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

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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.

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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.

Japan’s Apparel Sourcing Patterns

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(The full article is available HERE)

Key findings:

First, the total value of Japan’s apparel imports has been growing steadily in line with consumption patterns. Between 2010 and 2018, the value of Japan’s apparel imports enjoyed a 2.7% compound annual growth rate, which was lower than the US (3.4%), but higher than the EU (1.9%) and the world average (1.3%) over the same period.

Second, while China remains the top supplier, Japanese fashion brands and retailers are also diversifying their sourcing bases. Similar to their counterparts in the US and EU, Japanese fashion brands and retailers are actively seeking alternatives. Imports from Vietnam, Bangladesh, and Indonesia have been growing particularly fast, even though their production capacity and market shares are still far behind China.

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Third, Japanese fashion companies are increasingly sourcing from Asia. As of 2018, only 7.5% of Japan’s apparel imports came from non-Asian countries (mostly western EU countries), a notable drop from 11.4% back in 2000. A good proportion of Japan’s apparel imports from Asia actually contain fibers and yarns originally made in Japan. For example, it is not difficult to find clothing labeled ‘Made in China’ or ‘Made in Vietnam’ that also includes phrases such as ‘Using soft, slow-spun Japanese fabric’ and ‘With Japanese yarns’ in the detailed product description.

Fourth, overall, Japan sets a lower tariff barrier for apparel than other leading import countries. As of September 2019, there were around 15 FTAs and TPAs in force in Japan, whose members include several 1st tier apparel supplying countries in Asia, such as Vietnam, Bangladesh, India, Indonesia, and Cambodia. Most of these trade programs adopt the so-called “fabric-forward” rules of origin (also known as “double-transformation” rules of origin). Additionally, Japan is actively engaged in negotiations on a trilateral free trade agreement with China and South Korea, and the Regional Comprehensive Economic Partnership (RCEP), which involves Japan, South Korea, China and members of the Association of Southeast Asian (ASEAN) countries. Once reached and implemented, these trade agreements will provide new exciting duty-saving sourcing opportunities, including from China, the top apparel exporter in the world.

New Report: Fashion’s New Must-have—Sustainable Sourcing at Scale

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The study was based on a survey of 64 sourcing executives from vertical apparel retailers, hybrid wholesalers, and sportswear companies, with a total sourcing volume of $100 billion. Below are the key findings of the report:

  • More sourcing executives now focus on process improvements in their companies, such as sustainability and transparency (56% of respondents), digitalization of sourcing process and related areas (45% of respondents), consolidation of supplier base (42% of respondents), end-to-end process efficiency (41% of respondents) than shifting sourcing countries (20% of respondents). Related, as cost gaps between sourcing destinations are narrowing, apparel companies are shifting from minimizing the price of supply to a focus on customer-centric, agile product development to meet customer demand. Digitalization, such as intelligent sourcing, is one of the most promising areas.
  • Affected by the on-going U.S.-China tariff war, two-thirds of surveyed companies expect their overall sourcing cost to increase in the years ahead, including 37.5% expecting a 2-4% increase and 25% expecting 1-2% increase. However, only 3.1% of respondents expect a significant cost increase (>4%).
  • Echoing the findings of other recent studies, respondents plan to source relatively less from China through 2025. Bangladesh, Vietnam, Myanmar, and Ethiopia are among the top alternative sourcing destinations. Meanwhile, more companies are considering near-sourcing. The biggest challenge, however, is limited fabric production capacity, NOT higher wages.
  • Sustainable apparel sourcing is regarded as a must—70% of EU companies and 35% of North American companies surveyed say “responsible and sustainable sourcing was on the CEO agenda.” Top challenges to achieve sustainable apparel sourcing include “no common, objective industry standard on sustainable sourcing”, “consumers lack a clear picture of what sustainable fashion is all about”, “mixed influence of the sourcing function in company-wide sustainability strategy.” Further, more companies prioritize environmental-sustainability initiatives (issues such as sustainable material, recycled material, traceability, and packing) than social sustainability initiatives (issues such as) fair on living wage and decent work). Additionally, respondents hold competing views on whether sustainability will increase sourcing costs overall. Around 58% of respondents see additional costs for sustainable sourcing between 1% and 5%.
  • Sustainability will play an increasingly important role in how apparel companies select their suppliers. Some surveyed apparel brands and retailers say they have upgraded their supplier ratings over the last couple of years, moving away from viewing sustainability simply as a compliance-based hygiene factor and instead embracing criteria that are more sophisticated.
  • There is also a need to shift from the transactional-based, season-by-season and the low-commitment relationship between apparel companies and their vendors to strategic partnerships between the two. Around 73% of respondents plan to consolidate their supplier base by at least 5% over the next few years. Related, apparel companies increasingly empower suppliers for self-auditing with tools like the Higg Index.

WTO Reports World Textile and Apparel Trade in 2018

Updated data in 2019 is now available: WTO Reports World Textiles and Apparel Trade in 2019
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According to the World Trade Statistical Review 2019 newly released by the World Trade Organization (WTO), the current dollar value of world textiles (SITC 65) and apparel (SITC 84) exports totaled $315 billion and $505 billion in 2018 respectively, increased by 6.4% and 11.1% from a year earlier. This has been the fastest growth of world textile and apparel trade since 2012. Specifically: 

I. Textile export

China, European Union (EU28), and India remained the world’s top three exporters of textiles in 2018. Altogether, these top three accounted for 66.9% of world textile exports in 2018, a new record high since 2011. Notably, China and EU (28) also enjoyed a faster-than-world-average export growth in 2018, up 7.9% and 6.9% respectively. The United States remained the world’s fourth top textile exporter in 2018, accounting for 4.4% of the shares, down slightly from 4.6% in 2017.

II. Apparel export

China, the European Union (EU28), Bangladesh, and Vietnam unshakably remained the world’s top four largest exporters in 2018. Altogether, these top four accounted for as much as 72.3% of world market shares in 2018, which, however, was lower than 75.8% in 2017 and 74.3% in 2016—primarily due to China’s declining market shares. Notably, even though apparel exports from Vietnam (up 13.4%) and Bangladesh (up 11.1%) enjoyed a fast growth in absolute terms in 2018, their gains in market shares were quite limited (up 0.3 percentage point from 5.9% to 6.2% for Vietnam and up 0.1 percentage point from 6.4% to 6.5% for Bangladesh). This result once again suggests that due to capacity limits, no single country has emerged to become the “Next China.” Instead, China’s lost market shares in apparel exports were fulfilled by a group of countries, a phenomenon which can be linked with fashion brands and retailers’ sourcing diversification strategy.

III. Textile import

The European Union (EU28), the United States, and China were the top three largest importers of textiles in 2018, accounting for 37.5% of the world’s total textile imports that year. Although the market shares of the top three in 2018 were close to 37.7% a year earlier, it nevertheless was much lower than over 50% back in the 2000s. The increasing diversification of textile import market is associated with the shifting pattern of world apparel manufacturing and export closely.

IV. Apparel import

Affected by consumers’ purchasing power (often measured by GDP per capita) and size of the population, the European Union, the United States, and Japan remained the world’s top three importers of apparel in 2018. Altogether, these top three absorbed 61.5% of world apparel in 2018, which, however, was lower than 62.3% in 2017 and a significant drop from 84% back in 2005. Behind the result, it is not the case that consumers in the EU, U.S., and Japan are importing less clothing. Instead, several emerging economies (such as China) are becoming fast-growing apparel consumption markets and starting to import more. As consumers’ purchasing power in these emerging economies continues to improve, we could expect a more diversified world apparel import market in the years ahead.

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Additional reading: Latest trends in world textile and apparel trade

Challenges facing Sub-Saharan Africa (SSA) as an Apparel Sourcing Base

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Sub-Saharan Africa (SSA) is widely regarded as a growing apparel-souring destination. Particularly, U.S. Congress established the African Growth and Opportunity Act (AGOA), a non-reciprocal trade preference program, in 2000, to help developing SSA countries grow their economy through expanded exports to the United States. 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. Notably, 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 items use yarns and fabrics produced by non-AGOA members, such as China, South Korea, and Taiwan. This special rule is deemed as critical as most SSA countries still have no capacity in producing capital and technology-intensive textile products.

That being said, to play a bigger role as an apparel sourcing base, SSA is not without significant challenges:

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Challenge 1: limited industry upgrading and local textile production capacity

Theoretically, as a country’s economy advances, it should gradually be producing and exporting more capital and technology-intensive textiles versus labor-intensive apparel products. This is the notable trends in many Asian countries (such as China and Vietnam), where the textile/apparel export ratio has been rising steadily between 2005 and 2017. However, as a reflection of the stagnant industry upgrading, the textile/apparel export ratio remains fairly low in SSA, including in Lesotho, Kenya, and Mauritius, the top three largest apparel exporters in the SSA region.

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Challenge 2: Slow and no progress in export diversification

Ideally, as the economy becomes more sophisticated, textiles and apparel (T&A) should account for a declining share in a country’s total merchandise exports. Countries such as China, Vietnam, and ASEAN demonstrate perfect examples. However, in some SSA countries (e.g., Lesotho), T&A has stably accounted for over 80% of their total merchandise exports over the past 17 years, a sign of slow or no progress in export diversification. In other SSA countries, T&A accounted for less than 10% of their total merchandise exports, suggesting the sector is not a priority to the local economy.

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Challenge 3: Intense competition both in key export markets and domestic market

As of 2017, over 96% of SSA countries’ T&A exports went to three markets: the United States, the EU, and other SSA members. However, because of the intense competition, except for the regional SSA market, SSA countries account for merely 1.4% and 0.2% of total U.S. and EU textile and apparel imports in 2017 respectively.

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Even more concerning, the T&A industry in SSA countries is facing growing competition in the domestic market with cheap imports, mostly from Asia. Notably, SSA countries import MORE apparel than they export, a phenomenon rarely seen among developing countries in a similar stage of economic development.

Challenge 4: U.S. companies remain low interest in investing in the region directly

According to several recent studies, leading U.S. fashion brands and retailers remain low interest in investing in the SSA region directly, even though companies admit more investments in areas such as infrastructure are critical to the success of SSA countries serving as competitive apparel sourcing bases. Some argue that the “temporary” nature of AGOA make companies hesitant to build factories in SSA. However, should AGOA become a permanent free trade agreement, which follows the principle of reciprocity, SSA countries would have to lower their trade barriers to U.S. products, including eliminating the tariffs and non-tariff barriers, in exchange for the reciprocal market access benefits from the United States. It doesn’t seem most AGOA members are ready for that stage yet.

by Sheng Lu

Further reading: Challenges for sub-Saharan Africa as an apparel sourcing hub

Cambodia May Lose Its Eligibility for European Union’s Everything But Arms (EBA) Program

Last week in FASH455, we discussed the unique critical role played by textile and apparel trade in generating economic growth in many developing countries. The developed countries also use trade policy tools, such as trade preference programs, to encourage the least developed countries (LDCs) making and exporting more apparel. However, a debate on these trade programs is that they have done little to improve the genuine competitiveness of LDCs’ apparel exports in the world marketplace, but instead have made LDCs rely heavily on these trade programs to continue their apparel exports. Here is one more example:

With growing concerns about “the deterioration of democracy, respect for human rights and the rule of law in Cambodia”, in a statement made on February 12, 2019, the European Union says it has started the process that could lead to a temporary suspension of Cambodia’s eligibility for EU’s Everything But Arms (EBA) program. Specifically, the EU process will include the following three stages:

  • Stage 1: six months of intensive monitoring and engagement with the Cambodian government;
  • Stage 2: another three months for the EU to produce a report based on the findings in stage 1
  • Stage 3: after a total of twelve months in stages 1 & 2, the EU Commission will conclude the procedure with a final decision on whether or not to withdraw tariff preferences; it is also at this stage that the Commission will decide the scope and duration of the withdrawal. Any withdrawal would come into effect after a further six-month period.

However, the EU Commission also stressed that launching the temporary withdrawal procedure does not entail an immediate removal of Cambodia’s preferential access to the EU market, which “would be the option of last resort.”

Developed in 2001, the EBA program establishes duty-free and quota-free treatment for all Least Developed Countries (LDCs) in the EU market. EBA includes almost all industries other than arms and armaments. As of February 2019, there are 49 EBA beneficiary countries.

The EBA program has benefited the apparel sector in particular given clothing accounts for the lion’s share in many LDCs’ total merchandise exports. Because of the preferential duty benefits provided by EBA, many LDCs can compete with other competitive apparel powerhouses such as China. Notably, the EBA program also adopts the “cut and sew” rules of origin for apparel, which is more general than the “double transformation” rules of origin typically required by EU free trade agreement and trade preference programs. Under the “cut and sew” rule, Cambodia’s apparel exports to the EU can enjoy the import duty-free treatment while using yarns and fabrics sourced from anywhere in the world.

Cambodia is a major apparel supplier for the EU market, accounting for approximately 4% of EU’s total apparel imports in 2017. Exporting apparel to EU through the EBA program is also of particular importance to Cambodia economically. In 2016, the apparel sector created over 500,000 jobs in Cambodia, of whom 86% were female, working in 556 registered factories. According to Eurostat, of EU’s €4.9bn imports from Cambodia in 2017, around 74.9% were apparel (HS chapters 61 and 62). Meanwhile, of EU’s €3.7bn apparel imports from Cambodia in 2017, as high as 96.6% claimed the EBA benefits. Understandably, losing the EBA eligibility could hurt Cambodia’s apparel exports to the EU significantly.

Demystify the “Made in the USA” Apparel Sourcing Strategy

While the majority of apparel consumed in the United States come from overseas, “Made in the USA” is growing in popularity. According to the 2018 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association (USFIA) in July 2018, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume.  Likewise, the State of Fashion 2019 report published by Business of Fashion (BOF) and McKinsey & Company in November also forecasts that over 20 percent of U.S. fashion companies’ sourcing volume could be from nearshore by 2025, thanks to automation technology and consumers’ increasing demand for speed to market.

However, the detailed practice of the “Made in the USA” apparel sourcing strategy–including who is sourcing, what products are sourced, and what the typical price range of these products remain largely unknown.

To answer these questions, we recently analyzed the pricing, product assortment and inventory information of over 90,000 fashion retailers and 300,000,000 fashion apparel products at the Stock-Keeping Unit (SKU) level based on EDITED, a big data and business analytics tool developed for the fashion industry. For the research purpose, we selected apparel products newly launched to the U.S. market in the past twelve months (i.e., between 1 December 2017 and 30 November 2018) with “Made in the USA” explicitly mentioned in the product description. Below are the key findings:

First, “Made in the USA” apparel overall are treated as a niche product in U.S. fashion brands and retailers’ sourcing portfolio.

During the 12 months we examined (1 December 2017-30 November 2018), 94 out of the total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S. market. The top 10 sellers list includes BOTH retailers that focus on the value market such as Walmart and relatively high-end department stores such as Bloomingdale and Saks Fifth Avenue. However, even for these top sellers, “Made in the USA” apparel accounted for less than 8 percent of their total product offers on average.

Second, U.S. fashion brands and retailers are most likely to source“Made in the USA” apparel for relatively fashion-oriented items, particularly bottoms (such as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and dungarees), swimwear and suits-sets.

The competitive edge for these product categories in the retail market, in general, increasingly depends on unique designs, high product quality, and speed to market, which makes sourcing from the United States commercially beneficial. In comparison, imported products are more concentrated on basic fashion items often competing on price in the U.S. retail market, including tops (such as T-shirt and polo shirt), underwear, and nightwear.

It is also interesting to note that “Made in the USA” apparel were predominately women’s wear (92 percent), whereas imported clothing adopted a more balanced gender combination (63 percent women’s wear and 37 percent men’s wear). Because the fashion trends for women’s wear usually are shorter-lived and harder to predict, this result once again indicates that seeking quick response and shorter lead time for stylish and trendy items could be an important incentive for local sourcing by U.S. fashion brands and retailers.

Third, consistent with the common perception, “Made in the USA” apparel overall are pricier than imported ones in the U.S. retail market.

Taking the U.S. apparel retail market as a whole, close to 40 percent of “Made in the USA” offering in the past 12 months targeted the premium or luxury market, compared with only 20 percent of imported products.  In contrast, as few as 18 percent of “Made in the USA” offering were in the value market, which, however, accounted for approximately 60 percent of all imported apparel sold in the U.S. market. In totality, it seems U.S. fashion brands and retailers are purposefully targeting “Made in the USA” apparel for less price-sensitive segments of the market to balance the high domestic production cost.

On the other hand, when examining U.S. fashion brands and retailers’ pricing strategy at the product level, “Made in the USA” clothing was still priced much higher than imported ones for almost all major apparel categories, except hosiery. Notably, in the past 12 months, the average unit retail price of “Made in the USA” clothing was 99.2 percent higher than imported ones in the value and mass market and 36.0 percent higher in the premium and luxury market. This interesting phenomenon supports the arguments that U.S. consumers somehow are willing to pay a premium price for products with the “Made in the USA” label.  

Additionally, during the past 12 months, around 46.3 percent of “Made in the USA” apparel were sold at a discount compared with more than 54.6 percent of imported ones. The advantage of proximity to the market, which makes speedy replenishment for in-season items possible, is an important factor behind the more successful control of markdowns for “Made in the USA” products. For example, data shows that U.S. fashion brands and retailers replenished approximately 12.7 percent of their “Made in the USA” offering in the past 12 months but only 2.8 percent of imported clothing.

In conclusion, the findings of this study concur with the view that “Made in the USA” apparel are still relevant today. Meanwhile, it does not seem to be the case that “Made in the USA” apparel and imported ones are necessarily competing with each other in the U.S. retail market. With apparel sourcing increasingly requiring striking a balance among various factors ranging from cost, flexibility, compliance to speed to market, it is hopeful that “Made in the USA” apparel will continue to have its unique role to play in U.S. fashion brands and retailers’ merchandising and sourcing strategies.

By Sheng Lu

Outlook 2019: Apparel Industry Issues in the Year Ahead

In January 2019, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2019–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. Any comments and suggestions are more than welcome!

1: What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2019, and why?

In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2019, ranging from a more volatile global economy, the unpredictable outlook of the U.S.-China trade talks to the various possible scenarios of Brexit. While uncertainty creates exciting new research opportunities for scholars like me, it could be a big headache for companies seeking a foreseeable market environment to guide their future business plan and investments. 

Meanwhile, the increasing digitalization of the apparel supply chain based on big-data tools and artificial intelligence (AI) technologies means a huge opportunity for fashion companies. Indeed, the apparel industry is quickly changing in nature—becoming ever more globalized, supply-chain based, technology-intensive and data-driven. Take talent recruitment as an example. In the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), as much as 68 percent of surveyed leading U.S. fashion brands and apparel retailers say they plan to increase hiring of data scientists in the next five years. Googling “apparel industry” together with terms such as “big data” and “data science” also returns much more results than in the past. It is hopeful that the advancement of digital technologies and the smarter use of data will enable apparel companies to overcome market uncertainties better and improve many aspects of their businesses such as speed to market, operational efficiency and even sustainability.

2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2019, and what can apparel firms and their suppliers do to stay ahead?

Based on my research, I have three observations regarding apparel companies’ sourcing trends and the overall sourcing landscape in 2019:

First, apparel companies overall will continue to maintain a diverse sourcing base. For example, in a recent study, we examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Notably, on average these companies sourced from over 20 different countries or regions using more than 200 vendors in 2017. Similarly, in the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), we also found companies with more than 1,000 employees typically source from more than ten different countries and regions. Since no sourcing destination is perfect, maintaining a relatively diverse sourcing base allows apparel companies to strike a balance among various sourcing factors ranging from cost, speed, flexibility, to risk management.

Second, while apparel companies are actively seeking new sourcing bases, many of them are reducing either the number of countries they source from or the number of vendors they work with. According to our study, some apparel companies have been strategically reducing the number of sourcing facilities with the purpose of ensuring closer collaborations with their suppliers on social and environmental compliance issues. Some other companies are consolidating their sourcing base within certain regions to improve efficiency and maximize productivity in the supply chain. Related to this trend, it is interesting to note that approximately half of the 50 largest U.S. apparel companies report allocating more sourcing orders to their largest vendor in 2017 than three years ago.

Third, nearshoring or onshoring will become more visible. Take “Made in the USA” apparel for example. According to the 2018 U.S. Fashion Industry Benchmarking Study, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume. In a recent study, we find that 94 out of the total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S. market between December 2017 and November 2018. These “Made in the USA” apparel items, in general, focus on fashion-oriented women’s wear, particularly in the categories of bottoms (such as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and dungarees), swimwear and suits-sets. The advantage of proximity to the market, which makes speedy replenishment for in-season items possible, also allows retailers to price “Made in the USA” apparel substantially higher than imported ones and avoid offering deep discounts. Looking ahead, thanks to automation technology and consumers’ increasing demand for speed to market, I think nearshoring or onshoring, including ”Made in the USA” apparel, will continue to have its unique role to play in fashion brands and retailers’ merchandising and sourcing strategies.

3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?

2019 will be a year to test apparel companies’ resources, particularly in the sourcing area. For example, winners will be those companies that have built a sophisticated but nimble global sourcing network that can handle market uncertainties effectively. Likewise, companies that understand and leverage the evolving “rules of the game”, such as the apparel-specific rules of origin and tariff phase-out schedules of existing or newly-reached free trade agreements, will be able to control sourcing cost better and achieve higher profit margins. Given the heavy involvement of trade policy in apparel sourcing this year, companies with solid government relations should also enjoy unique competitive advantages. 

On the other hand, as apparel business is changing in nature, to stay competitive, apparel companies need to start investing the future. This includes but not limited to exploring new sourcing destinations, studying the changing consumer demographics, recruiting new talents with expertise in emerging areas, and adopting new technologies fitting for the digital age. 

4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2019 to be better than 2018, and why?

Two things are at the top of my watchlist:

First, what is the future of China as an apparel sourcing base? While external factors such as the U.S.-China tariff war have attracted most of the public attention, the genuine evolution of China’s textile and apparel industry is something even more critical to watch in the long run. From my observation, China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. Similar trends are seen in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame. A key question in my mind is how quickly China’s textile and apparel industry will continue to evolve and upgrade by following the paths of most other advanced economies in history.

Second, how will the implementation of several newly-reached free trade agreements (FTAs) affect the big landscape of apparel sourcing and the existing regional apparel supply chains? For example:

  • The newly-reached U.S.-Mexico-Canada Free Trade Agreement (USMCA or commonly called NAFTA2.0) includes several interesting changes to the textile and apparel specific rules of origin provisions, such as the adjustment of the tariff-preference level (TPL) mechanism. Whether these changes will boost textile and apparel production in the Western-Hemisphere and attract more sourcing from the region will be something interesting to watch.
  • The implementation of the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA) will allow Vietnam to get access to nearly 40% of the world apparel import market (i.e., EU + Japan) duty-free. However, restrained by the country’s relatively small population, the apparel industry is increasingly facing the challenge of competing for labor with other export-oriented sectors in Vietnam. Realistically, what is the growth potential of apparel “Made in Vietnam” after the implementation of CPTPP and EVFTA?
  • In 2017, close to 80% of Asian countries’ textile imports came from other Asian countries, up from around 70% in the 2000s. Similarly, in 2017, 85.6% of Asian countries’ apparel imports also came from within the region. The negotiation of the Regional Comprehensive and Economic Partnership (RCEP) is likely to conclude in 2019, whose membership includes member states of the Association of Southeast Asian Nations (ASEAN) and other six economies in the Asia-Pacific region (Australia, China, India, Japan, South Korea and New Zealand). Will RCEP result in an ever more integrated Asia-based textile and apparel supply chain and make the Asia region even more competitive as an apparel sourcing destination?  

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Market Size of the Global Textile and Apparel Industry: 2016 to 2021/2022

Textile Mills

The textile mills market primarily includes yarns and fabrics. The market size is estimated based on the value of domestic production plus imports minus exports, all valued at manufacturer prices.

The value of the global textile mills market totaled $748.1 billion in 2016 (around 83.7% were fabrics and 16.3% were yarns), up 3.5% from a year earlier. The compound annual growth rate of the market was 2.7% between 2012 and 2015. The Asia-Pacific region accounted for 59.6% of the global textile mills market value in 2016 (up from 54.6% in 2015), Europe and the United States accounted for a further 19.1% and 10.8 of the market respectively.

The global textile mills market is forecast to reach $961.0 billion in value in 2021, an increase of 28.5% since 2016. The compound annual growth rate of the market between 2016 and 2021 is forecast to be 5.1%.

Apparel manufacturing market

The apparel manufacturing market covers all clothing except leather, footwear and knitted items as well as other technical, household, and made-up products. The market size is estimated based on the value of domestic production plus imports minus exports, all valued at manufacturer prices.

The value of the global apparel manufacturing market totaled $785.9 billion in 2016, up 3.3% from a year earlier. The compound annual growth rate of the market was 4.4% between 2012 and 2016. The Asia-Pacific region accounted for 61% of the market value in 2016 and Europe accounted for a further 15.2% of the market.

The global apparel manufacturing market is forecast to reach $992 billion in value in 2021, an increase of 26.2% since 2016. The compound annual growth rate of the market during the period of 2016 and 2021 is forecast to be 4.8%.

Apparel retail market

The apparel retail industry consists of the sale of all menswear, womenswear and childrenswear. The market value is calculated at retail selling price (RSP), and includes all taxes and duties.

The value of the global apparel retail market totaled $1,414.1 billion in 2017 (52.6% womenswear, 31.3% menswear and 16.1% childrenswear), up 4.9% from a year earlier. The compound annual growth rate of the market was 4.4% between 2013 and 2017. The Asia-Pacific region accounted for 37.1% of the global apparel retail market in 2017 (up from 36.8% in 2015), followed by followed by Europe (28.5%) and the United States (23.6%).

The global apparel retail market is forecast to reach $1,834 billion in value in 2022, an increase of 29.7% since 2017. The compound annual growth rate of the market between 2017 and 2022 is forecast to be 5.3%.

Data source: MarketLine (2018)

How Has the Apparel Trade Flow Reacted to the Section 301 Tariff Action against China? (updated November 2018)

While apparel products are not subject to the Section 301 tariff yet, the trade action nevertheless has created huge market uncertainties for U.S. fashion brands and apparel retailers. Here is how the monthly trade flow of U.S. apparel imports has reflected the impacts of the U.S.-China tariff war:

First, U.S. companies did NOT stop importing from China. Seasonally adjusted data shows that between January and September 2018, the value of U.S. apparel imports from China decreased by 0.6 percent in volume and 0.05 percent in value year on year. Despite the decline, China remained the No.1 apparel supplier for the U.S. market in the first nine months of 2018, accounting for 32.3 percent market share in value and 41.3 percent shares in quantity, only marginally dropped by 1 and 0.7 percentage points from a year earlier respectively .

Second, apparel “Made in China” are becoming even cheaper. Notably, the average unit price of U.S. apparel imports from China dropped from $2.5/SME in 2016,$2.38/SME in 2017 to $2.36/SME in the first nine months of 2018. On the one hand, this result suggests that cost concern is not the most influential factor that drives U.S. companies to source less from China. However, it is also likely that Chinese exporters are intentionally reducing their price to keep their orders and overcome the challenges caused by the Section 301.

Third, there is no perfect replacement for “Made in China”. In response to the market uncertainty created by the Section 301 trade action, U.S. apparel importers are diversifying their sourcing base. That being said, it is difficult to identify a single largest beneficiary–notably, the market shares of apparel exports from Vietnam, Bangladesh, NAFTA, and CAFTA regions only marginally increased in the first nine months of 2018 compared with a year ago.

Additionally, it remains unclear whether the section 301 trade action has benefited U.S. textile and apparel manufacturing. Data shows that in the first ten months of 2018, the production index (2012=100) of textile manufacturing in the United States slightly increased from 92.8 in 2017to 94.3. However, over the same period, the index of apparel manufacturing decreased from 73.6 to 72.4.

Looking ahead, the volume of US textile and apparel imports from China is likely to increase in the short run since U.S. importers are eager to complete their sourcing orders before the new tariff hit.  Usually, companies place sourcing orders several months ahead of the selling season. However, it will be interesting to see if the trade data in the first half of 2019 will reveal the negative impact of the Section 301 action on China’s apparel exports to the U.S. market.

Data source: Office of Textiles and Apparel (OTEXA), US Department of Commerce

by Sheng Lu

USITC Releases New Study on the State of the U.S. Textile and Apparel Manufacturing Sector

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A recent study released by the U.S. International Trade Commission (USITC) provides a comprehensive review and valuable insights into the state of textile and apparel manufacturing in the United States. According to the study:

First,  data suggests a mixed picture of the recovery of textile manufacturing in the U.S.

  • Total capital expenditures in plants and equipment for the textile sector increased by 36 percent in the 2013–16 period. Interesting enough, much of the new investment is by foreign firms, including new investments by Chinese and Indian firms, as well as by firms from Mexico, Canada, Turkey, and Saudi Arabia.
  • U.S. textile shipments increased in 2017 to $39.6 billion, but remained 3 percent below the 2013 level. The result suggests that rather than simply increasing capacity, some of the new investment is likely replacing existing equipment, as firms upgrade and modernize their manufacturing processes and/or focus their operations on different products. [Note: shipments measure the dollar value of products sold by manufacturing establishments and are based on net selling values, f.o.b. (free on board) plant, after discounts and allowances are excluded]
  • At $10.6 billion, U.S. textile exports in 2017 were also below the five-year high of $12.1 billion in 2014.
  • Employment in the textiles sector declined by 4 percent from 131,000 in 2013 to an estimated 126,000 in 2017. Meanwhile, official data on labor productivity index for yarns and fabrics show steady declines during 2013–16.

Second, some evidence suggests that reshoring has taken place in recent years in the apparel sector, although on a modest scale.

  • For the 2013–16 period, capital expenditures were up 5 percent to $301 million, suggesting capital investment in the apparel sector may be increasing, as the industry begins to adopt more labor-saving technologies.
  • Domestic shipments of apparel showed modest increases in the past two years, reaching $12.0 billion in 2016 and $12.5 billion in 2017, after a record low of $11.5 billion in 2014 and 2015.
  • Employment in the apparel sector steadily declined during 2013–17, down 21 percent from 145,000 workers in 2013 to 120,000 workers in 2017. Official data on labor productivity also showed steady declines during 2013–16.
  • U.S. fashion companies continue to source apparel from the United States, although in a relatively small amount.

Third, the advantages of making textiles and apparel in the United States include:

  • Advantages of producing textiles in the United States include local and state incentives for investment, and the benefits afforded by free trade agreement (FTA) preferences (i.e., the “yarn-forward” rules of origin) that encourage the use of U.S.-produced inputs in downstream production in FTA partner countries, energy cost and the availability and reliability of high-quality cotton. Meanwhile, product innovation and automation are important aspects of the U.S. textile sector’s competitiveness strategy.
  • Advantages of producing apparel in the United States include improved lead times, better quality control, and more flexible production. Many domestically made products also use “Made in USA” branding to capitalize on the buy-American trend and the appeal of “Made in USA.” The adoption of various automation and digital technologies to accelerate the process of product development, improve the fit of the final product and reduce the needs for skilled sewing operators may also help improve the competitiveness.  

BIS Released Assessment Report of the U.S. Textile and Apparel Manufacturing Sector

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The Bureau of Industry and Security (BIS) under the U.S. Department of Commerce recently released its assessment report of the U.S. textile and apparel (T&A) manufacturing sector. The report was based on a survey of 571 U.S. T&A manufacturers in summer 2017. These respondents include 230 textile mills (NAICS 313), 128 textile product mills (NAICS 314), and 213 apparel manufacturers (NAICS 315).

Below are the key findings of the study:

The state of the U.S. textile and apparel (T&A) manufacturing sector

  • U.S. T&A manufacturing has shrunk significantly: the value of T&A shipments (seasonally adjusted) in 2016 ($68 billion) was almost 56% decrease in real terms since 1995 ($153 billion).
  • U.S. T&A manufacturing has undergone substantial structural change: textiles and textile products accounted for 82% of the total shipments of the U.S. T&A industry as of 2016, compared to 57% in 1995. Notably, only 18% of shipments came from apparel manufacturing in 2016, compared to 43% in 1995.
  • U.S. T&A manufacturing sector is hiring less: Between 1990 and 2016, total employment decreased by 79%, from 1.7 million to 352,000 workers; over the same period, over 86% of apparel manufacturing jobs disappeared.
  • U.S. T&A manufacturers are making more capital investments: The overall total Capital Expenditures (CAPEX) of the 571 respondents increased 90 percent from 2012 to 2016 (from $1.6 billion to $3.1 billion). Particularly, the CAPEX of textile mills grew by 80 percent over that period—mostly on “Machinery, Equipment, and Vehicles.”
  • North Carolina hosted the largest number of U.S. T&A facilities (22 percent of the respondents), followed by Georgia (10 percent), and South Carolina (9 percent).
  • China, Mexico, and Canada are the most popular destinations for foreign investments by U.S. T&A manufacturers.

Competition landscape and factors

  • Respondents listed a total of 1,309 U.S. competitors and 552 non-U.S. competitors. Chinese companies were cited as the number one source of foreign competition.
  • “Quality,” “Lead Time,” and “Innovation” were the top three competitive advantages of U.S. T&A manufacturers as they related to foreign competition. “Labor Costs” was regarded as the top disadvantage of U.S. T&A manufacturing.
  • 43 percent of respondents believed that reshoring was occurring in U.S. T&A manufacturing. Almost all of these respondents believed that “Shorter Lead Times” and the “Marketability of the ‘Made in USA’ Label” were the factors driving the trend.
  • The Affordable Care Act (ACA), Minimum Wage regulations (Federal, State, and Local), and U.S. Trade Policy were the top governmental regulations and provisions cited as negatively impacting the competitiveness of U.S. T&A manufacturers.
  • 61 percent of respondents reported that they had difficulties hiring and/or retaining employees for their T&A operations, specifically production line workers such as operators and machine technicians. The skill gaps in the labor market for those positions were by far the biggest ones identified for the industry.
  • 43 percent of respondents believed that reshoring was occurring in T&A manufacturing (i.e., the practice of transferring a business operation that was moved to a non-U.S. location back to the United States.) Textile manufacturers were more likely to be aware of reshoring.

Trade and U.S. textile and apparel manufacturing

  • On average, respondents say 48 percent of their textile and textile products are “100 percent made in the U.S.”, while for apparel it was around 54 percent.
  • U.S. T&A exports dropped 10 percent between 2012 and 2016, from $2.2 billion to $1.98 billion. On average, exports accounted for only 12 percent of respondents’ total sales.
  • 33 percent of respondents considered themselves to be dependent on foreign sources for supplies, which was highest among textile mills.
  • 37 percent of respondents reported that they considered themselves to be dependent on non-U.S. sourcing for their machinery or equipment.

Berry Amendment and U.S. textile and apparel manufacturing

  • For textile mills, an average of 12 percent of U.S. output was Berry Amendment-related; for textile product mills the average was 21 percent, and for apparel production, it averaged 26 percent. 67 percent of respondents believed that the Berry Amendment had a positive impact on their organization’s business.

WTO Reports World Textile and Apparel Trade in 2017

Statistical review of world textile and apparel trade in 2018 is now available

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According to the newly released World Trade Statistical Review 2018 by the World Trade Organization (WTO), the current dollar value of world textiles (SITC 65) and apparel (SITC 84) exports totaled $296.1bn and $454.5bn respectively in 2017, increased by 4.2% and 2.8% from a year earlier. This is the first time since 2015 that the value of world textile and apparel exports enjoyed a growth.

Textiles and apparel are not alone. Driven by rising demand for imports globally, the current dollar value of world merchandise exports also grew by 4.7% in 2017–its most robust growth in six years, to reach $17.43 trillion. Particularly, the ratio of trade growth to GDP growth finally returned to its historic average of 1.5, compared to the much lower 1.0 ratio recorded in the years following the 2008 financial crisis.

China, European Union (EU28), and India remained the world’s top three exporters of textiles in 2017. Altogether, these top three accounted for 66.3% of world textile exports in 2017, up from 65.9% in 2016. All the top three also enjoyed a faster-than-average export growth in 2017, including 5.0% of China, 5.8% of EU(28) and 5.9% of India. The United States remained the world’s fourth top textile exporter in 2017, accounting for 4.6 percent of the shares, the same as a year earlier.

Regarding apparel, China, the European Union (EU28), Bangladesh and Vietnam unshakably remained the world’s top four largest exporters in 2017. Altogether, these top four accounted for as much as 75.8% of world market shares in 2017, which was higher than 74.3% a year earlier and a substantial increase from 68.3% back in 2007.

Continuing with the emerging trend in recent years, China is exporting less apparel and more textiles to the world. Notably, China’s market shares in world apparel exports fell from its peak—38.8% in 2014 to a record low of 34.9% in 2017. Meanwhile, China accounted for 37.1% of world textile exports in 2017, which was a new record high. It is important to recognize that China is playing an increasingly critical role as a textile supplier for many apparel-exporting countries in Asia. Measured by value, 47% of Bangladesh’s textile imports came from China in 2017, up from 39% in 2005. We observe similar trends in Cambodia (up from 30% to 65 %), Vietnam (up from 23 % to 50 %), Pakistan (up from 32 % to 71 %), Malaysia (up from 25 % to 54 %), Indonesia (up from 28 % to 46 %), Philippines (up from 19 % to 41 %) and Sri Lanka (up from 15 % to 39 %) over the same period.

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Additional readings: 
Lu, S. (2018). Changing trends in world textile and apparel trade. Just-Style.
Lu, S. (2018). How regional supply chains are shaping world textile and apparel trade. Just-Style.

2018 U.S. Fashion Industry Benchmarking Study Released

The 2019 U.S. Fashion Industry Benchmarking Study is now availablecover

The report can be downloaded from HERE

Key findings of this year’s study:

Business challenges facing U.S. fashion companies: Protectionism is the top challenge for the U.S. fashion industry in 2018. More companies worry about increases in production or sourcing cost, too. For the second year in a row, “protectionist trade policy agenda in the United States” ranks the top challenge for U.S. fashion companies in 2018.

Industry outlook: Despite concerns about trade policy and cost, executives are more confident about the five-year outlook for the U.S. fashion industry in 2018 than they were a year ago, although confidence has not fully recovered to the level seen in 2015 and 2016. In addition, 100 percent of respondents say they plan to hire more employees in the next five years, compared with 80-85 percent in previous studies; market analysts, data scientists, sustainability/compliance related specialists or managers, and supply chain specialists are expected to be the most in-demand.

U.S. fashion companies’ sourcing strategy: When it comes to sourcing, diversification is key for many companies.

  • Most respondents continue to maintain a diverse sourcing base, with 60.7 percent currently sourcing from 10+ different countries or regions, up from 57.6 percent in 2017.
  • Larger companies, in general, continue to be more diversified than smaller companies.
  • Reflecting the U.S. fashion industry’s growing global reach, respondents report sourcing from as many as 51 countries or regions in 2018, the same as in 2017. Asia as a whole continues to take the lead as the dominant sourcing region. Meanwhile, with the growing importance of speed-to-market and flexibility, the Western Hemisphere is becoming an indispensable sourcing base.
  • Keeping a relatively diverse sourcing base will remain a key element of U.S. fashion companies’ sourcing strategy. Nearly 80 percent of respondents plan to source from the same number of countries, or more countries, in the next two years. However, respondents are equally divided on whether to increase or decrease the number of suppliers they will work with.
  • China plus Vietnam plus Many” has become an ever more popular sourcing model among respondents. And this model is evolving as companies further diversify their China production. In particular, China now typically accounts for only 11-30 percent of companies’ total sourcing value or volume, compared with 30-50 percent in the past.
  • Although China’s position as the top sourcing destination is unshakable, companies are actively seeking alternatives to “Made in China.” This does not seem to be due to concerns about cost, but rather the worries about the escalating U.S.-China trade tensions.
  • Benefiting from the diversification away from China, Vietnam and Bangladesh are expected to play a bigger role as apparel suppliers for the U.S. market in the near future.

Rules of origin and the utilization of trade agreements for sourcing: Rules of origin, and exceptions to the rules of origin, significantly impact whether companies use free trade agreements (FTAs) and trade preference programs for sourcing.

  • While FTAs and trade preference programs remain largely underutilized by U.S. fashion companies, more companies are using NAFTA (65 percent), CAFTA-DR (58 percent) and AGOA (50 percent) than in the past two years.
  • Still, it’s concerning that companies often do not claim the duty-free benefits when sourcing from countries with FTAs or preference programs. Companies say this is primarily due to the strict rules of origin.
  • Exceptions to the “yarn-forward” rules of origin, including tariff preference levels (TPLs), commercial availability/short supply lists, and cumulation, are priorities for respondents; 48 percent say they currently use these mechanisms for sourcing. These exceptions provide critical flexibilities that make companies more likely to use FTAs and source from FTA regions.

NAFTA: U.S. fashion companies call for a further reduction of trade barriers and urge trade negotiators to “do no harm” to NAFTA, the most-utilized free trade agreement by respondents.

  • Respondents predominantly support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to restrictive rules of origin in NAFTA and future free trade agreements.
  • More than half of respondents explicitly say NAFTA is important to their business—and they have grave concerns about the uncertain future of the agreement.

Sourcing in sustainable and socially compliant ways: Overall, U.S. fashion companies are making more commitments to sustainability and social responsibility.

  • 85 percent of respondents plan to allocate more resources for sustainability and social compliance in the next two years, in areas including providing training to suppliers and internal employees, adding more employees, and working more closely with third-party certification programs on sustainability and social compliance. However, the availability of operational budget remains the primary hurdle for companies that want to do more.
  • 100 percent of respondents map their supply chains (i.e., keep records of name, location, and function of suppliers), up from 90 percent in 2017. Over 80 percent of respondents track not only Tier 1 suppliers (i.e., factory where the final product is assembled), but also Tier 2 suppliers (i.e., subcontractors or major component suppliers, such as fabrics). However, it’s less common for companies to map Tier 3 (i.e., yarn spinners, finding and trimming suppliers) and Tier 4 suppliers (i.e., raw materials suppliers, such as cattle/pig hides, rubber, cotton, wool, goose down, minerals/metals and chemicals).
  • 100 percent of respondents audit their suppliers for issues including building safety, fire safety, and treatment of workers. The vast majority of respondents (96 percent) currently use third-party certification programs to audit, with both announced and unannounced audits.

The US Fashion Industry Benchmarking Study from 2014 to 2017 can be downloaded from HERE

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

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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, represented 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

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.

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)

Automation Comes to Fashion

Video Discussion Questions:

#1 Why do you agree or disagree with the video that automation will post a significant challenge to garment workers in developing countries such as Bangladesh? How should policymakers react to the challenges?

#2 Can automation be a permanent solution to the social responsibility problem in the garment industry?

#3 In your view, how will automation affect the big landscape of apparel sourcing and the patterns of world textile and apparel trade?

#4 Why or why not do you anticipate a sizable return of apparel manufacturing to the United States if apparel production can be largely automated?

Additional reading: The robots are coming for garment workers. (WSJ, 2018)

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Outlook 2018: Apparel Industry Issues in the Year Ahead

Outlook 2019: Apparel Industry Issues in the Year Ahead is available 

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In January 2018, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2018–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. All suggestions and comments are most welcome!

1. What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2018, and why?

One of the biggest opportunities facing the apparel industry in 2018 could be the faster growth of the world economy. According to the International Monetary Fund (IMF), the global growth forecast for 2018 is expected to reach 3.7 percent, about 0.1 percent points higher than 2017 and 0.6 percent points higher than 2016. Notably, the upward economic growth will be broad-based, including the United States, the Euro area, Japan, China, emerging Europe and Russia. Hopefully, the improved growth of the world economy will translate into increased consumer demand for clothing in 2018.

Nevertheless, from the macroeconomic perspective, oversupply will remain a significant challenge facing the apparel industry in 2018. Data from the World Bank and the World Trade Organization (WTO) shows that, while the world population increased by 21.6 percent between 2000 and 2016, the value of clothing exports (inflation-adjusted) surged by 123.5 percent over the same period. Similarly, between 2000 and 2016, the total U.S. population increased by 14.5 percent and the GDP per capita increased by 22.2 percent, but the supply of apparel to the U.S. retail market surged by over 67.8 percent during the same time frame. The problem of oversupply is the root of many challenges faced by apparel companies today, from the intense market competition, pressure of controlling production and sourcing cost, struggling with excessive inventory and deep discounts to balancing sustainability and business growth.

2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2018, and what can apparel firms and their suppliers do to stay ahead?

The 2017 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA) earlier this year, provides some interesting insights into companies’ latest sourcing strategies and trends. Based on a survey of 34 executives at the leading U.S. fashion companies, we find that:

First, most surveyed companies continue to maintain a relatively diversified sourcing base, with 57.6 percent currently sourcing from 10+ different countries or regions, up from 51.8 percent last year. Larger companies, in general, continue to have a more diversified sourcing base than smaller companies. Further, around 54 percent of respondents expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; over 60 percent of those expecting to diversify currently source from more than 10 different countries or regions already. Given the uncertainties in the market and the regulatory environment (such as the Trump Administration’s trade policy agenda), companies may use diversification to mitigate potential market risks and supply chain disruptions due to protectionism.

Second, although U.S. fashion companies continue to seek alternatives to “Made in China” actively, China’s position as top sourcing destination remains unshakable. Many respondents attribute China’s competitiveness to its enormous manufacturing capacity and overall supply chain efficiency. Meanwhile, it is interesting to note that the most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many” (i.e. China typically accounts for 30-50 percent of total sourcing value or volume, 11-30 percent for Vietnam and less than 10 percent for other sourcing destinations). I think this sourcing model will likely to continue in 2018.

Third, social responsibility and sustainability continue to grow in importance in sourcing decisions. In the study, we find that nearly 90 percent of respondents give more weight to sustainability when choosing where to source now than in the past. Around 90 percent of respondents also say they map their supply chains, i.e., keeping records of name, location, and function of suppliers. Notably, more than half of respondents track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e., supplier’s suppliers. However, the result also suggests that a more diversified sourcing base makes it more difficult to monitor supply chains closely. Making the apparel supply chain more socially responsible, sustainable and transparent will continue to be a hot topic in 2018.

3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?

I assume many experts will suggest what apparel firms should change to stay competitive into the future. However, the question in my mind is what should companies keep doing regardless of the external business environment? First, I think companies should always strive to understand and impress consumers and control their supply chains. Despite the growing popularity of e-commerce and the adoption of transformative new technologies, the fundamental nature of apparel as a buyer-driven business will remain the same. Second, companies should always leverage their resources and stay “unique,” no matter it means offering differentiated products or value-added services, maintaining exclusive distribution channels or keeping the leadership position in a particular niche market. Third, apparel firms should always follow the principle of “comparative advantage” and smartly define the scope of their core business functions instead of trying to do everything. Additionally, winners will always be those companies that can take advantage of the mega-development trends of the industry and be willing to make long-term and visionary investments, both physical and intangible (such as human talents).

4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2018 to be better than 2017, and why?

I think the apparel industry should keep a close eye on the following issues in 2018:

  • The destiny of the North American Free Trade Agreement (NAFTA): The potential policy change to NAFTA means so much to the U.S. textile and apparel industry as well as suppliers in other parts of the world. Notably, through a regional textile and apparel supply chain facilitated by the agreement over the past 23 years, the NAFTA region has grown into the single largest export market for U.S. textile and apparel products as well as a major apparel sourcing base for U.S. fashion brands and retailers. In 2016, as much as half of U.S. textile and apparel exports went to the NAFTA region, totaling US$11billion, and U.S. apparel imports from Mexico and Canada exceeded US$3.9billion. Understandably, if NAFTA no longer exists, sweeping changes in the trade rules, such as import duties, could significantly affect the sourcing and manufacturing behaviors of U.S. textile and apparel companies and consequentially alter the current textile and apparel trade patterns in the NAFTA region. For example, Mexico’s focus on basic apparel items suggests that U.S. importers could quickly source from elsewhere if duty savings under NAFTA are eliminated.
  • The possible reaching of the Regional Comprehensive Economic Partnership (RCEP): Even though RCEP is less well-known than the Trans-Pacific Partnership (TPP), we should not ignore the potential impact of the agreement on the future landscape of textile and apparel supply chain in the Asia-Pacific region. One recent study of mine shows that the RCEP will lead to a more integrated textile and apparel supply chain among its members but make it even harder for non-RCEP members to get involved in the regional T&A supply chain in the Asia-Pacific. This conclusion is backed by the latest data from the World Trade Organization (WTO): In 2016, around 91 percent of Asian countries’ textile imports came from other Asian countries, up from 86 percent in 2006. The more efficient regional supply chain as a result of RCEP will further help improve the price competitiveness of apparel made by “factory Asia” in the world marketplace. Particularly in the past few years, textile and apparel exports from Asia have already posted substantial pressures on the operation of the textile and apparel regional supply chain in the Western Hemisphere.
  • Automation of apparel manufacturing and its impact on the job market: Recall my observations at the MAGIC this August, several vendors showcased their latest technologies which have the potential to automate the cut and sew process entirely or substantially reduce the labor inputs in garment making. The impact of automation on the future of jobs is not a new topic, but the apparel industry presents a unique situation. Globally, over 120 million people remain directly employed in the textile and apparel industries today, a good proportion of whom are females living in poor rural areas. According to the World Trade Organization (WTO), for quite a few low-income and lower-middle income countries such as Bangladesh, Gambia, Pakistan, Madagascar, Sri Lanka, and Cambodia, as much as over 70 percent of their total merchandise exports were textile and apparel products in 2016. Should these labor-intensive garment sewing jobs in the developing countries were replaced by machines, the social and economic impacts will be consequential. I think it is the time to start thinking about the possible scenarios and the appropriate policy responses.