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

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On April 3, 2018, the U.S. Trade Representative Office (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, including textile machinery. However, textile and apparel (HS chapters 50 to 63) were not on the list.

USTR says it will make a final decision on whether to implement the proposed tariff action after a public hearing process scheduled at around May 15, 2018. Most U.S.-based textile and apparel industry associated have submitted their public comments regarding the section 301 investigation. Because of their respective commercial interests, not surprisingly, the U.S. textile industry favors the retaliatory tariffs on imports from China whereas U.S. fashion brands and retailers oppose the action strongly. Specifically:

National Council of Textile Organizations (NCTO)

  • NCTO applauds the Trump Administration’s formal initiation of a Section 301 case designed to address China’s persistent and highly damaging actions in the area of intellectual property theft. NCTO argues that illegal activity on the part of the government of China has gone on for far too long, at the direct expense of U.S. manufacturers and the loss of millions of U.S. manufacturing jobs.
  • The U.S. textile industry is severely disappointed that the retaliation list published by USTR on April 3 does not contain a single textile or apparel product.
  • NCTO argues that China’s illegal IPR activities have damaged the U.S. textile industry and recommend that textile and apparel products be added to the retaliation list.

The United States Fashion Industry Association (USFIA)

  • USFIA opposes adding apparel (items classifiable under chapters 61 and 62 of the HTSUS) and other fashion products (such as footwear, handbags, and luggage) to the retaliation list against China.
  • USFIA argues that tariffs are NOT the appropriate mechanism to redress the activities outlined in USTR’s report to the White House. Imposing tariffs on imports of fashion products would do nothing to solve the concerns about China’s IP policies and practices outlined in USTR’s Section 301 report.
  • USFIA believes that the best way to address concerns about China’s IPR practices is action at the multilateral level that includes other US trading partners.

American Apparel and Footwear Association (AAFA)

  • AAFA strongly opposes the proposed imposition of tariffs on textile, apparel, and footwear equipment and machinery as this will result in increased costs for AAFA members who are making yarns, fabrics, clothes, and shoes in the United States.
  • AAFA believes that a tariff on textile and apparel products would be a hidden tax on U.S. consumers, particularly since China represents such a large source of U.S. imports of these products.
  • AAFA strongly supports the Trump Administration’s efforts to improve the protection of intellectual property rights in China.

VF Sourcing Strategy Case Study Updates (May 2018)

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(Slide above: VF Corporation European Headquarter; Photo Credits: Hannah Wilson)

VF Business Operation General

V.F. Corporation (VF) designs, manufactures, distribute and market branded lifestyle apparel, footwear and accessories. The company offers Jeanswear, outdoor and action sports, image wear, sportswear and contemporary brands. The company markets its products under brands namely, the North Face, Wrangler, Timberland, Vans, Lee, and Nautica, among others. It sells its products to specialty stores, department stores, national chains and mass merchants, as well as through direct-to-consumer channel consisting of VF operated stores and internet sites.

VF reported revenue of $11.8 billion in 2017, down 4.6% over the fiscal year 2016. Gross margin% of the company improved from 48.3% in 2016 to 50.5% in 2017 as benefits from pricing, lower product costs, and a mix-shift toward higher margin businesses. However, gross margin% was partially offset by changes in foreign currency and the impact of restructuring charges. VF’s net income (net profit) substantially decreased by 42.8 percent to $615 million in 2017 from 2016 and net profit% also went down to 5.2% over the period. 

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VF Sourcing Strategy

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VF’s centralized global supply chain organization is responsible for producing, procuring and delivering products to its customers. On an annual basis, VF sources or produces approximately 473 million units spread across more than 30 brands. In 2017, VF’s products are obtained from its 21 self-operated manufacturing facilities and approximately 1,000 contractor manufacturing facilities in over 50 countries. No single supplier represents more than 10% of VF’s total cost of goods sold. In 2017, 23% of VF’s units were manufactured in VF-owned facilities (up from 22% in 2016) and 77% were obtained from independent contractors. 

VF operates manufacturing facilities in the U.S., Mexico, Central and South America, the Caribbean and Europe. A significant percentage of denim bottoms and occupational apparel is manufactured in these plants, as well as a smaller percentage of footwear and other products. 

For VF’s self-owned production facilities, VF purchases raw materials from numerous U.S. and international suppliers to meet their production needs. Raw materials include products made from cotton, leather, rubber, wool, synthetics, and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers, snaps, eyelets, and laces). Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors.

Independent contractors generally own the raw materials and ship finished, ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with satellite offices across Asia) and Panama. These hubs are responsible for managing the manufacturing and procurement of product, supplier oversight, product quality assurance, sustainability within the supply chain, responsible sourcing and transportation and shipping functions. In addition, VF’s hubs leverage proprietary knowledge and technology to enable certain contractors to more effectively control costs and improve labor efficiency. Substantially all products in the Outdoor & Action Sports and Sportswear coalitions, as well as a portion of products for VF Jeanswear and Imagewear coalitions, are obtained through these sourcing hubs.

Products obtained from contractors in the Western Hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives VF greater flexibility, shorter lead times and allows for lower inventory levels.

This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing. VF intends to continue to manage its supply chain from a global perspective and adjust as needed to changes in the global production environment (VF Annual Report, 2015, 2016, 2017).

“Third-Way” Sourcing Update

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VF has the goal of 40/40/20 for factory ownership. They want to own 40% of the factories they use, utilize the third-way approach in 40% of the factories, and use transactional sourcing for the other 20% (Glaser, 2014).

VF has expanded its Third-Way manufacturing program to sub-Sahara Africa, in addition to the third way factories VF works within Bangladesh, Cambodia, the Dominic Republic and Nicaragua. VF is looking into Africa because, while Africa may not be as efficient as Asia currently, there is potential to get it to 80% efficiency in the coming years. It could also be cheaper to source from Africa given the African Growth and Opportunity Act (AGOA) with the United States

Since its creation, VF has split its “Third-Way” factories into three different categories: light, medium, and heavy. Light Third-Way is having engineers consult with the factories and visit each week. The medium Third-Way involves having an engineer on site and a long-term commitment to the supplier from VF. Lastly, the heavy Third-Way involves profit-share and open book costing as well as sharing of research and development (R&D) (Barrie, 2015). 

Trust continues to be a central theme in Third-Way sourcing, as does having the right people on board with the initiative. VF also believes that any positive changes made to the factories because of the Third-Way program will ultimately help the whole industry and drive positive change, even if the changes are used for other companies that source from the same vendor (Barrie, 2015).

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 the meaning and significance of our course. The names of several experts featured in the video should sound familiar to you too, including David Spooner (former U.S. Chief Textile Negotiator and Assistant Secretary of Commerce), Julia Hughes (president of the US Fashion Industry Association) and Auggie Tantillo (president of the National Council of Textile Organizations).

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 implications; we also discussed various trade theories and the general pattern of the evolution of T&A industry in a country’s industrialization process; we further explored three primary T&A supply chains in the world (namely the Western-Hemisphere supply chain, “Factory Asia” supply chain based on the flying geese model and the phenomenon of intra-region T&A trade in Europe); last but not least, we looked at trade policies that are unique to the T&A sector (e.g.,: tariff, the quota system, and the yarn-forward rules of origin) as well as the complicated economic, social and political 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 perspective 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 renegotiation of the North American Free Trade Agreement (NAFTA) 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 hope FASH455 can put students into thinking the meaning of being a FASH major (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&A usually 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 can trade policy promote and support textile and apparel manufacturing in the United States?
  • How to make sure that 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.

State of the EU Textile and Apparel Industry (Updated April 2018)

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EU region as a whole remains a leading producer of both textile and apparel. The value of EU’s T&A production totaled EUR141.2bn in 2016 (Statistical Classification of Economic Activities or NACE, sectors C13, and C14), which was divided almost equally between textile manufacturing (EUR75.8bn) and apparel manufacturing (EUR65.4bn).

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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 2016. 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 18% in 2008 to 21% in 2015, which reflects the structural change of the sector.

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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.

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It is also interesting to note that in Western EU countries, labor only accounted for 22.8% 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 because of increased investment in automation technology.

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Because of their relatively high GDP per capita and size of the population, UK, Germany, France, Italy, and Spain altogether account for around 60% of total apparel retail sales in EU.

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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$89bn textile imports in 2016, as much as 64.1% (or US$57bn) were in the category of intra-region trade. Similarly, of EU countries’ total US$198bn apparel imports in 2016, as much as 55.6% (or US$110bn) also came from other EU members. In comparison, close to 97% of apparel consumed in the United States are imported in 2016, of which more than 75% come from Asia.

Data source: Eurostat (2018); WTO (2018)

by Sheng Lu

New CRS Report: U.S. Trade with Free Trade Agreement (FTA) Partners

3Key findings:

  • Between 1985 and 2011, the United States entered into 14 free trade agreements (FTAs) with 20 countries. Data from the Census shows that U.S. merchandise trade (or trade in goods) with FTA partner countries represents nearly 70% of all U.S. exports in goods and services, and more than 80% of all U.S. imports of goods and services.
  • In 2016, the United States ran a merchandise trade deficit of -$71.3 billion with the 20 FTA partner countries and a services surplus of $68.9 billion. The share of the U.S. trade deficit with FTA partners, however, has fallen by nearly half over the 2007-2017 period, from 18% to only about 10% of the total -$734.4 billion U.S. merchandise trade deficit.

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  • Regarding the economic impact of FTAs on the United States, a study conducted by the U.S. International Trade Commission suggests that bilateral and regional trade agreements increased U.S. aggregate trade by about 3%, but less than 1% for U.S. employment (or 159,300 full-time equivalent employees). Specifically, the study finds that rising imports, due in part to the Agreement on Textiles and Clothing (ATC), accounted for most of the reduction in U.S. employment in the apparel industry between 1998 and 2014.
  • Current trade data treat exports and imports as though the full value of an export was produced domestically and the full value of an import was produced abroad. However, the rapid growth of global value chains and intra-industry trade (importing and exporting goods in the same industry) has significantly increased the amount of trade in intermediate goods in ways that can blur the distinction between domestic and foreign firms and goods. For example, foreign value added accounts for about 11% of the content of U.S. exports in 2010. As a result of the growth in value chains, traditional methods of measuring trade may obscure the actual sources of goods and services and the allocation of resources that are used in producing those goods and services.

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  • Trade agreements of the type currently being negotiated by the United States comprise a broad range of issues that could have significant economic effects on trade and commercial relations over the long run between the negotiating parties, particularly for developing and emerging economies. However, the negative effects of international trade and trade agreements, particularly potential job losses and lower wages, often are distributed disproportionately with the effects falling more heavily on some workers and on some firms.

The full report can be downloaded from HERE

Resources for Learning about Cotton: FASH455 Exclusive Interview with Shannon Brady, CottonWorks™ Student Ambassador

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The picture above: Shannon Brady, Junior, UD Fashion Merchandising Major (Fourth one from the left in the front row) visited Cotton Inc together with other Cotton Student Ambassadors.

Question: What is the CottonWorks™ Ambassador program about and what is your role as an ambassador?

The CottonWorks™ ambassador program is a program where students in fashion and apparel related majors get to promote CottonWorks™ on their college campuses. Ambassadors are charged with helping faculty and students understand the resources available through CottonWorks™ as well as promote this resource through social media. This semester there are twelve ambassadors (including myself) from 12 different schools across the country.

My role as an ambassador is to raise awareness about CottonWorks™ on campus as it is a new program here at the University of Delaware. In January of this year, I had the opportunity to visit the Cotton Incorporated Headquarters in Cary, North Carolina. I, along with other CottonWorks™ ambassadors participated in an all-day CottonWorks™ training as well as a tour of the production facilities at Cotton Incorporated. I got to see everything from raw cotton to state-of-the-art laser finished denim. It was a unique experience and such a cool way to see the material I learned about in class come to life. 

Question: Cotton Incorporated recently launched a new CottonWorksTMprogram to help industry professionals and emerging professionals (like our FASH students) know more about cotton. Can you give us an overview of the program, particularly the learning resources related to the sourcing of cotton products?

CottonWorks™ is a free website where students and professionals can access a multitude of resources about cotton and the fashion and apparel industry.  The site offers many learning resources. Detailed guides are offered on topics such as sourcing and manufacturing, retail and marketing, fabric and technology, fashion and trend, and sustainability. These topics really apply to the fashion curriculum at UD. Additionally, the site offers a mobile-friendly textile encyclopedia where students can look up any textile related word anytime, anywhere.

However, the site offers more than just learning resources. CottonWorks™ is a great supplemental learning tool, but the site also offers emerging professionals ways to get engaged with their industry. Free webinars and workshops are offered through the website and are a great way to engage with industry professionals and learn about the issues pressing the industry right now. Their next webinar is on Tuesday 24 April 2018 registration is open on the CottonWorks™ website, and the topic of discussion is Cotton’s Biodegradability in Aquatic Environments.

Particularly regarding learning resources on sourcing cotton products, the sources and manufacturing topic on the website offers dozens of guides all kinds of cotton products, ranging from denim to cotton nonwovens.

Last but not the least, the Executive Cotton Update and Monthly Economic Letter, both posted every month at cottonworks.com/news are great resources for students and industry professionals interested in knowing what is happening in the U.S. and world cotton industry.

Question: Developing a sustainable supply chain is critical for the textile and apparel industry. So how is cotton related to sustainability? What are the facts important to know?

Cotton Incorporated is committed to being at the forefront of cotton sustainability, and the CottonWorks™ site offers many resources on how cotton is related to sustainability, including guides on responsible cotton production and manufacturing because sustainability happens throughout the lifecycle of cotton.

Cotton is a natural fiber, unlike some manmade fibers such as polyester it can biodegrade. If you log on to CottonWorks™ website you can view a recap of their webinar last month that went in depth about cotton’s biodegradability in soil and septic environments.

Additionally, CottonWorks™ has information on campaigns such as Cotton LEADS™ and Blue Jeans Go Green™ to promote the sustainability of cotton. Cotton LEADS™ is a joint program with Australia and the United States that supports a reliable and responsible cotton supply chain through five core principles of sustainability, use of best practices and traceability in the supply chain. Blue Jeans Go Green™ initiative collects denim sent to landfills and recycles it in partnership with Bonded Logic Inc. You can learn more about both these initiatives on the CottonWorks™ site at cottonworks.com/topics/sustainability.

Question: What are the opportunities for our FASH and UD students to get involved with CottonWorks™ and learn more about cotton?

Students can get started today! By registering for a free account on cottonworks.com, they have access to all of the amazing resources I touched on and many more. Additionally, they can follow @cotton_works on Instagram and Twitter to learn more about cotton and get cotton inspiration for their projects. 

I will also be hosting a tabling event where students can learn more about these resources, talk to me, and win free food and prizes on Thursday 19 April 2018 in Perkins! There will be more tabling events in the future that I will be posting about in my social media as well.

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Regional Textile and Apparel Supply Chains–Questions from FASH455

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NAFTA and Textile and Apparel Rules of Origin

#1 How do rules of origin (RoO) and free trade agreement (FTA) regulations affect speed to market in apparel sourcing? Do countries who are part of an FTA find it to be easier to get to market in a shorter amount of time if they are working with other FTA members? Or could RoO slow down the production process because producers have to be more careful about compliance with the complicated RoO?

#2 Why or why not the “yarn forward” rules of origin remains an effective way to promote textile and apparel production in the Western-Hemisphere?  What other options are available to improve the competitiveness of the Western-Hemisphere textile and apparel supply chain?

#3 What would happen to the Western-Hemisphere textile and apparel supply chain should NAFTA no longer exist?

#4 Should NAFTA be responsible for the loss of US apparel manufacturing jobs? Any hard evidence?

#5 If you were U.S. trade negotiators, what would you do with TPL in NAFTA given the competing views from the U.S. textile industry and U.S. fashion brands and retailers?

The Outlook of “Factory-Asia”

#6 From the perspective of the U.S. textile and apparel industry, is it a good idea for the United States to reach free trade agreement (FTA) with Asian countries? If so, what countries should be included in the new FTA? If not, why?

#7 How can U.S. companies get involved in the Asia-based textile and apparel supply chain?

#8 Why or why not is the “Flying geese model” unique to Asia? Can the model be replicated in America too?

(Welcome to join our online discussion. Please mention the question number in your reply)