USTR Releases Negotiating Objectives of the Proposed U.S.-Kenya Free Trade Agreement

On May 22, 2020, Office of the U.S. Trade Representative (USTR) released the specific negotiating objectives of the proposed U.S.-Kenya Free Trade Agreement. Overall, the proposed free trade agreement (FTA) intends to “builds on the objectives of the African Growth and Opportunity Act (AGOA) and serve as an enduring foundation to expand U.S.-Africa trade and investment across the continent.” USTR also visions to conclude an agreement with Kenya that “can serve as a model for additional agreements in Africa, leading to a network of agreements that contribute to Africa’s regional integration objectives.”

Regarding the textiles and apparel (T&A) sector, USTR says it will “Secure duty-free access for U.S. textile and apparel products and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities.” The proposed agreement also will “Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.” The same/very similar language is used in the proposed U.S.-Japan Free Trade Agreement and U.S.-EU trade negotiation.

Of the total $667million U.S. merchandise imports from Kenya in 2019, nearly 70% were apparel items, making the sector the single largest stakeholder of the proposed FTA. While still being a relatively minor supplier, Kenya’s apparel exports to the U.S. reached a record high of $453million in 2019, which was an increase of 132% from ten years ago. For many U.S. fashion companies, Kenya is also its single largest apparel-sourcing base in Sub-saharan Africa (SSA), accounting for one-third of the region’s total apparel exports to the U.S. in 2019.

However, how to design the textile and apparel chapter in the proposed U.S.-Kenya FTA is anything but easy. A preliminary content analysis of the 133 public comments submitted to the U.S. International Trade Commission (USITC) as of May 2020 shows that various stakeholders have proposed competing views on several complicated issues, ranging from the rules of origin to the tariff elimination schedule. Specifically:

First, the fashion apparel industry has expressed strong unanimous support for the proposed U.S.-Kenya FTA. Notably, Kenya is widely regarded as a growing sourcing destination for U.S. fashion brands and retailers. As noted by the U.S. Fashion Industry Association (USFIA) in its comment “there is a tremendous opportunity to expand trade between the United States and Kenya” through the elimination of both tariff and non-tariff barriers under the FTA.

Second, the fashion apparel industry calls for the proposed U.S.-Kenya FTA to “do no harm” to the existing supply chain established based on AGOA and ensure a seamless transition between the two trade programs. For example, PVH, one of the largest U.S. fashion corporations, says in its comment, “no change should be made with respect to market access and dutyfree treatment for apparel made in Kenya effective from the date of entry into force of the agreement.” Likewise, USFIA calls for the new FTA to “Preserve the commercial opportunities developed through AGOA benefits.” The American Apparel and Footwear Association (AAFA) further proposes to extend AGOA for another ten years after 2025, regardless of the status of the U.S.-Kenya FTA.

Third, despite the overall support for the agreement, industry stakeholders hold different views on how liberal the apparel-specific rules of origin should be in the U.S.-Kenya FTA and how long to keep it. Data shows, between 2015 and 2019, 99.7% of U.S. apparel imports from Kenya claimed the AGOA benefits. Of these imports, almost 100% took advantage of the so-called “third-country” fabric provision, which allows lesser-developed SSA countries like Kenya to enjoy duty-free access to the U.S. market for apparel made from yarns and fabrics originating from anywhere in the world (also known as the “cut and sew” or “single transformation” rules of origin).

On the one hand, some argue that without AGOA-like liberal rules of origin, Kenya won’t survive as an apparel sourcing destination for U.S. fashion companies because of the lack of local textile manufacturing capacity. For example, according to the African Coalition for Trade representing businesses in several SSA countries, “Africa does not currently have the capacity to produce the volume and variety of yarn and fabric necessary to support its apparel industry. Any tightening of the third-country fabric rule of origin in the post-AOGA model FTA would decimate the African apparel industry and lead to the loss of hundreds of thousands of jobs.”

However, some other industry stakeholders suggest that U.S.-Kenya FTA should gradually adopt the more restrictive “yarn-forward” rules of origin to encourage the development of the local textile industry in Kenya and the broader SSA region. Should U.S.-Kenya FTA adopt the “yarn-forward” rules of origin, garment factories in Kenya would have to either import yarns and fabrics from the United States, an option that is commercially infeasible given the long-distance, or use textile inputs locally-made. PVH, in its comment, explains the rationale behind the proposal, “we should move to a yarn forward rule of origin in phases…to allow the orderly verticalization of the apparel industry (in Kenya).” AAFA further adds, “A strong, vertical supply chain for the apparel and footwear industry in Kenya will reduce costs, minimize disruption and improve efficiency.”

Notably, the National Council of Textile Organizations (NCTO), which represents the voice of the U.S. textile industry, has not commented on U.S.-Kenya FTA yet but may potentially join the rules of origin debate. For years, NCTO insists that all U.S. free trade agreements should adopt the strict “yarn-forward” rules of origin. NCTO is most likely to hold the same position for the proposed U.S.-Kenya FTA because of two reasons: 1) avoid setting a “bad precedent” that may have implications for future U.S. FTA negotiations; 2) prevent the case when U.S. apparel imports from Kenya substantially increase and negatively affect apparel suppliers in the Western Hemisphere (such as Mexico and countries in Central America).

Furthermore, the debate on rules of origin is connected with the discussion on how to promote a regional textile and apparel supply chain in SSA and enhance regional economic integration. Several stakeholders, including AAFA, urge that U.S.-Kenya FTA should support regional supply chain collaboration rather than intensify the competition between Kenya and other AGOA members in the U.S. apparel market. The Atlantic Council, a well-known think tank also argues, “the bilateral (FTA) approach should not undercut the US’ longstanding support for regional integration in African markets and the progress that has been made in the East African Community (EAC) and the African continental free trade agreement area (AfCFTA).” Mauritius embassy echoes and suggests that the U.S.-Kenya FTA “could be made conductive to regional integration in Africa by allowing cumulation provisions in the agreement that would allow the use of materials sourced from other African partners to achieve the rules of origin requirements.

Fourth, industry stakeholders also suggest that U.S.-Kenya FTA could include modern trade agendas to make the agreement more relevant to the needs of the fashion apparel industry in the 21st-century world economy. The most commonly mentioned issues include: 1) Sustainability, labor, and environmental standard; 2) E-commerce, digital trade, and data protection; 3) Strengthened intellectual property rights (IP) protection; 4) Transparency and trade facilitation. The released USTR negotiation objectives have covered most of these topics.

Additionally, how to deal with Kenya’s secondhand clothing import restriction could be another thorny issue relevant to fashion apparel in the U.S.-Kenya FTA negotiation. In its submitted comment, the Secondary Materials and Recycled Textiles Association (SMART), whose members export 8-10 million kilograms of used clothing each year, urged the proposed U.S.-Kenya FTA to “prohibit the imposition of any import ban on secondhand clothing” and “phase-in duty eliminations on secondhand clothing.” However, SMART’s position could be at odds with apparel manufacturers in Kenya, along with U.S. fashion brands and retailers interested in expanding apparel sourcing from the country.

Further readings:

  1. Lu, S. (2019). Challenges for sub-Saharan Africa as an apparel sourcing hubJust-Style.
  2. Kendall Keough and Sheng Lu. (forthcoming). U.S.-Kenya Free Trade Agreement: Comments from the Fashion Apparel Industry. Just-Style.

USITC Report: U.S. Apparel Sourcing under African Growth and Opportunity Act (AGOA)

Untitled

A newly released study by the U.S. International Trade Commission (USITC) suggests that the African Growth Opportunity Act (AGOA) and its “third-country fabric provision” are critical for U.S. apparel sourcing from sub-Saharan Africa (SSA). Specifically:

U.S. apparel imports from SSA grew faster than the world average. During 2016–19, U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 11.8 percent (compared with 1.3 percent CAGR of all countries), from $1.0 billion in 2016 to $1.4 billion in 2019. However, SSA overall remained a small apparel supplier to the U.S. market, accounting for only 1.7 percent of the market shares in 2019 (lower than 2.7 percent in 2004, but was a record high since 2015).

U.S. apparel imports from SSA remain uneven across countries. The five SSA countries–Kenya, Lesotho, Madagascar, Mauritius, and Ethiopia altogether accounted for almost 95 percent of all apparel imported from the SSA region under AGOA. The growth of U.S. apparel imports from Ethiopia was particularly fast (86.4% CAGR during 2016-2019), thanks to the country’s industrial parks and its increased use of AGOA benefits. Several global brands such as H&M, Calvin Klein, and Tommy Hilfiger currently source apparel from garment factories located in these industrial parks.

The USITC report suggests that the duty-free preferences awarded under AGOA and the liberal rules of origin available for apparel under the “third-country fabric provision”* are the key competitive advantages of SSA serving as an apparel sourcing destination for U.S. companies. Due to limited yarn and fabric production in SSA, the third-country fabric provision remained critical for SSA exports of apparel to receive duty-free entrance to the United States. Notably, nearly all U.S. imports of apparel from SSA countries entered under AGOA (98 percent). Of these imports, virtually all of them (95.8 percent) used the third-country fabric provision in 2018.

Further, the USITC report used Madagascar as an example to illustrate the significance of AGOA and its third-country fabric provision in particular to SSA countries’ apparel exports to the United States. As noted by USITC:

  • Madagascar was evidenced by the sharp decline in its apparel exports to the U.S. after the country lost its AGOA eligibility in 2009. Without duty-free access to the United States, the average duty rate for U.S. imports of apparel from Madagascar rose to 19.6 percent, and apparel exports to the United States from Madagascar fell from over $211 million in 2009 to only $40 million in 2011.
  • Madagascar’s AGOA benefits were reinstated in 2014. Just in two years, U.S. apparel imports from Madagascar bounced back to one-half of the 2009 level. In 2019, U.S. apparel imports from Madagascar totaled $243 billion, a new record high since 2015.

The USITC report mentioned several factors that are encouraging more U.S. apparel sourcing from SSA. For example:

  • U.S. fashion companies’ sourcing diversification strategy
  • U.S. fashion companies’ rising emphasis on corporate social responsibility (CSR) in sourcing
  • Deepened regional economic integration among SSA countries through regional trade arrangements such as the African Continental Free Trade Area

However, it remains a concern that SSA countries are lack of genuine competitiveness as apparel sourcing destinations. According to the USITC report, SSA countries’ current competitive advantage in apparel “comes solely through the cutting of tariffs on apparel to zero, since the apparel sectors of Bangladesh, Vietnam, and China are more cost-competitive than those of SSA countries. The current competitive advantage that SSA countries have in the apparel sector will decline significantly if AGOA expires in 2025. The uncertainty about AGOA renewal will likely discourage U.S. FDI in the SSA apparel sector.”

Related, as quoted by the USITC report, according to the 2019 Fashion Industry Benchmarking Study, almost half of the surveyed U.S. fashion companies expressed hesitancy about investing in the SSA region due to the temporary nature of AGOA. Moreover, long lead times, lack of infrastructure, and high logistical costs continue to deter apparel retailers from investing in the AGOA region.

*About the African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to US imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen US trade and investment ties with the region.

Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA. Particularly, the “third-country fabric provision” under AGOA allows US apparel imports from certain SSA countries to be qualified for duty-free treatment even if the apparel use yarns and fabrics produced by non-AGOA countries/regions (such as China, South Korea, and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology-intensive textile products.

On 29 June 2015, the Obama Administration signed a new bill to extend the AGOA (including the third-country fabric provision) for another ten years (until 30 September 2025). The new law simplifies the AGOA rules of origin; gives the president the ability to withdraw, suspend or limit benefits (rather than just terminate eligibility) if designated AGOA countries do not comply with the eligibility criteria; adds notification and reporting requirements; and improves transparency and participation in the AGOA review process.

About the “Third-Country Fabric” provision under AGOA

This is a “Special Rule” for lesser-developed SSA countries (LDCs) under AGOA. According to the rule, these SSA LDCs can enjoy duty-free and quota-free access to the U.S. market for apparel made from yarns and fabrics originating from anywhere in the world. In comparison, most U.S. free trade agreements require the more restrictive “yarn-forward” rules of origin.

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

Production and Export Strategies of U.S. Textile and Apparel Manufacturers

Presenter: Kendall Keough (MS 2020, Fashion and Apparel Studies)

Textiles and apparel “Made in the USA” are gaining growing attention in recent years amid the escalating U.S.-China trade war, the rising cost of imports, and consumers’ increasing demand for “speed to market.” Statistics show that the value of U.S. textile and apparel (T&A) production totaled $US28.1bn in 2018, which was a record high since 2010. Meanwhile, different from the old days, more and more T&A “Made in the USA” are sold overseas today. According to the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, the value of U.S. T&A exports reached US$22.9bn in 2019, up nearly 20% from ten years ago.

Despite the strong performance in production and export, however, U.S. T&A manufacturers do not seem to be “visible” enough. Given the information gap, we recently analyzed the 122 U.S. T&A manufacturers included in the OTEXA “Made in the USA” database. Information in the database is self-reported by companies and then verified by OTEXA. Our analysis intends to gain more insights into the state of U.S. T&A mills, including their demographics, production and supply chain strategies, as well as their export behaviors.

Key findings:

First, U.S. T&A manufacturers display a relatively high concentration of geographic locations. Notably, as much as 61% of self-reported yarn manufacturers are from North Carolina (NC), followed by South Carolina (SC), which accounts for another 11%. The concentration of yarn manufacturing in the south, in particular, can be attributed to the abundant cotton supply in that region. Meanwhile, California (CA) has one of the most complete T&A supply chains in the country, with the presence of manufacturers across all T&A sub-sectors.

Second, large-size textile mills are gradually emerging in the United States, whereas U.S. apparel manufacturers are predominantly small and medium-sized. U.S. textile mills, in general, have a high concentration of factories with over 100 employees, particularly those engaged in producing yarns (53%), fabrics (37%), and technical textiles (38%). In the past decade, many relatively small-sized U.S. textile mills had merged into larger ones to take advantage of the economies of scale and reduce production cost. In comparison, over half of the apparel mills in the OTEXA database reported having less than 50 employees. Notably, because of the significant disadvantage in labor cost, U.S. apparel mills are not trying to replace imports, but instead focusing on their “niche market.” For example, designer-based micro-factories are popular these days in U.S. fashion centers such as New York City and California. These factories typically provide customized services, ranging from proto-typing to sample production.

Third, “fabric + apparel” and “fabric + technical textiles” are the two most popular types of vertical integration among U.S. T&A mills. A relatively small proportion of T&A mills included in the OTEXA database had adopted the vertical integration business strategy. Notably, fabric mills seem to be most actively engaged in the vertical integration strategy–around one-third of them reported also making apparel, technical textiles, or home textiles. Additionally, 20% of technical textile manufacturers in the OTEXA database have incorporated an apparel component to their product portfolio. This is a significant trend to watch as more and more sportswear brands are developing technology-driven functional apparel. However, we find few U.S. T&A mills have created a vertical integration model that covers three or more different nature of products.

Fourth, U.S. T&A mills have shifted from only making products to also offering various value-added services. Notably, the majority of companies included in the OTEXA “Made in the USA” database reported having the in-house design capability, including apparel mills (86%), fabric mills (80%), yarn manufacturers (61%), home textiles manufacturers (71%) as well as those making technical textiles (91%). U.S. T&A mills also commonly describe themselves as “innovators” and “solutions providers” on their websites to highlight that the nature of their core business is to serve customers’ needs rather than just “making” physical products.

Fifth, exporting has become an important economic activity of U.S. T&A manufacturers today. Notably, of all the 122 U.S. T&A manufacturers in the OTEXA “Made in the USA” database, as many as 70.5% reported engaged in export, a trend which echoes the rising value of U.S. textile and apparel exports in recent years. Regarding the particular export behaviors of U.S. T&A mills, several patterns are interesting to note:

  • U.S. textile mills (76%) are more actively engaged in export than those that make apparel products only (37%).
  • Larger U.S. T&A mills overall had a higher percentage engaged in export than those manufacturers smaller in size.
  • The Western Hemisphere is the dominant export market for U.S. yarn, fabric, and home textile mills, whereas the export markets for U.S. apparel mills and technical textile producers are relatively more diverse.
  • Except for apparel producers, the export diversification strategy is commonly adopted by U.S. T&A mills. As many as 77% of yarn manufacturers included in the OTEXA database reported exporting to three or more different markets in the world. Likewise, around 40% of the fabric, home textiles, and technical textiles mills did the same.
  • Free trade agreements support U.S. T&A exports. A high percentage of U.S. T&A mills that reported exporting to the Western Hemisphere said they took advantage of NAFTA and CAFTA-DR, two primary U.S. free trade agreements with the region. The utilization of NAFTA and CAFTA-DR is particularly high among U.S. yarn producers (83.3%).

Additional reading: Kendall Keough and Sheng Lu. (2020). ‘Made in the USA’ textiles and apparel – Key production and export trends. Just-Style.

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]

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

1

4

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.

2

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.

1

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).

6

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.

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

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

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

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

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

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

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

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

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

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

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

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

Q .: How is China adapting?

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

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

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

Q .: Why is that?

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

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

Q .: For price?

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

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

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

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

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

Top Ten Most-read Blog Posts on Shenglufashion in 2019

download.png

#1 WTO reports world textile and apparel trade in 2018

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

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

#4 Timeline of trade policy in the Trump administration

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

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

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

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

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

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

Happy Holidays!