, the lowest since 2018.
  • The Asia region remains the dominant source of apparel for US fashion companies: about 74.4% of US apparel imports came from Asian countries in the first half of 2022 (by value), which has stayed stable for over a decade.
  • One critical factor behind the apparent “contradictory” phenomenon is US fashion companies’ intention to reduce their “China exposure” further. Notably, considering all primary sourcing factors, from cost, speed to market, production flexibility, agility, and compliance risks, relatively large-scale Asian suppliers are the most likely alternatives to “Made in China.” Thus, the CR5 index excluding China (i.e., the market shares of Vietnam, Bangladesh, Indonesia, India, and Cambodia) increased from 40.7% in 2021 to 45.5% in the first half of 2022.

Fourth, US fashion companies’ evolving China sourcing strategy is far more subtle and complicated than simply “moving out of China.”

  • US fashion companies doubled their efforts to reduce sourcing from China in 2022, particularly in response to the newly implemented Uyghur Forced Labor Prevention Act (UFLPA) and the growing geopolitical risks. For example, measured in value, only 13.2% of US cotton apparel imports (OTEXA code 31) came from China in the first half of 2022, which fell from 14.4% a year ago and much lower than nearly 30% back in 2017.
  • Industry sources indicate that US fashion companies are “upgrading” what they source from China, possibly to offset the Section 301 punitive tariffs. The structural change includes importing less basic apparel items (e.g., tops and bottoms) and more sophisticated and higher-valued categories (e.g., dresses). Also, US fashion companies increasingly source from China for apparel items sold in the high-end market. For example, measured by the number of Stock Keeping Units (SKU), about 94% of apparel labeled “Made in China” sold in the US retail market targeted the value segment in 2018. However, of those apparel “Made in China” newly launched to the US retail market between January and July 2022, less than 2% were in the value segment. Instead, items targeting the higher-priced premium and mass market segments surged from 5% to 64%. Another 33% of “Made in China” were luxury apparel items. In other words, US fashion companies no longer see China as a sourcing base for cheap low-end products. Their sourcing decisions regarding China would give more consideration to non-price factors.
  • Further, some US fashion companies still see China as a promising sales market with growth potential. Localizing the supply chain (i.e., made in China for China) could be an increasingly popular practice for these companies. Thus, fashion companies’ vision for China could increasingly differ between those that only import products from China and those that see China as an emerging sales market.

Fifth, US apparel imports from the free trade agreements and trade preference programs partners stayed relatively stable in 2022 but lacked growth.

  • Despite the growing enthusiasm among US fashion companies for expanding near sourcing from the Western Hemisphere, the trade volume stayed stagnant. For example, in the first half of 2022, members of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) accounted for 8.8% of US apparel imports in quantity and 9.9% in value, lower than a year ago (i.e., 9.9% in quantity and 11.1% in value). Likewise, Mexico also reported lower market shares in the US apparel import market in 2022. The results remind us that encouraging more US apparel sourcing from free trade agreements and preference program partners should go beyond offering preferential duty treatment.
  • Product diversification is a critical area that needs improvement, particularly regarding Western Hemisphere sourcing. For example, results show that US apparel sourcing from CAFTA-DR and Mexico generally concentrated on basic items such as tops and bottoms. In comparison, Asian countries, such as China, Vietnam, and Bangladesh, could offer much more diverse categories of products. This explains why US fashion companies treat large-scale Asian countries as their preferred alternatives to “Made in China” rather than moving sourcing orders to CAFTA-DR or Mexico.
  • Even though the ultimate goal is to expand US apparel sourcing from the Western Hemisphere, we need to make more efforts to practically and creatively solve the bottleneck of textile raw material supply facing garment producers in the region.

by Sheng Lu

Additional reading: Lu, Sheng. (2022). Asia triumphs in June despite US apparel sourcing diversification efforts. Just-Style.

What’s Happening with Myanmar’s Apparel Exports (Updated August 2022)

Zara (UK) sells plain trench coats “Made in Myanmar”

The prospect of Myanmar as an apparel sourcing base has been a hot-button issue since the country’s 2021 military coup. Notably, the labor-intensive apparel sector remained one of Myanmar’s largest employers and accounted for more than 30% of the country’s total exports in 2021 (UNComtrade, 2022). However, the military coup had also resulted in substantial job losses and growing concerns about the working conditions in Myanmar’s apparel sector.  

Nevertheless, fashion companies’ Myanmar apparel sourcing strategy seems to evolve in 2022 in response to the shifting business environment, particularly the inflation factor and the need to reduce “China exposure.” Specifically:

First, data from UNComtrade shows that fashion brands and retailers continued to source apparel from Myanmar in 2022, although the practice varied by country.

  • While Myanmar’s apparel export suffered a notable decline in 2021, it somehow bounced back in 2022 (Jan-May). Among its top apparel export markets, Myanmar’s market shares stayed stable in the EU and the US, and it enjoyed a remarkable increase in Japan (i.e., back to the level before the military coup).
  • That being said, Mynammar’s market shares in the leading apparel import markets (e.g., US, EU, and Japan) remain tiny (less than 5%). Likewise, fashion brands and retailers typically treat Myanmar as a supplementary sourcing base as part of their overall sourcing diversification strategy.
  • Meanwhile, Myanmar is gradually diversifying its export market after the military coup. For example, over 8.5% of Myanmar’s apparel exports went to other Association of Southeast Asian Nations (ASEAN) members in 2021, up from only 3.0% in 2020 and 2.7% in 2019.
  • As a developing country, Myanmar relies on imported textile raw materials for its apparel production. In 2021, 97.3% of Myanmar’s imported textiles came from Asia, including 72% from China.

Second, Myanmar’s apparel export performance is associated with the level of trade-related sanctions imposed by the importing countries.

Third, from the business perspective, fashion companies commonly use Myanmar as a low-cost sourcing destination for specialized product categories, particularly outwear.

  • Brands and retailers currently source apparel from Myanmar include Zara, H&M, Adidas, Fast Retailing Group, C.P. Company, among others.
  • Outwear is the single largest category of products fashion companies sourced from Myanmar (around 37%).In comparison, fashion companies typically source tops and bottoms from Bangladesh and Vietnam.
  • Also, industry sources indicate that, on average, outwear “Made in Myanmar” (around $70/piece) is priced much lower than those sourced from China (over $200/piece) and Vietnam (over $150/piece) in the retail market (EU, US, and Japan).
  • As fashion companies struggled with the hiking sourcing costs in 2022 and the pressure of reducing China exposure further, Myanmar remains a reasonable sourcing destination to fulfill certain orders from the business perspective.

Nevertheless, Myanmar’s outlook as an apparel sourcing base remains quite uncertain, especially given the recent new political instability in the country. Notably, some labor unions call for the EU to suspend Myanmar’s EBA eligibility. Without the duty-free benefits, it would be detrimental to Myanmar’s apparel exports. Meanwhile, labor unions also ask fashion brands and retailers to “make responsible exit from Myanmar,” including committing to transparency throughout and ensuring workers receive all wages, benefits, and severance payments owed to them.

by Sheng Lu

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