The Impact and Insights of Trade – the 2020 Shakeup & the 2021 Outlook for the Fashion Industry

The panel discussion is part of the 2020 Virtual Apparel and Textile Sourcing Show. Topics covered by the session include:

  • Impact of COVID-19 on US fashion companies’ businesses and sourcing strategies
  • Impact of the 2020 US presidential election on the fashion industry
  • Key US trade policy issues related to the fashion industry 2020-2021
  • Patterns of US apparel sourcing and trade 2020-2021
  • Sourcing from Asia vs. near sourcing from the Western Hemisphere

COVID-19 and U.S. Apparel Imports: Key Trends (Updated: November 2020)

First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. The value of U.S. apparel imports in September 2020 went up by 8.8% from August 2020 (seasonally adjusted), a new record high since March 2020 when COVID-19 broke out in the States. As of September 2020, the volume of U.S. apparel imports has recovered to around 84-85% of the pre-coronavirus level.  This result echoes the trend of U.S. apparel retail sales (NAICS 4481), which also indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports hopefully will last for another 1-2 months.

Data also shows that compared with the 2008 world financial crisis, Covid-19 has caused a more significant drop in the value of U.S. apparel imports. However, it seems the post-Covid recovery process has been more robust than the 2008 financial crisis. Notably, the Auto Regressive Integrated Moving Average (ARIMA) model forecasts that at the current speed of recovery, the value of U.S. apparel imports (seasonally adjusted) could start to enjoy a positive year over year (YoY) growth by February 2021 (or around 11 months after the outbreak of Covid-19 in March 2020). In comparison, when recovering from the 2008 world financial crisis, it took almost 15 months to turn the YoY growth rate from negative to positive.

Second, still, no evidence suggests that U.S. fashion companies are giving up China as one of their essential apparel-sourcing bases. Notably, since May 2020, China had quickly regained its position as the top apparel supplier to the U.S. market. From June to September 2020, China’s market shares have stably stayed at around 27-28% in value and 40-42% in quantity.

According to the media, some sourcing orders are returning to China as China’s competitors in Asia are struggling with more limited production capacity, shortage of raw material and supply chain disruption caused by Covid-19.

CR5 (exclude China) includes Vietnam, Bangladesh, Indonesia, India and Cambodia

That being said, trade data suggests that U.S. fashion companies continue to reduce their “China exposure” overall. For example, both the HHI index and the market concentration ratios (CR3–total market shares of top 3 suppliers and CR5–total market shares of top 5 suppliers) indicate that apparel sourcing orders are gradually moving from China to other Asian countries–it is interesting to see HHI, CR3 and CR5 all suggest a more diversified apparel sourcing base in 2020 (Jan-Sep) than in 2018 and 2019; however, the value of CR5 (exclude China) reached a new record high in 2020 (Jan-Sep).

Third, related to the point above, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.0% YTD in 2020 vs. 16.2% in 2019), ASEAN (33.1% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.4% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.4% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.

Fourth, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first nine months of 2020, only 9.1% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.4% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first nine months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 26% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the major contributing factors.

Just an anecdote–according to some industry insiders, the booming of E-commerce during the pandemic may also possibly explain why “near sourcing” is not reflected in trade data despite its reported growing popularity. Specifically, US fashion retailers would:1) import products from Asia and stock them in the bonded warehouses in Mexico (note: bonded warehouse means dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty). 2) When US consumers place orders, the retailer will ship products directly from these bonded warehouses in Mexico to the final destination. Most importantly, retailers could take advantage of the US de minimis rule (i.e., goods valued at $800 or less could enter the U.S. duty-free one person one day) and avoid paying tariffs– even though these products are counted as imports from Asian countries that do not have a free trade agreement with the United States. In other words, these products are not officially treated as imports from Mexico even though they are shipped from bonded warehouse in Mexico.

by Sheng Lu

Battling the Trade War and COVID-19: Rethinking Global Supply Chains in a Time of Crisis

Speaker: Wilson Zhu, the Chief Operating Officer of Li & Fung

Event summary:

  • The originator of the US-China trade war was not actually about the “trade deficit”, but rather a lack of “trust” between the two countries.
  • Trade deficit could be a “misleading concept”–while the iPhone was claimed to be “Made in China”, it wasn’t manufactured there at all—instead, China only played the role of a “middle-man of the supply chain.” Such a misunderstanding is within the ancient country of origin rules used in international trade.
  • The “Made in China” label is becoming “obsolete.” As China continues to expand its supply chain globally, ports in China are evolving into “managers” of products “Made in the world.”
  • Despite the tariff war and the pandemic, interestingly enough, it seems some apparel sourcing orders are returning from India and Vietnam to China. Further, China’s emergence as a lucrative apparel consumption market implies huge business opportunities for fashion brands and retailers.
  • There is still great hope for the global apparel supply chain in the post-Covid world. Less economically developed countries like Vietnam are now mimicking the former industrialization of China in its factories with the help of advanced technology. And, the United States continues to advance the efficiency and sophistication of its textile production.  It seems that all in all, the only way to make it through this crisis successfully, is through global collaboration, not conflict.

(summarized by Andrea Attinello)

New ILO Report: The supply chain ripple effect– How COVID-19 is affecting garment workers and factories in Asia and the Pacific

The full report is available HERE. Key findings:

1. The garment industry in the Asia-Pacific region is particularly vulnerable to the adverse impact of COVID-19 because of the size of the industry present and the high stakes involved. Notably, garment workers (over 60 million in total, including 35 million women) accounted for 21.1% of the manufacturing employment in the region as of 2019. Over 60% of the world’s apparel exports currently come from the Asia-Pacific region.

2. The cumulative impacts of COVID-19 on garment supply chains have been both far-reaching and complex: 1) As of September 9, 2020, more than 31 million garment workers in the Asia Pacific region were still affected by factory closure (i.e., mandatory closures of non-essential workplaces). 2) The drop in consumer demand and the decline in retail sales in the primary apparel consumption markets across the world have affected garment workers in the Asia-Pacific region negatively. As of September 9, 2020, 49% of all jobs in the Asia-Pacific garment supply chains (29 million) were dependent on demand for garments from consumers living in countries with the most stringent lockdown measures in place. Another 31 million jobs (51%) depended on consumer demand that is based in countries with a medium level of lockdown measures in place. 3) COVID-19 has further caused supply chain disruptions and prevented imported inputs into garment production from arriving in time. The heavy reliance on textile raw material supply from China makes many apparel producing countries in South-East Asian countries highly vulnerable to shortages of inputs.

3. The world apparel trade has fallen in the first half of 2020 sharply. This includes a 26% YoY drop in the US, a 25% drop in the EU, and a 17% drop in Japan. However, the timing and magnitude of these import declines vary significantly — China’s exports started to drop first at the beginning of the year,2020. Then, the exports from Vietnam, Bangladesh, Indonesia, and India began to decrease also since February (a joint effect of the shortage of raw material + decreased import demand). Data further shows that the drop in world apparel trade has been more significant than other products in the first half of 2020.

4. Apparel suppliers in the Asia Pacific region have been struggling with order cancellations AND longer payment terms insisted on by Western fashion brands and retailers. Garment factories say that they don’t have the leverage to ‘push back’ against these changes to contract terms and buyer policies.

5. Thousands of garment factories in the Asia-Pacific region closed at least temporarily because of COVID-19, some of them indefinitely. For example, In Cambodia, approximately 15-25% of factories had no orders at the end of the June 2020. Likewise, around 60% of garment factories in Bangladesh reported closing for more than 3 weeks. Related, layoffs have been widespread. For example, according to Indonesia’s Ministry of Industry, approximately 30% of their apparel and footwear workforce had been laid-off by July 2020 (812,254 in total). In Cambodia, approximately 15% of their garment workers (more than 150,000 workers) were reported to have lost their jobs during the pandemic. Further, garment factories have been operating at reduced capacity during the pandemic. For example, in Bangladesh, as of July 2020, the proportion of workers returning to work after re-opening was only 57% of the pre-pandemic level. Similarly, in Vietnam, as of July 2020, the proportion of workers returning to work after re-opening was also just around 50% of the pre-pandemic level.

Related reading:

COVID-19 and U.S. Apparel Imports: Key Trends (Updated: October 2020)

First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. The value of U.S. apparel imports in August 2020 went up by 7.6% from July 2020 (seasonally adjusted), a new record high since March 2020 when COVID-19 broke out in the States. As of August 2020, the volume of U.S. apparel imports has recovered to around 80% of the pre-coronavirus level.  This result echoes the trend of U.S. apparel retail sales (NAICS 448), which also indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports hopefully will last for another 1-2 months.

Nevertheless, between January and August 2020, the value of U.S. apparel imports decreased by almost 30% year over year, which has been MUCH worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

Second, no evidence suggests that U.S. fashion companies are giving up China as one of their essential apparel-sourcing bases. Notably, since May 2020, China had quickly regained its position as the top apparel supplier to the U.S. market. From June to August 2020, China’s market shares have stably stayed at around 27-28% in value and 40-42% in quantity.

Some industry sources show that “Made in China” enjoys two notable advantages that other apparel supplying countries cannot catch up in the short term. 1) unparalleled production capacity, meaning importers can source almost all products in any quantity from China vs. more limited production capacity (both in terms of variety and volume) in other alternative sourcing destinations. 2) China can mostly produce textile raw material locally vs. many apparel exporting countries still rely heavily on imported yarns and fabrics (supplied by China).

However, non-economic factors, particularly the reported Xinjiang forced labor issue, are complicating fashion companies’ sourcing decisions. Notably, US cotton apparel imports from China year-to-date (YTD) in 2020 (Jan to August) significantly decreased by 54% from a year ago, much higher than the 22% drop in US imports from the rest of the world.  As a result, China’s market share in the US cotton apparel import market sharply declined from 22% in 2019 to only 15.1% in 2020 (Jan-Aug), a record low in the past ten years. This unusual trade pattern suggests that the concerns about social compliance risk are holding US fashion companies back from sourcing cotton apparel products from China. As the forced labor issue continues to evolve and become ever more sensitive and high profile, it is not unlikely that US fashion companies may substantially cut their China sourcing further, even if it is not a preferred choice economically.

Third, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.2% YTD in 2020 vs. 16.2% in 2019), ASEAN (33.6% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.6% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.

Likewise, thanks to a highly integrated regional textile and apparel supply chain, Asian countries all together were able to maintain fairly stable market shares on the world stage over the past decade despite all market disruptions, from the financial crisis, trade war to the wage increase.

Fourth, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first seven months of 2020, only 8.9% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first eight months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 28.0% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the contributing factors.

Further, industry sources show that the apparel products U.S. fashion companies import from members of USMCA and CAFTA-DR predominantly are tops and bottoms. The lack of production capacity for other product categories significantly limits the growth potential of these countries playing the role as a leading sourcing base.

by Sheng Lu

Textiles and Apparel – Being Responsible Stakeholders

Panelists:

  • Anna Ashton– US-China Business Council (USCBC)
  • Amy Lehr – Center for Strategic and International Studies (CSIS)
  • Nate Herman – American Apparel and Footwear Association (AAFA)
  • John Foote – Baker McKenzie

Related readings

Examine the US-China Tariff War from a Theoretical Perspective: Discussion Questions from Students in FASH455

#1 In class, we discussed that trade always creates both winners and losers. So who are the winners and losers in the US-China tariff war? Also, why should or should not the government use trade policy to pick up winners and losers in international trade?

#2 Why do you think U.S. fashion brands and retailers oppose Section 301 tariffs on apparel imports from China, whereas the National Council of Textile Organizations (NCTO), which represents the US textile industry, supports Trump’s tariff action?

#3 The U.S.-China tariff war continues during the pandemic, resulting in higher sourcing costs for U.S. fashion brands and retailers, which have been struggling hard financially. In such a case, if you were the CEO of Macy’s, why or why not would you pass the tariff burden to consumers, i.e., ask consumers to pay a higher price?

#4 Why or why not do you agree with the Trump Administration to lift the Section 301 tariffs on PPE imports from China? Isn’t a high tariff typically protects the domestic industry and would incentivize more U.S.-based PPE production?

#5 Most classic trade theories (such as the comparative advantage trade theory and the factor proportion trade theory) advocate free trade with no government interventions. However, international trade in the real world has been so heavily influenced by government policy, such as tariffs. How to explain this phenomenon? Are trade theories wrong, or is the government wrong?

[Anyone is welcome to join the online discussion. For students in FASH455, please address at least two questions in your comment. Please also mention the question number in your comment]

FASH455 Exclusive Interview with Jason Prescott, CEO of Apparel Textile Sourcing Trade Shows

Guest Speaker: Jason Prescott

Jason Prescott founded JP Communications INC in 2005 and rapidly established TopTenWholesale.com and Manufacturer.com as the largest US-based B2B global trade network for manufacturers, retailers, department stores, discounters, importers, wholesalers, buyers and brands.  A decade later, in 2016, he established the Apparel Textile Sourcing trade show platform with the China Chamber of Commerce for Import & Export of Textile & Apparel to connect the global B2B network of over 2 million with manufacturers around the globe via in-person events.  By 2020, the ATS brand has created the fastest-growing trade shows in the industry producing annual events in Miami, Toronto, Montreal, Berlin and virtually.

Jason is active in search marketing models and technology and provides consulting and seminars in around the world for organizations looking to invest in the USA market.  He is the author of two best-selling books, Wholesale 101 and Retail 101, published by McGraw Hill as well as articles on business and technology appearing in B2B Online, Omma, IMediaConnection, CEO Magazine, Entrepreneur Online, and been cited in Inc Magazine, Business Week and Forbes Online.

Moderator: Kendall Keough

Kendall Keough is a recent graduate from the University of Delaware (UD) with a Master of Science in Fashion & Apparel Studies. She also graduated from the UD with a Bachelor’s Science in Fashion Merchandising & Honors in 2019. Kendall was a recipient of the 2018 YMA Fashion Scholarship Fund national case study competition. While studying at UD, she also held several leadership positions, including serving as the President of the Synergy Fashion Group between 2018 and 2019. Kendall is the author of several recent papers addressing the U.S. textile and apparel industry and related trade issues, including: Explore the export performance of textiles and apparel “Made in the USA”: A firm-level analysis. (Journal of the Textile Institute, 2020); US-Kenya trade deal – Here’s what the apparel industry wants (Just-Style, 2020); ‘Made in the USA’ textiles and apparel – Key production and export trends (Just-Style, 2020).

Interview highlights

Kendall: What has motivated you to get involved in the apparel business, especially running the Apparel Textile Sourcing Trade (ATS) Shows, which has grown into one of the most popular and influential sourcing events today?

Jason: We started our company in 2005 w/ our flagship product – www.TopTenWholesale.com – which is a search engine for wholesale suppliers and products.  In 2010 we acquired www.manufacturer.com – a sourcing platform to find global producers and manufacturers.  It would be fair to say that never in our wildest imagination did we think we would be producing some of the world’s top sourcing trade fairs in the apparel and textile industry.  I’d like to say it was a natural evolution but to be frank the opportunity came up over a cup of tea with a very good friend of mine, Mr. Chen Zhirong – Director for the China Chamber of Commerce for Import & Export of Textiles (CCCT) – in Dec 2015.  What started from a cup of tea wound up growing into a trade show company that now produces events 4 cities, 3 countries and 2 continents (Miami, Toronto, Montreal, Berlin).

More than 200 of the world’s top producers of apparel, textiles, accessories, footwear, and personal protective equipment will exhibit virtually at Apparel Textile Sourcing trade shows this fall.  Attendance is always free and the interactive event also specializes in seminars, sessions, workshops and panels from experts in the industries of sourcing, fashion, design and retail. 

Kendall: COVID-19 is the single biggest challenge facing the textile and apparel industry today. From your observation, how has COVID-19 affected textile and apparel companies’ sourcing practices? What will be the medium to the long-term impact of COVID on textile and apparel sourcing?

Jason: The fallout from the pandemic – particularly in the textile and apparel industry – and how it impacts sourcing, has had such a far-reaching magnitude that it’s still very challenging to figure out how sourcing practices will be impacted.  Over the long term, there is no question that this pandemic will speed up near-sourcing, on-shoring, digitization, and real-time production.  The interim has resulted in massive layoffs, geo-political uncertainty and a turbulent political atmosphere that has rattled the cages of just about every sourcing director.  The industry has seen purchase orders defaulted on, behavior in the supply chain that should not be tolerated, and a general lack of accountability.   I also have no question that as we continue to emerge out of the pandemic there will be an advanced focus much more on the global revolution of sustainability, fair labor practices, plus a far-keener eye on the eco-systems in which the textile industry lives and breathes.

Kendall: There have been more heated debates on the future of China as an apparel sourcing base for US fashion companies, especially given the escalating U.S.-China trade war and the COVID-19. What is your view?

Jason: It should be noted that more than a billion dollars of trade in the textile sector in China was lost in export shipments to the USA during the first half of 2019 – primarily due to the trade war.  The pandemic has since crippled exports of textile and apparel – in not just China – but also in every sourcing region on the planet.  While many media outlets and others talk about the demise of China as a producer for textile and apparel that is just not the case.  The Chinese have built an infrastructure, invested billions of dollars in the best technology, and have mastered the art of production over the last 3+ decades.  We must not also forget that much of this infrastructure was built with trillions of dollars by the world’s leading brands, retailers, and governments.  To bail on that would not be prudent.  The Chinese are extremely adaptive and there is no question they have taken the time during the pandemic – and I should also note that they have emerged quicker than anyone else from the pandemic – to invest much more in technology, made-to-order, customization, and enhances on sustainable practices by utilizing more renewables.

Kendall: Many studies suggest that fashion companies continue to actively look for China’s alternatives. Do we have a “Next China” yet– Vietnam, Bangladesh, India, Ethiopia, or somewhere else?

Jason: No we do not have a next China yet.  The production in many regions that have competent supply chains – like Vietnam – are full and at over-capacity.  It should further be noted that a large portion in places like Vietnam are owned in partnerships thru the Chinese.  Simply stated, many of the other regions such as Bangladesh, India, and the AGOA regions lack infrastructure and the decades of experience that the Chinese have. 

Kendall: Some predict that near sourcing rather than global sourcing will become ever more popular as fashion companies are prioritizing speed to market and building a shorter supply chain. Why or why not do you think the shift to near sourcing or reshoring is happening?

Jason: This is correct.  On-demand production, near-sourcing, and the evolution of digitization will of course lead to increased manufacturing domestically.  Neither of these options are yet a solution for the high-volume production which is at the heart of the industry.  I will agree that the continued emergence of micro-brands, and continually evolving shifts in consumer behavior which generally has resulted in ‘disloyalty’ to brands is another factor that makes on-shoring or near-shoring more attractive.

Kendall: Building a more sustainable and socially responsible textile and apparel supply chain is also growing in importance. From interacting with fashion brands and retailers, can you provide us with some updates in this area, such as companies’ best practices, issues they are working on, or the key challenges that remain?

Jason: The circularity of the industry encompassing the producer, the brand, logistics, and the consumer will continue to evolve in their social responsibilities and awareness of sustainable practices engaged in by the brand.  There are great organizations out there like WRAP, TESTEX and Better Buying who are growing and have a much larger voice than what they have had in the past.  Post-pandemic, I believe we will see social responsibility as one of the top priorities with so many millions of people displaces from COVID-19.

Kendall: For our students interested in pursuing a career in the textile and apparel industry, especially related to sourcing, do you have any suggestions?

Jason: The top suggestion I can offer is to pursue experience as you are actively engaged in your studies.  One of the key elements I can advise of is to take the time and learn culture over language.  Having a cultural understanding of the key regions where sourcing occurs will catapult your career and bring significant relationships to the table that you never thought you would have had before.   Also, attend trade shows!  Walking thru international apparel trade shows – like The Apparel Textile Sourcing – will help you immerse yourself with numerous different nationalities and personalities that you would otherwise never have the chance to meet.  Jump on any opportunity you can to go abroad.  Especially to regions in Asia and Latin America.  Most importantly never forget that your credibility in life is everything and maintain the highest pedigree of integrity as possible.

-END-

COVID-19 and U.S. Apparel Imports (Updated: September 2020)

The latest statistics from the Office of Textiles and Apparel (OTEXA) show that the patterns of U.S. apparel imports continue to involve because of COVID-19 and the escalating US-China tensions. Meanwhile, there appeared to be more potent signs of gradual economic recovery in the U.S. driven by consumers’ robust demand. Specifically:

While the value of U.S. apparel imports decreased by 32.0% in July 2020 from a year ago, the speed of the decline has significantly slowed (was down 60% and 42.8% year over year in May and June 2020, respectively). This result echoes the trend of U.S. apparel retail sales (NAICS 448), which indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports could continue in the next two to three months.

Nevertheless, between January and July 2020, the value of U.S. apparel imports decreased by 30.7% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

The latest trade statistics suggest that based on economic factors, U.S. fashion companies would like to continue to treat China as an essential apparel-sourcing base. As the first country hit by COVID-19, China’s apparel exports to the U.S. dropped by as much as 49.3% from January to July 2020 year over year. In February 2020, China’s market shares slipped to only 11%, and both in March and April 2020, U.S. fashion companies imported more apparel from Vietnam than from China. However, China had quickly regained its position as the top apparel supplier to the U.S., with a 26.3% market share in value and a 38.8% share in quantity in July 2020.

Different from the impact of the trade war, COVID-19 could benefit China as an apparel sourcing base as fashion companies have to “do more with fewer resources.” In general, China still enjoyed two notable advantages that other apparel supplying countries are unable to catch up in the short term. 1) unparalleled production capacity, meaning importers can source almost all products in any quantity from China vs. more limited production capacity (both in terms of variety and volume) in other alternative sourcing destinations. 2) China can mostly produce textile raw material locally vs. many apparel exporting countries still rely heavily on imported yarns and fabrics (supplied by China).

Contrary to common perceptions, apparel “Made in China” apparently are also becoming more price-competitive–the unit price slipped from $2.25/Square meters equivalent (SME) in 2019 to $1.88/SME in 2020 (January to July), or down more than 16.7% (compared with a 5.6% price drop of the world average). As of July 2020, the unit price of U.S. apparel import from China was only 65.7% of the world average, and around 25—35 percent lower than those imported from other Asian countries.

That being said, non-economic factors, from the deteriorating US-China relations to the reported Xinjiang forced labor issue, are increasingly complicating fashion companies’ sourcing decisions. Somehow as a warning sign, China’s market shares in the U.S. apparel import market slipped in both quantity and value terms in July 2020 compared with a month ago.

Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.5% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.3% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.6% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.

However, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first seven months of 2020, only 8.8% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first seven months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 28.9% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the contributing factors why near sourcing has been stagnant.

As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first six months of 2020. The price index declined from 104.7 in 2019 to 99.0 YTD (Jan to Jul) in 2020 (Year 2010 =100). The imports from Mexico (price index =86.4 YTD in 2020 vs. 112.1 in 2019) and China (price index = 69.7 YTD in 2020 vs. 83.5 in 2019) have seen the most notable price decrease so far.

by Sheng Lu

2020 USFIA Fashion Industry Benchmarking Study Released

The full report is available HERE

Key findings of this year’s report:

Impact of COVID19 on Fashion Companies’ Businesses

The overwhelming majority of respondents report “economic and business impacts of the coronavirus (COVID-19)” as their top business challenge in 2020. The business difficulties caused by COVID-19 will not go away anytime soon, and U.S. fashion companies have to prepare for a medium to the long-term impact of the pandemic.

COVID-19 has caused severe supply chain disruptions to U.S. fashion companies. The disruptions come from multiple aspects, ranging from a labor shortage, shortages of textile raw materials, and a substantial cost increase in shipping and logistics.

COVID-19 has resulted in a widespread sales decline and order cancellation among U.S. fashion companies. Almost all respondents (96 percent) expect their companies’ sales revenue to decrease in 2020.

As sales drop and business operations are significantly disrupted, not surprisingly, all respondents (100 percent) say they more or less have postponed or canceled sourcing orders. Nearly half of self-identified retailers say the sourcing orders they canceled or postponed go beyond the 2nd quarter of 2020. Another 40 percent expect order cancellation and postponement could extend further to the fourth quarter of 2020 or even beyond. The order cancellation or postponement has affected vendors in China, Bangladesh, and India the most.

Impact of COVID-19 and US-China Trade War on Fashion Companies’ Sourcing

As high as 90 percent of respondents explicitly say, the U.S. Section 301 action against China has increased their company’s sourcing cost in 2020, up from 63 percent last year.

COVID-19 and the trade war are pushing U.S. fashion companies to reduce their “China exposure” further. While “China plus Vietnam plus Many” remains the most popular sourcing model among respondents, around 29 percent of respondents indicate that they source MORE from Vietnam than from China in 2020, up further from 25 percent in 2019.

As U.S. fashion companies are sourcing relatively less from China, they are moving orders mostly to China’s competitors in Asia. All respondents (100 percent) say they have “moved some sourcing orders from China to other Asian suppliers” this year, up from 77 percent in 2019.

However, no clear evidence suggests that U.S. fashion companies are sourcing more from the Western Hemisphere because of COVID-19 and the U.S.-China trade war.

Emerging Sourcing Trends

Sourcing diversification is slowing down, and more U.S. fashion companies are switching to consolidate their existing sourcing base. Close to half of the respondents say they plan to “source from the same number of countries, but work with fewer vendors,” up from 40 percent in last year’s survey.

China most likely will remain a critical sourcing base for U.S. fashion companies. However, non-economic factors could complicate companies’ sourcing decisions. Benefiting from U.S. fashion companies’ reduced sourcing from China, Vietnam and Bangladesh are expected to play a more significant role as primary apparel suppliers for the U.S. market.

Given the supply chain disruptions experienced during the pandemic, U.S. fashion companies are more actively exploring “Made in the USA” sourcing opportunities to improve agility and flexibility and reduce sourcing risks. Around 25 percent of respondents expect to somewhat increase sourcing locally from the U.S. in the next two years, which is the highest level since 2016.

US-Mexico-Canada Trade Agreement (USMCA)

For companies that were already using NAFTA for sourcing, the vast majority (77.8 percent) say they are “ready to achieve any USMCA benefits immediately,” up more than 31 percent from 2019. Even for respondents who were not using NAFTA or sourcing from the region, about half of them this year say they may “consider North American sourcing in the future” and explore the USMCA benefits. Some respondents expressed concerns about the rules of origin changes. These worries seem to concentrate on denim products in particular.

African Growth and Opportunity Act (AGOA)

Close to 37 percent of respondents say they have been sourcing MORE textile and apparel from sub-Saharan Africa (SSA) since the latest AGOA renewal in 2015, a substantial increase from 27 percent in the 2019 survey. More than 40 percent of respondents say AGOA and its “third-country fabric provision” are critical for their sourcing from the SSA region. More than 40 percent of respondents say AGOA and its “third-country fabric provision” are critical for their sourcing from the SSA region.

However, respondents still demonstrate a low level of interest in investing in the SSA region directly. Around 27 percent of respondents say the temporary nature of AGOA and the uncertainty associated with the future of the agreement have discouraged them.

With AGOA’s expiration date quickly approaching, the discussions on the future of the agreement and the prospect of sourcing from SSA begin to intensify. Among the various policy options to consider, “Renew AGOA for another ten years with no major change of its current provisions” and “Replace AGOA with a permanent free trade agreement that requires reciprocal tariff cut and continues to allow the third-country fabric provision” are the most preferred by respondents.

COVID-19 and U.S. Apparel Imports (Updated: August 2020)

The latest statistics from the Office of Textiles and Apparel (OTEXA) show that while the negative impacts of COVID-19 on U.S. apparel imports continued in June 2020, there appeared to be early signs of economic recovery. Specifically:

While the value of U.S. apparel imports decreased by 42.8% in June 2020 from a year ago, the speed of the decline has slowed (was down 60% year over year in May 2020). Nevertheless, between January and June 2020, the value of U.S. apparel imports decreased by 30.4% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

The latest trade statistics support the view that U.S. fashion companies continue to treat China as an essential apparel-sourcing base, despite COVID-19, the trade war, and companies’ sourcing diversification strategy. As the first country hit by COVID-19, China’s apparel exports to the U.S. dropped by as much as 49.0% from January to June 2020 year over year. In February 2020, China’s market shares slipped to only 11%, and both in March and April 2020, U.S. fashion companies imported more apparel from Vietnam than from China. However, China’s apparel exports to the U.S. are experiencing a “V-shape” recovery: as of June 2020, China had quickly regained its position as the top apparel supplier to the U.S., with a 29.1% market share in value and 43.4% share in quantity.

Moreover, U.S. apparel imports from China are also becoming more price-competitive—the unit price slipped from $2.25/Square meters equivalent (SME) in 2019 to $1.88/SME in 2020 (January to June), or down more than 16% (compared with a 4.6% price drop of the world average). As of June 2020, the unit price of U.S. apparel import from China was only 65% of the world average, and around 25—35 percent lower than those imported from other Asian countries. On the other hand, the official Chinese statistics report a 19.4% drop in China’s apparel exports to the world in the first half of 2020.

Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.3% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.4% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.9% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.

However, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first six months of 2020, only 8.8% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.2% from NAFTA members (down from 4.5% in 2019).

Notably, U.S. fashion companies source products from Asia (including China) and the Western Hemisphere for different purposes. In general, US companies tend to source either price-sensitive or more sophisticated items from Asia, where factories overall have higher productivity and more advanced production techniques. Meanwhile, the Western Hemisphere is typically used to source products that require faster speed-to-market or more frequent replenishments during the selling season. Some studies further show that there is more divergence in the products imported into the United States from Asian countries and the Western Hemisphere from 2015 to 2019. In contrast, over the same period, China, ASEAN, and Bangladesh appear to be exporting increasingly similar products to the United States.

That being said, as USMCA enters into force on July 1, 2020, a more stable trading environment could encourage more U.S. apparel sourcing from Mexico down the road (assuming garment factories there can gradually resume production and no further COVID-19 related shutdown).

As a reflection of weak demand, the unit price of U.S. apparel imports dropped in the first six months of 2020 (price index =100, meaning the same nominal price as in 2010). The price index was 104.7 in 2019. The imports from Mexico (price index =87.1 YTD in 2020 vs. 112.1 in 2019) and China (price index = 69.9 YTD in 2020 vs. 83.5 in 2019) have seen the most notable price decrease so far.

by Sheng Lu

WTO Reports World Textiles and Apparel Trade in 2019

According to the World Trade Statistical Review 2020 newly released by the World Trade Organization (WTO):

First, the volume of world textiles and apparel trade reduced in 2019 due to weakened demand and the negative impacts of trade tensions. According to the WTO, the value of the world textiles (SITC 65) and apparel (SITC 84) exports totaled $305bn and $492bn in 2019, respectively, decreased by 2.4% and 0.4% from a year ago. The world merchandise trade also fell by nearly 3% measured by value and 0.1% measured by volume 2018-2019, in contrast with a positive 2.8% growth 2017-2018. Put these numbers in context, the year 2019 was the first time that world merchandise trade fell since the 2008 global financial crisis, and the decline happened even before the pandemic. As noted by the WTO, the economic slowdown and the escalating trade tensions, particularly the tariff war between the United States and China, were among the major contributing factors for the contraction of trade flows. 

Second, the pattern of world textile exports overall stays stable in 2019; Meanwhile, China and Vietnam continue to gain momentum. China, European Union (EU28), and India remained the world’s top three exporters of textiles in 2019. Altogether, these top three accounted for 66.9% of the value of world textile exports in 2019, almost no change from two years ago. Notably, despite the headwinds, China and Vietnam stilled enjoy the positive growth of their textile exports in 2019, up 0.9%, and 8.3%, respectively. In particular, Vietnam exceeded Taiwan and ranked the world’s seventh-largest textile exporter in 2019 ($8.8bn of exports, up 8.3% from a year earlier), the first time in history. The change also reflects Vietnam’s efforts to continuously upgrade its textile and apparel industry and strengthen the local textile production capacity are paying off.

Third, the pattern of world apparel exports reflects fashion companies’ shifting strategies to reduce sourcing from China. China, the European Union (EU28), Bangladesh, and Vietnam unshakably remained the world’s top four exporters of apparel in 2019. Altogether, these top four accounted for as much as 71.4% of world market shares in 2019, which, however, was lower than 74% from 2016 to 2018—primarily due to China’s reduced market shares.

China is exporting less apparel and more textiles to the world. Notably, China’s market shares in world apparel exports fell from its peak of 38.8% in 2014 to a record low of 30.8% in 2019 (was 31.3% in 2018). Meanwhile, China accounted for 39.2% of world textile exports in 2019, 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.

On the other hand, even though apparel exports from Vietnam (up 7.7%) and Bangladesh (up 2.1%) enjoyed fast growth in absolute terms in 2019, their gains in market shares were quite limited (i.e., no change for Vietnam and marginally up 0.3 percentage point from 6.8% to 6.5% for Bangladesh). This result indicates that due to capacity limits, no single country has yet emerged to become the “Next China.” Instead, China’s lost market shares in apparel exports were fulfilled by a group of Asian countries altogether.

Fourth, associated with the shifting pattern of world apparel production, the world textile import is increasingly driven by apparel-exporting countries in the developing world. Notably, 2019 marks the first time that Vietnam emerged to become one of the world’s top three largest importers of textiles, primarily due to its expanded apparel production and heavy dependence on imported textile raw materials. In comparison, although the US and the EU remain the world’s top two largest textile importers, their total market shares had declined from nearly 40% in 2010 to only 31.2% in 2019, the lowest in the past ten years. Furthermore, both the US and the EU have been importing more finished textile products (such as home furnishings and carpets) as well as highly specialized technical textiles, rather than conventional yarns and fabrics for apparel production purposes. The weakening import demand for intermediary textile raw materials also suggests that reshoring (i.e., making apparel locally rather than sourcing from overseas) has NOT become a mainstream industry practice in the developed economies like the US and the EU.

Fifth, the world apparel import market is becoming ever more diversified as import demand is increasingly coming from emerging economies with a booming middle class. Affected by consumers’ purchasing power (often measured by GDP per capita) and size of the population, the European Union (EU28), US, and Japan remained the world’s top three importers of apparel in 2019. This pattern has lasted for decades. Altogether, these top three absorbed 58.1% of world apparel in 2019, which, however, was a new historic low (was 84% back in 2005). Behind the numbers, it is not the case that consumers in the EU, US, and Japan are necessarily purchasing less clothing. Instead, several emerging economies are becoming fast-growing apparel consumption markets and starting to import more. For example, China’s apparel imports totaled $8.9bn in 2019, up 8.1% from a year earlier. From 2010 to 2019, China’s apparel imports enjoyed a nearly 15% annual growth, compared with only 1.9% of the traditional top three.

by Sheng Lu

Additional reading: Lu, S. (2020). Five ways world textile and apparel trade is changing. Just-Style.

Appendix:

COVID-19 and U.S. Apparel Imports (Updated: July 2020)

The latest statistics from the Office of Textiles and Apparel (OTEXA) show that COVID-19 continued to enlarge its negative impact on U.S. apparel imports in May 2020, and the path to recovery will NOT be straightforward and quick. Specifically:

The value of U.S. apparel imports decreased by more than 60% in May 2020 from a year ago, setting a new record of single-month loss in trade volumes. Between January and May 2020, the value of U.S. apparel imports decreased by 27.8% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

As the first country hit by Covid-19, China’s apparel exports to the U.S. dropped by 60.2% in May 2020 from a year ago, close to its performance in April 2020 (down 59% YoY). While the figure itself is far from exciting, it suggests the sinking of China’s apparel exports could have hit bottom. As an important sign, China regained its position as the largest apparel supplier to the U.S. in May 2020, with 27.2% market shares in value and 41.4% market shares in quantity. Notably, this is a significant rebound from only 11% market shares back in February 2020. Overall, it seems U.S. fashion brands and retailers continue to treat China as an essential and probably indispensable apparel sourcing base, despite a new low of U.S.-China relations and companies’ sourcing diversification strategy. Meanwhile, the official Chinese statistics report a 20.3% drop in China’s apparel exports in the first five months of 2020.

Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.1% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.6% YTD in 2020 and vs. 27.4% in 2019) and Bangladesh (9.4% YTD in 2020 vs.7.1% in 2019) all gain additional market shares in 2020 from a year ago.

However, no clear evidence has suggested that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first five months of 2020, still, only 9.1% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.0% from NAFTA members (down from 4.5% in 2019). Two factors might explain the pattern: 1) Due to factory lock-down, the production capacity in the Western Hemisphere is affected negatively; 2) With an unrepresented high level of unemployment, U.S. consumers are becoming ever more price sensitive.  However, apparel produced in the Western Hemisphere, in general, are less price competitive than those made in Asia.

As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first five months of 2020 (price index =101.5) compared with 2019 (price index =104.7).  Imports from China have seen the most notable price decrease so far (price index =71.0 YTD in 2020 vs. 83.5 in 2019).

by Sheng Lu

COVID-19 and U.S. Apparel Imports (Updated: June 2020)

The latest statistics from the Office of Textiles and Apparel (OTEXA) show that the negative impact of COVID-19 on U.S. apparel imports deepened further in April 2020. Specifically:

  1. Unusually but not surprisingly, the value of U.S. apparel imports sharply decreased by 44.5% in April 2020 from a year ago. Between January and April 2020, the value of U.S. apparel imports decreased by 19.6% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

2. As the first country took a hit by COVID-19, China’s apparel exports to the United States continue to deteriorate—its value decreased by a new record of 59.0% in April 2020 compared with a year ago (and -46.4% drop year to date). This result is also worse than the official Chinese statistics, which reported an overall 22% drop in China’s apparel exports in the first four months of 2020).

3. For the second month in a row, Vietnam surpassed China and ranked the top apparel supplier to the U.S. market in April 2020. China’s market shares in the U.S. apparel import market remained as low as 18.2% in April 2020 (was 30% in 2019), although it slightly recovered from only 11% in March 2020. With U.S.-China relations at a new low, there have been more intensified discussions on how to move the entire textile and apparel supply chain out of China and diversify apparel sourcing from the Asia region as a whole. However, as China itself has grown into one of the world’s largest apparel consumption markets, there is little doubt that China will remain a critical player for apparel sourcing, especially for the “China for China” business model.

4. Continuing the trend emerged in recent years, China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (19.7% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.8% YTD in 2020 vs.7.1% in 2019). However, no clear evidence has suggested that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first four months of 2020, still only 9.4% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from NAFTA members (down from 4.5% in 2019).

5. As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first four months of 2020 (price index =102.1) compared with 2019 (price index =104.7).  Imports from China have seen the most notable price decrease so far (price index =71.5 YTD in 2020 vs. 83.5 in 2019).

by Dr. Sheng Lu

COVID-19 and U.S. Apparel Imports (Updated: April 2020)

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The spread of the coronavirus (COVID-19) has already resulted in a plummet of U.S. apparel imports that we have never seen in history. According to latest statistics from the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, as of February 2020:

  • The value of U.S. apparel imports sharply decreased by 11.2% in February 2020 from a year earlier. Between January and February 2020, the amount of U.S. apparel imports decreased by 10.9% year over year, which is nearly the same loss as in the 2008-2009 global financial crisis.

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  • As the first country took a hit by COVID-19, China’s apparel exports to the United States nearly collapsed in February 2020–down as much as 46.1% compared with a year ago (and -40.6% drop YTD). This result is also worse than the official Chinese statistics, which reported an overall 20% drop in China’s apparel exports in the first two months of 2020).

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  • China’s market shares in the U.S. apparel import market dropped to 21.3% in February 2020, a new record low in history (was 30% in 2019 and 23.9% in January 2020). However, it is important to note that such a downward trend started in October 2019, as U.S. fashion brands and retailers were eager to reduce their exposure to sourcing from China.
  • China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (18.8% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.1% YTD in 2020 vs.7.1% in 2019). However, there is no clear evidence suggesting that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first two months of 2020, only 9.5% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.2% from NAFTA members (down from 4.5% in 2019).

How Might Covid-19 Affect Apparel Sourcing and Trade

The top challenge facing apparel sourcing and trade in the shadow of Covid-19 has quickly shifted from a lack of textile raw material to order cancellation. In major apparel consumption markets such as the EU and US, clothing stores are locked down, making retailers have no choice but to postpone or even cancel sourcing orders.

Based on the Global Trade Analysis Project Recursive Dynamic (GTAP-RD) Model and its latest database, we estimated the trade impact of Covid-19 in three possible scenarios, as summarized in the table below. All these three scenarios are pretty bad but likely situations we may have to face this year. (Note: Because China, US, and EU are the epic-centers of Covid-19, in the study, we assume these three countries/regions’ economies will be hit harder than the rest of the world.)

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There are four preliminary findings:

First, the volume of the world apparel trade will be hit hard by Covid-19. As clothing stores are forced to shut down and consumers are losing jobs and struggling financially, the demand for apparel consumption in the EU and US, the world’s top two apparel consumption markets, is expected to drop sharply. As shown in the figures below, every 1% decline in the US and EU Gross Domestic Product (GDP) in 2020 could lead to at least a 2-3% drop in the value of their apparel imports.  Notably, during the 2008 financial crisis, the value of world apparel imports also decreased by as much as 11.5% when the EU and US GDP suffered a 2.5-3% negative growth.

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Second, with a sharp decline in U.S. and EU apparel imports this year, China could be hit the hardest. In all the three scenarios we estimated, China will suffer the most significant drop in its apparel exports to the US and EU markets. The reasons are threefold: The first factor is the size effect—as the largest source of US and EU apparel imports and with its unparalleled production capacity, China is often used to fulfill large-volume sourcing orders. In the current situation, however, retailers are most likely to cancel these large-quantity orders, resulting in a disproportional loss of China’s apparel exports. Secondly, the US and EU apparel imports from China currently cover almost all major categories, which also makes China the most exposed to order cancellation. Furthermore, jointly affected by last year’s US-China trade war and the outbreak of Covid-19 in China earlier this year, many US and EU fashion brands and retailers have been shifting sourcing orders from China to other Asian countries, such as Bangladesh and Vietnam. To prioritize their limited resources, US and EU retailers are most likely to accelerate this process in the current difficult time.

Other than China, apparel factories in Bangladesh also could suffer severe export decline. Similar to the case of China, Bangladesh serves as a leading apparel supplier for BOTH the EU and US markets, making it more exposed to order cancellation than other countries. Notably, as a beneficiary of the EU Everything But Arms (EBA) program, around 60% of Bangladesh’s apparel currently go to the EU. In comparison, with a more diversified export market, apparel factories in Vietnam are in a better position and have more flexibility to mitigate the impact of a declined import demand from the EU and the US. In 2018, around 40% of Vietnam’s apparel exports went to other markets in the world.

Third, the decreased US and EU apparel imports will have a notable impact on employment in many apparel exporting countries. In history, a 10% change in the value of apparel exports typically results in a 4%-9% change in garment employment. This means, should the US and EU apparel imports drop by 10% in 2020, leading apparel exporting countries such as Bangladesh, Vietnam, Cambodia and India may have to cut 4%-9% of their jobs in the garment sector accordingly.  Notably, in developing countries such as Bangladesh and Cambodia, the apparel sector remains the single largest job creator for the local economy, especially for women. The social and economic impact of job losses in the apparel sector due to Covid-19 is very concerning.

Fourth, the economic performance in the US, EU, and China will largely shape the pattern of apparel trade this year. The results in scenarios 1 and 2 overall are pretty close, suggesting the economic cloud of these three countries and regions altogether far exceed the rest of the world.

Last but not least, the global apparel supply chain could continue to face a turbulent time in the next 1-2 years, even if Covid-19 gradually gets under control in the second half of 2020. In history, affected by the 2008 global financial crisis, the value of world apparel exports dropped by 12.8% in 2009. However, the growth rate quickly rebounded to 11.5% the following year. Likewise, should the EU and US apparel imports were able to recover to its normal level in 2021, both importers and garment factories may have to deal with a new round of labor shortage, the price increase of raw material and a lack of production capacity.

by Sheng Lu

Additional reading:

COVID-19 and U.S. Apparel Imports (Updated: March 2020)

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Jointly affected by the U.S.-China tariff war and the spread of the coronavirus, the value of U.S. apparel imports from China see a significant drop in January 2020.

Specifically, the value of U.S. apparel imports from China went down by as much as 36.1% month over month in January 2020. As a result, China’s market shares also dropped from nearly 30% in 2019 to a new record low of 23.9% in January 2020. However, it is important to note that such a downward trend started in October 2019, as U.S. fashion brands and retailers were eager to reduce their exposure to sourcing from China.

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China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam and Bangladesh. However, there is no evidence showing that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In January 2020, only 8.1% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 3.7% from NAFTA members (down from 4.5% in 2019). Recent studies show that there’s more divergence in the products imported into the US  from Asian countries and the western hemisphere.

Meanwhile, according to the latest statistics from China’s Customs, the value of China’s apparel exports in the first two months of 2020 dropped by nearly 20% from a year earlier.

Evolving Patterns and Social Economic Impacts of World Textiles and Apparel Trade: Discussions Questions from FASH455

 

Patterns of world textile and apparel trade

#1 Based on the readings, why or why not do you think Africa is on the right track to become the next hub for apparel sourcing for western fashion brands?

#2 Based on the readings, do you think that any of the countries/regions discussed can become the “next China?” If so, what are the challenges faced by these exporters that have been gaining market shares (such as Vietnam and Bangladesh)?

#3 Why is Asian companies investing the most into the apparel industry in Sub Saharan Africa (SSA) rather than U.S. or EU investors? Notably, the African Growth and Opportunity Act (AGOA) is a trade preference program between the U.S. and SSA countries.

#4 If the punitive tariffs on Chinese goods are removed next year, why or why do you think U.S. retailers will increase apparel sourcing from China again?

#5 To which extent do you think the comparative advantage theory can explain the evolving world textile and apparel trade patterns?

#6 What policies or strategies could the US government use to convince companies to invest in the Sub-Saharan African region instead of countries like China and Vietnam?

Debate on used clothing trade

#7 Did you feel that the United States really explored every and any possible solution before deciding to suspend Rwanda’s eligibility under the AGOA? If not, what more could they have done or done differently?

#8 The US-EAC trade dispute on used clothing import ban is a very multilayered matter, which can be broken down with the help of trade preference programs. How can we improve the effectiveness of these trade preference programs and revolutionize them to become more significant in today’s economy?

#9 EAC countries are having a difficult time developing their local textile and apparel industry due to the large amounts of used clothing being imported and even proposed a high tariff to lower the amount of clothing being imported. Do you believe the ban on used clothing is the only option they have left for economic growth? If not, what are some ideas of ways they can grow their economy?

#10 The EAC countries have shown their unwillingness to used clothing trade. However, the US has presented that they are indifferent to regulate the used clothing trade as they are one of the biggest used clothing exporters. Are there any solutions to achieve the win-win situation on used clothing trade?

#11 The used clothing ban is put in place in order to develop the apparel and textile industry, but there needs to be more education for countries on sustainability. There is a big stigma about used clothing that needs to be abolished as well. An alternative to this ban is allowing used clothing, but also creating new clothing more sustainably so apparel and textile companies can profit. What are some other sustainable alternatives that benefit both sides?

#12 Given the debate on used clothing trade and its impact on East African nations, will you continue to donate used clothing? Why or why not?

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

Survey Results: Garment Factories in China Slowly Resume Production amid the Fight against the Coronavirus Outbreak

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A recent survey of 294 apparel companies and 20 apparel industry clusters* in China was conducted by the China Garment Association between February 19 and 20, 2020, aiming to understand the impact of the coronavirus (2019-nCoV) on China’s garment industry and production. The respondents of the survey include both garment factories (63.3%) and apparel brands (36.7%). Around 83.4% surveyed companies reported over RMB20 million (or $2.85million) sales revenues.  Below are the key findings:

State of Production

  • 68.4% of surveyed companies say they have gradually resumed production. Of these companies, about 45.6% of their workers in need have returned. The surveyed companies also expect their production output to reach 50% of its normal level by March and could fully recover by April, should the situation stabilized.
  • However, still, as many as 31.6% of surveyed companies say they have not resumed production because of a mix of factors ranging from the need to prevent coronavirus, government restrictions, to the difficulty in recruiting workers. Further, for apparel companies from areas most affected by the coronavirus, they report no plan for reopening anytime soon.
  • Around 87.2% surveyed “large companies” have resumed production, much higher than “medium-sized” (65.4%) and “small-sized” (34.7%) enterprises. [Note: according to China’s Bureau of Statistics, for manufacturers, “large companies” typically refer to those with over 1,000 employees and over RMB400 million (or $57million) annual sales revenue; “small or mini-sized companies” are those with employees less than 200 and less than RMB3million (or $0.43million) annual sales revenues. “medium-sized companies” are those in between].
  • Further, around 74.3% of surveyed apparel brands have resumed business operations, higher than 64.9% of garment factories. Meanwhile, some apparel brands say only their management team have resumed work or those positions that can be done through work from home; however, their plants remain closed.
  • Over half of the surveyed companies (54.08%) say less than 50% of their workers have returned. The lack of workers is a more pressing issue for small-sized companies, with over 80% having less than 50% of workers returned.

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Key challenges facing the surveyed companies:

  • #1: Lack of workers, especially to have those workers from other parts of China return to the factory due to travel restrictions (68.7%)
  • #2: Production cost increase and a lack of supply of raw material from the upstream sector (29.9%)
  • #3: Slow and stagnant sales, overstock of finished products due to delayed orders and tight with cash flows (20.6%)
  • #4: Weak market demand and cancellation of orders (19.2%)
  • #4: Disrupted logistics and transportation (19.2%)
  • #6: Hard to procure protective equipment for staffs and workers (such as facial masks) (16.8%)
  • #7: Cancellation of exhibitions, harder to explore markets and more financial burdens (8.4%)

(*Note: apparel industry clusters refer to geographic concentrations of interconnected factories that manufacture a particular type of apparel product)

Related reading: Apparel Sourcing in the Shadow of Coronavirus (updated February 2020)

Patterns of U.S. Textile and Apparel Imports (updated February 2020)

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The value of U.S. textile imports totaled $27,461 million in 2019, down 2.3 percent from 2018. This is the first time since 2016 that U.S. textile imports incurred a negative growth, which could be related to the slowed U.S. domestic textile and apparel production. Meanwhile, the value of U.S. apparel imports reached $83,822 million in 2019, up 1.2 percent from a year earlier but was substantially lower than a 3.4% growth between 2017 and 2018. Despite the trade uncertainties, the U.S. apparel imports overall still mirror the trend of apparel retail sales in the U.S. market.

Looking ahead, while the reaching of the “phase one” U.S.-China trade deal was a relief to U.S. fashion companies, the unexpected outbreak of the coronavirus in China since January and its fast spread had cast a new shadow on the outlook of the world economy. U.S. Fed Chairman Jerome Powell recently cited the prospect of a hit to tourism, exports and financial markets as ways the coronavirus could dent U.S. economic growth. As a consequence, the value of U.S. textile and apparel imports in 2020 could grow at a more modest rate than previously expected.

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Because the United States is no longer a major apparel manufacturer but one of the largest apparel consumption markets in the world, apparel products accounted for 75.3 percent of total U.S. textile and apparel imports in 2019, followed by made-up textiles (17.9 percent), fabrics (5.6 percent) and yarns (1.2 percent). This structure has remained quite stable over the past decade.

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The U.S. imported apparel from more than 150 countries in 2019. Meanwhile, the Herfindahl index declined from 0.269 in 2010 to 0.253 in 2019, suggesting that overall the U.S. apparel import market is becoming less concentrated. This result is consistent with some recent studies, which show that U.S. fashion brands and retailers continue to diversify their sourcing bases gradually. Reducing the dependence on sourcing from China, catering to the increasing demand for speed to market and fulfilling the market expansion needs were among the top-cited reasons for companies’ sourcing diversification strategy.

Specifically, all top apparel suppliers to the United States in 2019 (by value) were developing countries and most of them were located in Asia, including China (29.7%, down from 33.0% in 2018), Vietnam (16.2%, up from 14.7% in 2018), Bangladesh (7.1%, up from 6.5%), Indonesia (5.3%, down from 5.4% in 2018), India (4.8%, up from 4.6% in 2018) and Mexico (3.7%, down from 4.0% in 2018).

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Except for China, the average unit price of U.S. apparel imports from other major sources all went up in 2019, including Vietnam (up 4.6%), Bangladesh (up 5.6%), Indonesia (up 2.1%), India (up 3.1%), Cambodia (up 7.5%) and CAFTA-DR members (up 4.4%). The results suggest that U.S. fashion brands and retailers had to pay a higher price when they move their sourcing orders from China to other alternatives, due to much smaller production capacity and more costly raw material supply there.

Additional reading: US apparel Sourcing Patterns are Changing. Here is How (by Sheng Lu, on just-style). Key findings:

  • Consumption demand remains the most significant factor in shaping the volume of U.S. apparel imports. Between 2010 and 2019, the value of U.S. apparel retail sales always stayed at around three times as much as the value of U.S. apparel imports. Over the same period, the amount of U.S. apparel retail sales and apparel imports also changed in the same direction, and both enjoyed a roughly 3.0% annual growth on average. Such a synchronized move reminds us about the buyer-driven nature of the apparel business today and explains why this industry is so sensitive towards the health of the national economy.
  • The U.S.-China tariff war had resulted in a change of the seasonal patterns for apparel sourcing and shipment. While July to October used to be the busiest time for U.S. fashion brands and retailers to receive their sourcing orders from China, in 2019 the peak season started earlier in June and ended in September–mostly because U.S. fashion companies tried to avoid the hit of the proposed 15% Section 301 punitive tariffs on Tranche 4A products, which covered most apparel items. For the same reason, U.S. apparel imports from China in November and December 2019 were much lighter than usual.
  • U.S. fashion brands and retailers continue to diversify their sourcing base, yet the options available remain limited. The lack of qualified alternatives to “Made in China” is one big challenge. Despite the hundreds of apparel exporting countries in the world, only nine of them met the following two criteria: 1) enjoyed a 5% or higher growth of their apparel exports to the U.S. for two consecutive years since 2017; 2) achieved a minimum 1% market share as of 2019. Of these nine countries, only Vietnam, Bangladesh, and Cambodia ranked the top 10 apparel suppliers for the U.S. market in 2019.
  • U.S. fashion brands and apparel retailers increasingly source both from Asia and the Western Hemisphere, but for different purposes. Notably, the value of export similarity index (ESI) between China and the Western Hemisphere was as low as 40.8 in 2015 and went down further to only 39.6 in 2019, suggesting their export product structure had turned even more heterogeneous. In contrast, between 2015 and 2019, China, ASEAN (whose members include leading apparel exporting countries such as Vietnam, Indonesia, Cambodia, Malaysia, and Thailand) and Bangladesh appear to export increasingly similar products to the United States. This explained why Asian suppliers rather than NAFTA and CAFTA-DR members saw their apparel exports to the United States increased in 2019 as a result of the U.S.-China tariff war.

Apparel Sourcing in the Shadow of Coronavirus (updated February 2020)

[The situation has been quickly evolving. Please check the updated analysis: How Might Covid-19 Affect Apparel Sourcing and Trade ]

  • The real impact of the coronavirus is yet to come. Western fashion brands and retailers know that sourcing from China is always slow in January and early February because of the Chinese New Year (CNY). Instead, the immediate economic impact of the coronavirus right now is on China’s domestic retail market, as many stores (including well-known clothing and footwear brands) have been closed.
  • As the disease continues to spread quickly, the concerns about the outlook of sourcing from China are growing. Even though factories in China are scheduled to reopen on February 3, according to the latest government announcement, over dozens of major cities in the country have been locked down (encircling roughly 50 million people so far), making it impossible for many workers to return to their job. Further, it is hard to predict how long such an unprecedented large-scale lockdown will last.

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  • Many Western fashion companies are in the status of “wait and see what is going to happen.” Some delays in the arrival of their orders seem unavoidable. However, shifting sourcing orders to other countries does not seem to be a quick solution at this point either for three reasons: 1) China remains the single largest textile and apparel supplier with no alternatives (see the table above); 2) other apparel exporting countries (especially those in Asia) rely heavily on textile raw material, such as yarns and fabrics made in China. 3) for apparel factories in Asia and Africa, it is not rare to see their management team is from China. However, starting from the end of January, countries around the world have begun to impose travel restrictions targeting Chinese travelers.
  • While last year’s tariff war had already pushed Western fashion brands to source less from China, the coronavirus could accelerate companies’ sourcing diversification strategy further. Western fashion brands and retailers may also see their overall sourcing cost to go up as it requires additional resources to move products around and build new supply chains.

How Has the Tariff War Affected the Competitiveness of China’s Textile and Apparel Exports to the U.S.? (December 2019)

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This study intends to explore how has the U.S.-China trade tension since 2017 affected the competitiveness of China’s textile and apparel (T&A) exports to the U.S. market. The findings of the study will shed new light on the mega-trend of T&A sourcing from China in the medium term, and support T&A companies’ sourcing decision making in the current uncertain business environment.

Data for the analysis were collected from the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, including the value of U.S. imports from China between 2016 (i.e., the year before the U.S. launched the section 301 investigation against China) and October 2019 (the latest data available) for a total of 167 categories of T&A products.

Specifically, based on the constant market share (CMS) model, a commonly adopted international trade analysis tool, this study decomposed the value of U.S. T&A imports from China into the following four factors:

  • Market growth effect: changes in China’s T&A exports to the U.S. due to the growth of total U.S. import demand for T&A
  • Commodity structural effect: changes in China’s T&A exports to the U.S. due to the shifting product structure of China’s T&A exports
  • General competitive effect: changes in China’s T&A exports to the U.S. due to the shifting competitiveness of Chinese T&A products in the U.S. market (measured by China’s market shares)
  • Product competitive effect: changes in China’s T&A exports to the U.S. due to the joint effect of the product structure of China’s T&A exports and the shifting competitiveness of Chinese T&A products in the U.S. market (measured by China’s market shares)

Four findings are of note:

First, the U.S.-China trade tension has affected China’s T&A exports to the U.S. negatively. Even though Section 301 tariffs on the majority of apparel products didn’t start until September 2019, China’s T&A exports to the U.S. had suffered a significant drop. This result, however, was at odds with the overall trend of China’s T&A exports to the U.S. in recent years. Notably, except apparel, China’s yarns, fabrics and made-up textile exports to the U.S. all enjoyed a steady and positive growth between 2016 and 2018. The impact of the tariff war is real.

Second, the increased U.S. import demand has partially mitigated the negative impact of trade tension on China’s T&A exports to the U.S. market. Results of the CMS model indicate that expanded total U.S. import demand for T&A driven by the booming U.S. economy had avoided an even worse decline of U.S. T&A imports from China. In other words, without such a market growth, China’s T&A exports to the U.S. would have been $2,065 million less in 2018 (including $528 million for apparel) and $878 million less (including $613 million for apparel) in the first ten months of 2019 than their current level.

Third, China’s export competitiveness is shifting from apparel to textiles. Results of the CMS model show that even before the tariff war, the competitiveness of China’s apparel exports has been weakening steadily, which was the most significant contributing factor to the decline of $530 million U.S. apparel imports from China between 2016 and 2018. In comparison, China is exporting more yarns and fabrics to the U.S. in recent years. Data from OTEXA shows that between 2016 and 2018, China’s yarn and fabric exports to the U.S. enjoyed a 13.1% and 2.6% compound annual growth, respectively, compared with a 0.6% decline of apparel. The CMS model further suggests that China’s improved export competitiveness can explain the majority of these increased exports.

Fourth, China is adjusting its T&A export structure to mitigate the negative impact of the tariff war. As estimated, through targeting those product categories with higher growth in import demand, China was able to achieve an additional $36.7 million apparel export to the U.S. in the first ten months of 2019.  Likewise, the commodity structural effect also favored China’s made-up textile exports to the U.S. market in 2019, resulting in $148.7 million more exports than otherwise.

By Sheng Lu

The Changing Face of Textile and Apparel “Made in Asia”

Video 1: How one Chinese shirt-maker uses automation to safeguard its future

Video 2: Chinese investors move clothing factory to Bangladesh

Video 3: Can Vietnam become the next China?

Discussion questions (for FASH455: Please finish watching ALL the three short videos above before sharing your viewpoints)

  1. How are textile and apparel “Made in Asia” changing its face? What are the driving forces of these changes?
  2. What are the examples of the “flying geese model” from the videos? Overall, why or why not do you think this model is still valid today?
  3. Why or why not do you think the U.S.-China tariff war has fundamentally changed the patterns of textile and apparel production and trade in Asia?

Related readings

15% and 25% Section 301 Punitive Tariffs on Apparel Imports from China: Retail Price Impact Assessment

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The Trump administration has imposed 15% Section 301 punitive tariffs on $300 billion Chinese products (tranche 4) effective September 1, 2019, which includes almost 80% of U.S. apparel imports from China. As illustrated above, 15% punitive tariffs mean:

  • If the retailer keeps the retail price unchanged, its gross margin% could drop around 2.9-3 percentage points.
  • If the retailer tries to maintain a gross margin% of 40%, it may have to increase the retail price by around 11.5-12%.

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Likewise, should the punitive tariffs reach 25%, it means:

  • If the retailer keeps the retail price unchanged, its gross margin% could drop around 4.9-5.0 percentage points.
  • If the retailer tries to maintain a gross margin% of 40%, it may have to increase the retail price by around 19.4-20%.

(Welcome for any comments and suggestions)

by Sheng Lu

U.S.-China Tariff War Escalates–Impact on Apparel and Footwear

Background: In response to China’s decision to impose 5%–10% retaliatory tariffs on $75 billion U.S. products, on August 23, 2019, the Trump administration announced to raise the Section 301 tariffs from 25% to 30% for around $250 billion Chinese products (tranche 1, 2 and 3), effective October 1, 2019. The scheduled Section 301 tariffs on $300 billion Chinese products (tranche 4) to take into effect on September 1, 2019 and December 15, 2019 will also be increased from 10% to 15%.

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Trump lashes out at China, sending markets reeling

U.S. fashion brands and retailers are deeply concerned about the negative impacts of the tariff war on their businesses. According to the 2019 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association, even without considering the upcoming 10-15% tariffs to be imposed on around $35.7 billion Chinese textiles and apparel covered by tranche 4:

  • The trade diversion effect of Section 301 has accelerated U.S. fashion companies’ pace of reducing sourcing from China. About 83 percent of respondents expect to decrease sourcing from China over the next two years, up further from 67 percent in 2018.
  • The Section 301 action is pushing up the price of U.S. apparel imports across the board, making “increasing production and sourcing cost” the top business challenge for respondents in 2019. As much as 63 percent of respondents explicitly say the U.S. Section 301 tariff action against China “increased my companies’ sourcing cost” in 2019. As companies are moving sourcing orders to Bangladesh, Vietnam, and India, the average price of U.S. apparel imports from these countries – the main alternatives to China — have all gone up very quickly.
  • No evidence shows that Section 301 has benefited near-sourcing from the Western Hemisphere and reshoring from the United States significantly. Instead, respondents say Section 301 has increased the production costs of textiles and apparel “Made in the USA.”
  • Respondents say they are reluctant but may have to increase their retail prices, should the U.S.-China tariff war escalate further.

Related reading:

When ‘Made in Vietnam’ Products Are Actually From China

As described in the video, transshipment is one form of illegal import activities and occurs when false country-of-origin information is provided for imported goods in order to evade U.S. customs duties. Transshipment was a major issue in textile and apparel trade back in days when the quota system was still in place.

According to the media, because of the escalating U.S.-China tariff war, customs fraud such as transshipment is thriving again. Some fashion companies are also using tariff engineering to avoid paying the punitive tariffs in a legal way. Indeed, how to label “Made in ___” can be much more complicated, technical and subtle than we realize.

Related reading:

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

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

The full article is available HERE

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

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

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

Three findings are of note:

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

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

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

by Sheng Lu

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

The full article is available HERE

Key findings:

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

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

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

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

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

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

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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