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:

Tariff War + Coronavirus = U.S. Apparel Imports from China Plummet in January 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.

[This post will be regularly updated]

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.

Outlook 2020– Key Issues to Shape Apparel Sourcing

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In January 2020, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2020–Key Issues to Shape Apparel Sourcing Management Briefing. Below is my contribution to the report. All comments and suggestions are more than welcome!

What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2020, and why?

In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2020. The rising trade barriers and geopolitical tensions, from the evolving U.S.-China trade tensions, social instability in Hong Kong, to the Brexit and U.S. election-year trade politics, could make it particularly difficult for companies to plan their businesses in both the short run and long term. As an alarming sign, the World Trade Organization (WTO) recently reported a 37% increase in restrictive trade measures taken by G20 members in 2019 compared with a year ago.

Amid the rising protectionism, the economic outlook in 2020 is also a mixed picture, at best. The latest forecasts by the World Bank and International Monetary Fund (IMF) show that, while developing economies as a whole are likely to drive much of the growth, leading apparel consumption markets in the world, including the United States, China, Japan and members of the European Union, could ALL experience slower GDP growth in 2020 than in 2019. This casts a shadow on companies’ plans for new investment and their pace of global expansion.

Meanwhile, at the micro-firm level, several issues will present as both challenges and opportunities for apparel companies in 2020. For example, moving sustainability to the next level, from product design, selection of raw material, sourcing practices to collecting and recycling used clothing, will require substantial financial investments and other resources from companies. However, as one of my recent studies indicate that sustainable apparel market has experienced particularly rapid global growth in the past few years worldwide, meaning it could be a promising growth area for apparel companies too. Likewise, more and more apparel companies are using big data and business analytics tools to gain new insights into consumers’ purchasing behaviors, competitors’ pricing practices, and even forecasting next season’s fashion trends. (As a scholar, I can also recall my studies in recent years increasingly leverage inputs from big data and business analytics tools). That being said, companies that cannot afford an in-house team of data scientists or getting access to these powerful big-data tools, unfortunately, will be at a significant disadvantage in the market competition. To a degree, the apparel business is becoming more resources-intensive in the 21st century with an ever-higher market-entry barrier.

What’s happening with sourcing? How is the sourcing landscape likely to shift in 2020, and what can apparel firms and their suppliers do to stay ahead and remain competitive into the future?

The big-landscape of apparel sourcing in 2020, interesting enough, seems to be quite similar to the “quota era” 30 years ago. Even though physical quota is no longer in place, how much products apparel companies can source from a particular country is still largely capped—except this time the quantitative restriction is imposed by a more complicated sourcing matrix, which includes factors ranging from souring cost, speed to market, production capacity, flexibility to compliance risk.

Like it or not, apparel sourcing in 2020 could become even more diversified and fragmented because of two interconnected consensuses among companies.

First, it is no longer a secret that Western fashion brands and retailers are reducing their exposure to sourcing from China, given the current business environment. For example, according to the 2019 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association in July, a new record high of 83 percent of respondents expect to decrease sourcing from China over the next two years. Meanwhile, for the first time since 2014, China is found no longer always the top supplier for U.S. fashion companies. In fact, around 25 percent of respondents indicate that they source MORE from Vietnam than from China in 2019, an emerging trend that could continue in the years ahead.

Second, no single country has emerged to become the “next China” for apparel sourcing. I have been examining the patterns of world clothing trade and specific apparel sourcing trends in key markets such as the US, Japan, and the UK. One common finding is that China’s lost market shares have to be fulfilled by a group of countries altogether, primarily because of capacity issues. Even though it remains a question mark how much and how quickly sourcing from China will continue to drop in the next five years, it is for sure that the population in Vietnam, Bangladesh, and other countries deemed as China’s alternatives will NOT double. This explains why many fashion brands and retailers both in the US and EU say they will continue to maintain a “relatively diverse” sourcing base, and in the context of the apparel industry, it actually means sourcing from more than 20 or even 50 different countries or regions.

Third, while companies are sourcing from more countries, many of them are working with fewer vendors. The primary considerations include reducing cost, driving compliance, improving operational efficiency and strengthening the relationship with strategic supply chain partners.

Additionally, we may pay attention to the reaching or implementation of several free trade agreements (FTAs) in 2020 that involve important apparel importing and exporting countries. Notably, FTAs not only offer preferential duty treatment but also play a critical role in shaping new supply chains and maintaining existing ones. For example:

  • The potential reaching of the Regional Comprehensive and Economic Partnership (RCEP) may strengthen further the regional textile and apparel production and trade network among Asian countries. The agreement could also accelerate China’s transition from being an apparel exporter to a critical textile supplier for many Asian-based apparel-exporting countries.
  • Hopefully, the EU-Vietnam Free Trade Agreement (EVFTA) will be implemented in 2020. However, EU and US apparel companies may have to compete more intensely for sourcing orders from Vietnam then, resulting in higher sourcing costs and potentially greater risks in social compliance.
  • The U.S.-Mexico-Canada Free Trade Agreement (USMCA) is on the track to be ratified by all parties and go into force in early 2020, but with no 100% guarantee. However, the newly added 16-year “sunset clause” and the “6th-year” review mechanism could open new debates and controversies on the agreement. Further, as the new agreement includes higher labor and environmental standards and stronger enforcement mechanisms for these rules, how will these provisions affect the apparel industry, from production cost to compliance risk, is worth watching.
  • Under which terms the UK will leave the European Union (i.e., Brexit) could also result in a shift in apparel sourcing. In the no-deal Brexit scenario, in particular, the temporary tariff regime is likely to result in overall lower tariff rates for products sourced from countries like China that currently do not have a free trade agreement with the EU. However, UK companies could face a higher tariff when they source products from the EU, Turkey or countries that currently have a free trade agreement with the EU. As always, there will be both winners and losers in a delicate way.