Textile and Apparel Products Covered by the U.S.-China Tariff War Reference List (updated January 2020)

(You may also download this post in PDF)

US China tariff war reference list (Jan 15, 2020)_Page_1

3

table 3.jpg

table 4.jpg

table 5.jpg

Appendix: Links for the Product List (updated January 15, 2020)

by Sheng Lu

Interview with Modaes.es on the Latest Trends of Apparel Sourcing and Trade

The original interview (in Spanish) is available HERE. Below is the translated version.

Question: Is there a reversal in the globalization of fashion?

Sheng Lu: The fashion industry is becoming more global AND regional — the making and selling of a garment “travel” through more and more countries. Just look at the label of a Gap sweatshirt: it is an American clothing brand, but the product is “Made in Vietnam,” and the label includes the size standards in six different countries. The business model of the fashion industry today is “making anywhere in the world and selling anywhere in the world.”

Q .: What do you mean the industry is becoming more “regional”?

Sheng Lu: The trade flows of textiles and apparel today are heavily influenced by regional free trade agreements (FTAs). For example, while China is known as the world’s largest apparel producer and exporter, nearly 50% of the clothing consumed by European consumers are still produced by EU countries themselves. Notably, consumers have different expectations for clothing: many are price-sensitive, but others prefer more trendy items, which requires “near sourcing”—this explains why fashion companies have to adopt a more balanced sourcing portfolio.

Q .: Is the price still the most important factor in fashion companies’ sourcing decisions?

Sheng Lu: Sourcing is far more than just about chasing for the lowest cost. Sourcing decisions today have to consider a mix of factors, ranging from flexibility, speed to market, sustainability, to compliance risks. In fact, few companies “put all eggs in one basket.” My recent studies show that both in the United States and the EU, fashion companies with more than 1,000 employees, typically sourced from more than twenty different countries—sometimes even exceed forty. Behind such a diversified sourcing practice is the necessity to strike a balance between so many different sourcing factors.

Q .: Is apparel sourcing becoming more diversified today than a decade ago?

Sheng Lu: From my observations, fashion companies are souring from more countries and regions than a decade ago, but not in terms of producers. Especially in the last two or three years, I see some large companies are consolidating their supplier base to build a closer relationship with key vendors. The reason is the same as mentioned earlier: a very competitive price is not enough for apparel sourcing today.

Q .: How has the tariff war between the United States and China affected apparel sourcing?

Sheng Lu: The trade war between the United States and China is having big impacts on apparel sourcing that go beyond the two countries. Notably, American fashion brands and retailers are moving sourcing orders from China to other Asian countries such as Vietnam and Bangladesh. However, finding China’s alternatives is anything but easy. Despite the tariff war, China remains a competitive player in apparel sourcing. The unparalleled production capacity that can fulfill orders nearly for any products in any quantity, and the ability to comply with complex sustainability and social responsibility regulations are among China’s unique competitive advantages. Understandably, companies are not giving up sourcing from China, as there are few other “balanced” sourcing destinations in the world. That being said, it is important to recognize that the big landscape of apparel sourcing is evolving. Even in Europe, which is not having a trade war with China, apparel “Made in China” is seeing a notable decline in its market share.

Q .: How is China adapting?

Sheng Lu: The textile and apparel industry in China is undergoing a structural change. Partially caused by the tariff war, apparel producers in China are increasingly moving their factories to nearby Asian countries (especially for big-volume and/or relatively low value-added product categories). Meanwhile, China itself is changing from an apparel producer to become a leading textile supplier for other apparel-exporting countries in Asia. This is NOT a temporary move, but a permanent transition, which has happened in many industrialized economies in history. Somehow, the tariff war has accelerated the adjustment process, however.

Q .: Will Africa be the next hub for apparel sourcing in the near future?

Sheng Lu: As textile and clothing trade is turning more regional-based, Africa is facing significant challenges to become an attractive tier-1 sourcing base for Western fashion brands and apparel retailers.

Q .: Why is that?

Sheng Lu: In general, there are three primary apparel import markets in the world: the United States, the European Union, and Japan—as of 2018, these three regions altogether still accounted for as many as 70% of the world apparel imports. Surely, Asian countries are important apparel suppliers for all these three regions. However, each of these three markets also has its respective regional suppliers—Mexico and Central & South American countries for the United States, China, and a few Southeast Asian countries for Japan and Eastern European countries for the EU market. Other than geographic proximity, often, these regional suppliers also enjoy preferential market access to the US, EU, and Japan provided by regional free trade agreements.

Africa, on the other hand, is not close to any of these three major apparel import markets geographically. Why would fashion companies in the United States, Japan, or the EU have to source from Africa when there are so many other options available?

Q .: For price?

Sheng Lu: Several trade preference programs currently offer apparel exporters in African countries preferential or duty-free market access to the United States, the EU, and Japan (such as the African Growth Opportunity Act and the EU and Japan Generalized System of Preferences programs). However, sourcing from Africa will entail other extra costs—for example, the raw material cost will be higher as yarns and fabrics have to be imported from Asia first, and the transportation bill could be costly due to the poor infrastructure. Further, not like their counterpart in Asia, the apparel industry is not regarded as a development priority in many African countries, which continue to rely heavily on the export of raw materials instead. Manufacturing for the local market is also complicated—apparel producers in Africa are struggling with both the cheap clothing imported from Asia and the mounting used clothing sent from the West.

Q .: It is said that fashion might be the most regulated sector in international trade other than agriculture. How to explain this?

Sheng Lu:  I think we need some changes here. For example, in 2018, textiles and apparel accounted for only 5% of the total U.S. merchandise imports but contributed nearly 40% of the tariff revenue collected. This phenomenon, which makes no sense economically, is the result of the industry lobby—trying to protect domestic manufacturers from import competition.

As another example, around 15%-17% of Mexico’s clothing exports to the United States do not claim the duty-free benefits provided by the North American Free Trade Agreement (NAFTA), as the NAFTA rules of origin strictly require the using of regional yarns and fabrics for qualified apparel items. In the end, companies prefer bigger savings on the raw material cost than claiming the NAFTA duty-saving benefits. We should think about how to modernize these trade rules and make them more supply-chain friendly in the 21st century.

Meanwhile, policymakers are developing new regulations to address some emerging areas in international trade, such as E-commerce, labor standards and environmental protection. Increasingly, trade policy is moving from “measures at the border” to “measures behind the borders.”

Top Ten Most-read Blog Posts on Shenglufashion in 2019

download.png

#1 WTO reports world textile and apparel trade in 2018

#2 Wage level for garment workers in the world (updated in 2017)

#3 China’s changing role in the world textile and apparel supply chain

#4 Timeline of trade policy in the Trump administration

#5 State of the EU textile and apparel industry (updated April 2019)

#6  2019 U.S. fashion industry benchmarking study released

#7 U.S. textile and apparel industry is NOT immune to the U.S.-China tariff war

#8 U.S. apparel retailers’ shifting sourcing strategy for “Made in China” under the shadow of the tariff war

#9 Demystify the “Made in the USA” apparel sourcing strategy

#10 U.S. textile and apparel industry assesses the impacts of USMCA (NAFTA2.0)

Happy Holidays!

New Analysis: UK’s Apparel Sourcing Patterns under the Shadow of Brexit

UK1.jpg

The full article is available HERE

Key findings:

First, mirroring the trend of aggregate market demand, the value of UK’s apparel imports has only grown marginally over the past decade. Specifically, between 2010 and 2018, the compound annual growth rate of UK’s apparel imports was close to zero, which was notably lower than 1.4% of the world average, the United States (1.9%), Japan (1.5%) and even the European Union as a whole (1.1%).

Second, UK’s fashion brands and retailers are gradually reducing imports from China and diversifying their sourcing base. Similar to other leading apparel import markets in the world, China was the largest apparel-sourcing destination for UK fashion companies, followed by Bangladesh, which enjoys duty-free access to the UK under EU’s Everything But Arms (EBA) program. Because of geographic proximity and the duty-free benefits under the Customs Union with the EU, Turkey was the third-largest apparel supplier to the UK.

Affected by a mix of factors ranging from the increasing cost pressures, intensified competition to serve the needs of speed-to-market better, the market shares of “Made in China” in the UK apparel import market had dropped significantly from its peak of 37.2% in 2010 to a record low of 21.4% in 2018. However, no single country has emerged to become the “next China” in the UK market. Notably, while China’s market shares decreased by 6.3 percentage points between 2015 and 2018, the next top 4 suppliers altogether were only able to gain 0.7 percentage points of additional market shares over the same period.

Third, despite Brexit, the trade and business ties between the UK and the rest of the EU for textile and apparel products are strengthening. Thanks to the regional supply chain, EU countries as a whole remain a critical source of apparel imports for UK fashion brands and apparel retailers. More than 33% of the UK’s apparel imports came from the EU region in 2018, a record high since 2010. On the other hand, the EU region also is the single largest export market for UK fashion companies.

UK2

Fourth, the potential impacts of no-deal Brexit on UK fashion companies’ sourcing cost seem to be modest:

  • For products currently sourced from countries without a free trade agreement with the EU (such as China) and those Generalized System of Preferences (GSP) beneficiaries that enjoy non-zero preferential duty rates, the tariff rate in the no-deal Brexit scenario will be lower than the current level, as round 44% of tariff lines will be duty-free.
  • For products currently sourced from countries that enjoy duty-free benefits under the GSP program (such as EBA beneficiary countries), their duty-free market access to the UK will remain unchanged according to the temporary tariff regime.
  • Products currently sourced from EU countries and Turkey will lose the duty-free benefits and be subject to the MFN tariff rate. However, because around 44% of tariff lines will be duty-free, the magnitude of tariff increase should be modest.
  • Likewise, products currently sourced from countries that enjoy duty-free benefits under an EU free trade agreement could lose the duty-free treatment and be subject to the MFN tariff rate. However, as around 44% of tariff lines will be duty-free and the UK has signed several continuity trade agreements with some of these countries, the magnitude of tariff increase should be modest overall too. Additionally, these countries are minor sourcing bases for UK fashion companies.

 About the authors: Victoria Langro is an Honors student at the University of Delaware; and Dr. Sheng Lu is an Associate Professor in Fashion and Apparel Studies at the University of Delaware.

USTR Factsheet: Textiles and Apparel and the US-Mexico-Canada Free Trade Agreement (USMCA)

USMCA-Textiles.jpg

The factsheet is available in PDF

Background

On December 10, 2019, the United States, Mexico and Canada reached an updated U.S.-Mexico-Canada Free Trade Agreement (USMCA). Compared with the version signed in September 2018, the new USMCA includes even higher labor and environmental standards and stronger enforcement mechanisms for these rules. According to the released protocol of amendment, no change has been made to the Textiles Chapter, however.

Before taking into effect, the renegotiated USMCA needs to be ratified by U.S. Congress, which hopefully could happen either in 2019 or 2020. Meanwhile, Canada and Mexico have to go through their ratification process again for the new USMCA too.

EMBHEbLWsAAZWJ2.jpg

Textiles and Apparel and USMCA

First, in general, USMCA still adopts the so-called “yarn-forward” rules of origin. This means that fibers may be produced anywhere, but each component starting with the yarn used to make the garments must be formed within the free trade area – that is, by USMCA members.

Second, other than the source of yarns and fabrics, USMCA now requires that some specific parts of an apparel item (such as pocket bag fabric) need to use inputs made in the USMCA region so that the finished apparel item can qualify for the import duty-free treatment.

Third, USMCA allows a relatively more generous De minimis than NAFTA 1.0.

Fourth, USMCA seems to be a “balanced deal” that has accommodated the arguments from all sides regarding the tariff preference level (TPL) mechanism:

  • Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
  • Compared with NAFTA, USMCA will expand the TPL level for a few product categories with a high TPL utilization rate.

Fifth, USMCA will make no change to the Commercial availability/short supply list mechanism in NAFTA 1.0.

Sixth, it remains to be seen whether USMCA will boost “Made in the USA” fibers, yarns and fabrics by limiting the use of non-USMCA textile inputs. For example, while the new agreement expands the TPL level for U.S. cotton/man-made fiber apparel exports to Canada (currently with a 100 percent utilization rate), these apparel products are NOT required to use U.S.-made yarns and fabrics. The utilization rate of USMCA will also be important to watch in the future.

(Additional reading: Apparel-specific rules of origin in USMCA)

Economic Impacts of USMCA on the Textile and Apparel Sector

According to an independent assessment by the U.S. International Trade Commission (USITC) released on April 19, 2019:

First, 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.

Second, 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.

EU Textile and Apparel Industry and Trade Patterns: Discussion Questions from FASH455

This slideshow requires JavaScript.

#1: How do the ‘double transformation‘ rules of origin in most EU free trade agreements benefit or hurt the EU textile and apparel industry? What are the economic, geographic and policy factors behind the growing intra-region textile and apparel trade in the EU?

#2: The EU region is a leading producer of textiles and apparel. What effect do you think the proposed EU-US trade agreement will have on big-name EU fashion brands such as Hugo Boss?  What effect do you think the agreement will have on textile and apparel production in the EU as a whole?

#3: Why or why not do you think the EU textile and apparel industry is immune to the ongoing US-China tariff war?

#4: Comparing VF Corporation with Hugo Boss, what are the similarities and differences of their sourcing strategies? How might their respective sourcing strategy involve in the next 3-5 years and why?

#5: With such an emphasis on the merging of technology, data analytics, and differentiation in the textile and apparel industry worldwide, do you think it is possible for a small European apparel brand to compete with larger companies in the region? If so, how?

Additional reading; The EU-28 Textile and Clothing Industry in the year 2018

(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question # in your reply)