U.S. Apparel Retailers’ Shifting Sourcing Strategy for “Made in China” under the Shadow of the Tariff War

The full article is available HERE

Key findings:

First, U.S. fashion brands and retailers are sourcing less from China, particularly in quantity. Notably, the number of “Made in China” apparel newly launched to the market had significantly dropped from 26,758 SKUs in the first quarter of 2018 to only 8,352 SKUs in the first quarter of 2019 . Nevertheless, consistent with the macro-level trade statistics, China remains the single largest apparel supplier to the U.S. retail market.

Second, apparel “Made in China” are becoming more expensive in the U.S. retail market, yet remain price-competitive overall. Notably, apparel “Made in Vietnam” is becoming more expensive in the U.S. retail market too—an indication that as more production is moving from China to Vietnam, apparel producers and exporters in Vietnam are facing growing cost pressures.

Third, U.S. fashion retailers are shifting what apparel products they source from China. U.S. apparel retailers have been sourcing less lower value-added basic fashion items (such as tops, and underwear), but more sophisticated and higher value-added apparel categories (such as dresses and outerwear) from China since 2018. The shifting product structure could also be a factor that contributed to the rising average retail price of “Made in China” in the U.S. market.

On the other hand, U.S. retailers adopt a very different product assortment strategy for apparel sourced from China versus other regions of the world. There seems to be much fewer alternative sourcing destinations for more sophisticated product categories, such as accessories and outerwear. Somehow ironically, moving to source more sophisticated and higher value-added products from China could make U.S. fashion brands and retailers even MORE vulnerable to the tariff war because of fewer alternative sourcing destinations.

In conclusion, the results imply that China will remain a critical sourcing destination for U.S. fashion brands and retailers in the near future, regardless of the scenario of the U.S.-China tariff war. Meanwhile, we should expect U.S. fashion companies continue to adjust their sourcing strategy for apparel “Made in China” in response to the escalation of the tariff war.

Related reading: Trade war to hit high-end US fashion brands dependent on specialized Chinese manufacturing

What Do You Take Away from FASH455?

I encourage everyone to watch the video above, which provides an excellent wrap-up for FASH455 and reminds us of the meaning and significance of our course. The names of several experts featured in the video should sound familiar to you, including David Spooner (former U.S. Chief Textile Negotiator and Assistant Secretary of Commerce), Julia Hughes (president of the US Fashion Industry Association, USFIA) and Auggie Tantillo (president of the National Council of TextileOrganizations, NCTO).

First of all, I hope students can take away essential knowledge about textile and apparel (T&A)trade & sourcing from FASH455. As you may recall from the video, in FASH455, we’ve examined the phenomenon of globalization and its profound social, economic and political implications. We also discussed various trade theories and the general evolution pattern of a country’s T&A industry and its close relationship with that country’s overall industrialization process. We further explored three primary T&A supply chains in the world (namely the Western-Hemisphere supply chain, the flying geese model in Asia or “factory Asia” and the phenomenon of intra-region T&A trade in Europe). Last but not least, we looked at trade policies that are unique or critical to the T&A sector (e.g.,: tariff, and the yarn-forward rules of origin) as well as the complicated factors behind the making of these trade policies. No matter your dream job is to be a fashion designer, buyer, merchandiser, sourcing specialist or marketing analyst, understanding how trade and sourcing work will be highly relevant and beneficial to your future career given the global nature of today’s fashion industry.

Second, I hope FASH455 helps students shape a big picture vision of the T&A industry in the 21st-century world economy and provides students a fresh new way of looking at the world. Throughout the semester, we’ve examined many critical, timely and pressing global agendas that are highly relevant to the T&A industry, from apparel companies’ social responsibility practices, the debate on the textile and apparel provisions in the U.S.-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0) and Trump Administration’s trade policy agenda to the controversy of second-hand clothing trade. It is critical to keep in mind that we wear more than just clothes: We also wear the global economy, international business, public policy and trade politics that make affordable, fashionable, and safe clothes possible and available for hardworking families. This is also the message from many of our distinguished guest speakers this semester, and I do hope you find these special learning events enlightening and inspiring.

Likewise, I hopeFASH455 can put students into thinking the meaning of being a FASH major/minor(as well as a college graduate) and how to contribute to the world we are living today positively. A popular misconception is that T&A is just about “sewing,” “fashion magazine,” “shopping” and “Project Runway.” In fact, as one of the largest and most economically influential sectors in the world today, T&A industry plays a critical and unique role in creating jobs, promoting economic development, enhancing human development and reducing poverty. As we mentioned in the class, globally over 120 million people remain directly employed in the T&A industry, a good proportion of whom are females living in poor rural areas. For most developing countries, T&Ausually accounts for 70%–90% of their total merchandise exports and provide one of the very few opportunities for these countries to participate in globalization. Indeed, T&A is such an impactful sector, and we are as important as any other majors on the campus!

Last but not least, I hope from taking FASH455, students can take away meaningful questions that can inspire their future study and even life’s pursuit. For example:

  • How to make the growth of global textile and apparel trade more inclusive and equal?
  • How to make sure tragedies like the Rana Plaza building collapse will never happen again?
  • How will automation in apparel manufacturing change the future landscape of apparel sourcing?
  • How to use trade policy as a tool to solve some tough global issues such as labor practices and environmental standard?
  • Is inequality a problem caused by global trade? If global trade is the problem, what is the alternative?

These questions have no good answers yet. But they are waiting for you, the young professional and the new generation of leaders, to write the history, based on your knowledge, wisdom, responsibility, courage, and creativity!

So what do you take away from FASH455? Please feel free to share your thoughts and comments.

U.S. Textile and Apparel Industry is NOT Immune to the U.S.-China Tariff War

The full article is available HERE

This article tries to evaluate the potential impact of the U.S.-China tariff war on the U.S. textile and apparel (T&A) industry, including manufacturing and related trade activities.

The quantitative evaluation conducted is based on the Global Trade Analysis Project (GTAP) model. Data came from the latest GTAP9 database, which covers trade, employment and production in 57 sectors in 140 countries. In correspondence to the recent development of the U.S.-China tariff war, the analysis focuses on the following three scenarios:

  • Scenario 1: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, except textiles and apparel
  • Scenario 2: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel
  • Scenario 3: 25% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel

Three findings are of note:

First, the tariff war with China will increase the market price for T&A in the United States and consequentially incentivize more production of T&A “Made in the USA.” As shown in Figure 1, the annual U.S. T&A production will increase when the punitive tariff is imposed on textile and apparel imports from China. The most significant increase will happen in scenario 3 (textile output expands by US$8,829 million and apparel output expands by US$6,044 million) when a 25 percent punitive tariff is imposed and the market price of T&A in the U.S. also correspondingly goes up by nearly 1.5% compared with the base year level in 2017.

Second, the tariff war with China will hurt U.S. textile exports. The results show that the tariff war will increase the production cost of “Made in the USA,” and result in a decline of U.S. textile exports due to reduced price competitiveness. This is the case even in scenario 1 when the tariff war does not target T&A directly, but nevertheless, raises the price of intermediaries for producing textiles in the United States. The results further show that the annual U.S. textile exports will suffer the most significant decline in scenario 3 (down US$1,136 million), especially to China and other Asian countries where U.S. textile products are facing intense competition from local suppliers. In comparison, U.S. textile exports to the Western Hemisphere will suffer a loss as well in the tariff war, but to a much less extent due to the strong supply-chain relationship with the region.

Third, the trade diversion effect of the tariff war will bring in more apparel imports to the U.S. market from Asian suppliers other than China. As shown in the figure above, when the punitive tariff imposed on textile and apparel products, the value of U.S. apparel imports from China will decline ranging from US$4,573 million (10 percent punitive tariff imposed) to US$8,858 million (25 percent punitive tariff imposed) annually compared with the base year level in 2017. This result reflects U.S. apparel importers and retailers’ mounting concerns about sourcing cost in the setting of the tariff war. However, apparently, the tariff war will do little to help U.S. domestic apparel manufacturers reduce the competitive pressure with imports. Particularly, in scenario 3, U.S. apparel imports from suppliers other than China will increase as much as US$10,400 million, worsening the U.S. trade deficit in the apparel sector further.

by Sheng Lu

State of the EU Textile and Apparel Industry (Updated April 2019)

EU region as a whole remains a leading producer of both textile and apparel. The value of EU’s T&A production totaled EUR142.9bn in 2017 (Statistical Classification of Economic Activities or NACE, sectors C13, and C14), which was divided almost equally between textile manufacturing (EUR77.4bn) and apparel manufacturing (EUR65.4bn).

Regarding textile production, Southern and Western EU where most developed EU members are located such as Germany, France, and Italy, accounted for nearly 80% of EU’s textile manufacturing in 2017. Further, of EU countries’ total textile output, the share of non-woven and other technical textile products (NACE sectors C1395 and C1396) has increased from 20.2% in 2011 to 23.2% in 2016, which reflects the on-going structural change of the sector.

Apparel manufacturing in EU includes two primary categories: one is the medium-priced products for consumption in the mass market, which are produced primarily by developing countries in Eastern and Southern Europe, such as Poland, Hungary, and Romania, where cheap labor is relatively abundant. The other category is the high-end luxury apparel produced by developed Western EU countries, such as Italy, UK, France, and Germany.

It is also interesting to note that in Western EU countries, labor only accounted for 21.1% of the total apparel production cost in 2016, which was substantially lower than 30.1% back in 2006. This change suggests that apparel manufacturing is becoming capital and technology-intensive in some developed Western EU countries–could be the result of increased investment in automation technology.

Because of their relatively high GDP per capita and size of the population, Germany, Italy, UK, France, and Spain accounted for 60.8% of total apparel retail sales in EU in 2017. The market structure remains stable overall.

Intra-region trade is an important feature of EU’s textile and apparel industry. Despite the increasing pressure from cost-competitive Asian suppliers, statistics from the World Trade Organization (WTO) show that of EU region’s total US$65.3bn textile imports in 2017, as much as 58.2% (or US$38bn) were in the category of intra-region trade. Similarly, of EU countries’ total US$166.4bn apparel imports in 2017, as much as 47.2% (or US$78.6bn) also came from other EU members. In comparison, close to 97% of apparel consumed in the United States are imported in 2017, of which more than 75% come from Asia (Eurostat, 2019; WTO, 2018).

by Sheng Lu

USITC Economic Assessment Report on USMCA—Textile and Apparel Sector Summary

On April 19, 2019, the U.S. International Trade Commission (USITC) released its independent assessment report on the likely economic impact of the U.S.-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0). Below are the key findings of the report:

Impact of USMCA on the U.S. economy

USITC found that because of the size of the U.S. economy relative to the size of the Mexican and Canadian economies and the reduction in tariff and nontariff barriers that has already taken place among the three countries under the North American Free Trade Agreement (NAFTA), the overall impact of USMCA on the U.S. economy is likely to be moderate. For example, USITC’s computable general equilibrium (CGE) model suggests that compared to the base year level in 2017, USMCA could increase the U.S. GDP by 0.35% (or $68.2 billion) and create 0.17 million new jobs when other factors held constant.

Impact of USMCA on the textile and apparel sector

First, USITC found that the USMCA overall is a balanced deal for the textile and apparel sector, particularly regarding the rules of origin (RoO) debate. As USITC noted, USMCA eases the requirements for duty-free treatment for certain textile and apparel products, but tighten the requirements for other products. For example, USMCA eliminates the NAFTA requirements that visible linings must be sourced from members of the agreement; however, USMCA adds more restrictive new requirements for narrow elastic fabrics, sewing thread, and pocket bag fabric.

Second, USITC found that the USMCA changes to the Tariff Preference Level (TPLs) would not have much effect on related trade flows. As USITC noted in its report, where USMCA would cut the TPL level on particular U.S. imports from Canada or Mexico, the quantitative limit for these product categories was not fully utilized in the past.  Meanwhile, the TPL level for product categories typically fully used would remain unchanged under USMCA. The only trade flow that might enjoy a notable increase is the U.S. cotton and man-made fiber (MMF) apparel exports to Canada—the TPL is increased to 20million SME annually under USMCA from 9 million under NAFTA.

Third, USITC suggested that in aggregate, the changes under USMCA for the textile and apparel sector will more or less balance each other out and USMCA would NOT affect the overall utilization of USMCA’s duty-free provisions significantly. Notably, the under-utilization of free trade agreements (FTAs) by U.S. companies in apparel sourcing has been a long-time issue. Data from the Office of Textiles and Apparel (OTEXA) shows that of the total $4,292.8 million U.S. apparel imports from the NAFTA region in 2018, only $3,756.1 million (or 87.5%) claimed the preferential duty benefits under the agreement. As noted in the U.S. Fashion Industry Benchmarking Study, some U.S. fashion companies do not claim the duty savings largely because of the restrictive RoO and the onerous documentation requirements.

However, interesting enough, the USITC report says little about the potential impact of USMCA on U.S. textile and apparel manufacturing.

Timeline

On 30 September 2018, the United States reached USMCA with Canada and Mexico. On 30 November 2018, USMCA was officially signed by Presidents of the three countries. According to the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (the picture above), after the release of the USITC economic assessment report on USMCA, the Trump Administration will need to work with U.S. Congress to develop legislation to approve and implement the agreement. However, there remains huge uncertainties over USMCA’s prospect.

Related reading:

Trade 2030: The Future of World Trade


A group of eminent panelists will bring their experience on how digital technologies are changing international trade and how international trade cooperation can help governments reap the benefits and address the challenges of digital trade.

Speakers/Panalists:

  • Roberto Azevêdo, Director-General, World Trade Organization
  • Abdoullah Cisse, Professeur-Avocat, Carapaces Stratégies & Conformités
  • Caroline Freund, Director, Macroeconomics, Trade, and Investment Climate, World Bank
  • Susan Lund, Partner, McKinsey Global Institute

The Evolving Sourcing Strategies of U.S. Fashion Apparel Companies: Discussion Questions from FASH455

#1 Do you think it is a good move for companies to embrace the “China plus Vietnam plus Many” sourcing strategy, especially after learning about the working conditions in developing countries such as Bangladesh? Do you think this could backfire on companies?

#2 Why or why not do you think sourcing from Asia will become less attractive relative to sourcing from the Western Hemisphere due to the increasing importance of “speed to market” in U.S. fashion apparel companies’ sourcing decisions?

#3 As sustainability becomes more prevalent throughout the fashion industry, will there be a way to lower costs, while still creating garments that are better for the environment, and have transparency with consumers about factory conditions? Why?

#4 According to the article, “more and more well paid and high quality jobs in the US fashion industry will depend on international trade and the global value chain.” How do you feel about the quality of the US fashion industry depending so heavily on factors outside of the US? Do you see this changing in the future, and if so explain how.

#5 Most U.S. apparel companies have already shifted their businesses to non-manufacturing activities such as design, branding, sourcing and retailing. Is it still meaningful to give so much attention to apparel manufacturing in the U.S.?

#6 When purchasing your garments from either online stores or brick-and-mortar stores, do you look to see what country your goods are produced in and on a scale from 1 to 10 with 1 being the least important 10 being the most important, how significant is it to you to know where your goods are coming from and how much of a factor does that play into your buying decision?

#7 If it is predicted that more US fashion companies’ sourcing could be from nearshore due to automation technology, what would happen if they technology was implemented in a place where there were lower labor costs (for the people operating the machines)? Would the US continue to use nearby manufacturers or would they resort to wherever is cheaper?

#8 Do you think “made in the USA” apparel is truly telling the whole story of the supply chain? Do you think that it is truly more ethical? Or do you think it is just a way for retailers to charge more for apparel? If producing products in the U.S. is much more expensive than importing products from other countries, how are companies such as Walmart able to sell products with labels that say “Made in U.S.A”?

[For FASH455: 1) Please mention the question number in your comments; 2) Please address at least TWO questions in your comments]