International Trade – Page 12 – FASH455 Global Apparel & Textile Trade and Sourcing

JCPenney’s Global Sourcing Practices

In the class, we discussed how global U.S.-based apparel companies have become. The typical business model in the U.S. apparel industry today is “producing anywhere in the world and selling anywhere in the world”. Here is one more example: JCPenney.

JCPenney has been importing products from across the world since 1959. The company’s sourcing organization has eight offices globally aside from its office in Dallas. The offices are in Shanghai, Hong Kong, Korea, Bangladesh, Guatemala, Pakistan, India, and Taiwan.

In terms of its future growth opportunities, JCPenney identifies the following three:

Omnichannel: Implementing the necessary tools, processes and technologies that enable us to serve the customer no matter how they’re shopping with us. By creating a seamless shopping experience in stores and online, customers are likely to shop and spend more at JCPenney.
Center Core: Strengthening and revitalizing the highest traffic area in the store to become a leading destination for women’s shoes, handbags, fashion jewelry, intimate apparel and accessories, which are anchored by two very strong businesses: Sephora inside JCPenney and the Fine Jewelry store.
Home: Restoring our Home store to its previous sales productivity with a compelling assortment of value-driven products backed by a promotional strategy that builds customer loyalty and increases traffic.

(Source: JCPenney’s 2014 Annual Report)

What role do you see global sourcing could play in helping JCPenney achieve these strategic development goals? How do you understand the statement that sourcing is part of a company’s overall business strategy? Do you think JCPenney will likely to source more “Made in USA” products in the future? Please feel free to share your views.

Potential Impact of TPP on the Textile and Apparel Sector: A Summary of Recent Studies

(Picture credit: Lu, S. (2015) Does Japan’s accession to the Trans-Pacific Partnership mean an opportunity or a threat to the U.S. textile industry? A quantitative evaluation, Journal of the Textile Institute, 106(5), 536-549.)

With the conclusion of the Trans-Pacific Partnership (TPP) negotiation on Oct 5, 2015, it is time to think about its potential impact. Specifically for the textile and apparel (T&A) industry, the followings studies may offer some hints (to read more, you can click each title):

Trade Statistics

Statistics show the 12 TPP partners altogether imported $65 billion worth of textiles and $154 billion worth of apparel in 2013, which accounted for a world import share of 20 percent and 32 percent, respectively (WTO, 2015). In 2014, around 55 percent of U.S. textile and apparel exports (or $13.3 billion) went to the other 11 TPP partners, and 17 percent of U.S. textile and apparel imports (or $17.8 billion) came from the TPP region (OTEXA, 2015).

Impact of TPP on U.S. Textile and Apparel Manufacturing: A Preliminary Estimation

TPP overall will have a negative impact on U.S. domestic textile and apparel manufacturing. In all simulated scenarios, the annual manufacturing output in the United States will decline by $846 million–$3,780 million for textile and $1,154 million–$1,828 million for apparel than otherwise.

2.The “yarn-forward” rule may not substantially benefit U.S. domestic textile and apparel manufacturing as some people had suggested, for two reasons: 1) results show that Vietnam is more likely to use Japanese textiles than U.S. textiles when yarn-forward rule is in place. 2) U.S. apparel imports from Vietnam directly compete with those imported from NAFTA and CAFTA regions, the largest export market for U.S.-made yarns and fabrics. When NAFTA and CAFTA’s market share in the U.S. apparel import market is taken away by Vietnam, U.S. textile exports to NAFTA and CAFTA will decline anyway, regardless of whether Vietnam uses U.S.-made textiles.

3.Results suggest that compared with the “yarn-forward” rule, development of Vietnam’s local textile industry will have an even larger impact on the future of U.S. domestic textile and apparel manufacturing. Particularly, when Vietnam becomes more capable of making textile inputs by its own, not only Vietnam’s overall demand for imported textiles will decline, but also Vietnam’s apparel exports will become even more price-competitive in the U.S. as well as the world marketplace.

“Import Sensitive” Clothing and the TPP X-basket : What might include

Based on examining three recent trade programs, including: U.S. International Trade Commission (USITC) monitoring program on T&A imports from China based on the U.S.-China Textile Memorandum of Understanding (MOU) (2008—present), Office of Textiles and Apparel (OTEXA) monitoring program on U.S. T&A imports from Vietnam (2007-2008) and U.S. textile safeguard measures against China (2003-2005), it seems “import sensitive” T&A in the United States mostly refer to cotton and man-made fiber apparel and fabrics. OTEXA product Code 338, 339, 340, 345, 347, 348, 352, 447, 638, 639, 640, 645, 646, 647, 648 and 652 are most likely to be included in the TPP X-basket.

Because Vietnam’s T&A exports to the United States heavily concentrate on these “import sensitive” T&A categories, the X-basket has the potential to substantially affect the actual trade liberalization that can be enjoyed by the T&A sector under TPP:

By the most conservative estimation, i.e. the X-basket only covers Category A “import sensitive” apparel products, it will affect about 41.6 percent of U.S. apparel imports from Vietnam (or 38.7 percent of total U.S. T&A imports from Vietnam) if trade pattern remains the same as in 2014.
In the worst case, i.e. the X-basket covers all “import sensitive” T&A products identified by this study, it will affect about 70.0 percent of total U.S. T&A imports from Vietnam, if trade patterns remains the same as in 2014.

2015 US Fashion Industry Benchmarking Study

The survey results show that TPP matters for the U.S. fashion industry, with as many as 79 percent of respondents saying implementation of the agreement will impact their business practices. Specifically:

72 percent expect to source more textiles and apparel from TPP partners, suggesting the imminent impact of TPP for the U.S. fashion industry could be trade creation.
Fewer than 10 percent expect to source less from non-TPP members after the implementation of the agreement, suggesting the trade diversion effect of TPP could be limited.
48 percent expect to strategically adjust or redesign their supply chain based on TPP, implying TPP could be a game changer and has the potential to shape new patterns of textile and apparel trade in the Asia-Pacific region in the long term.
However, as few as 7 percent expect to export more products to TPP partners, while only 10 percent expect to invest more in TPP partners (building factories, operating retail stores and e-commerce operations) after implementation of the agreement. It seems the U.S. fashion industry hasn’t focused much on TPP’s potential to promote exports and achieve greater market access.
Additionally, 45 percent say the TPP Short-Supply List should be expanded, and comments indicate the proposed “yarn-forward” Rule of Origin is a major hurdle to the industry realizing real benefits from the agreement. In fact, as many as 83 percent support or strongly support abandoning the strict “yarn-forward” Rule of Origin and adopting a more flexible one in future FTAs (Figure 21). This suggests that the benefit of TPP for the U.S. fashion industry and the utilization of the agreement will largely depend on the Rule of Origin. In particular, there is a strong call among U.S. fashion companies to make the textile and apparel Rule of Origin less restrictive and more flexible in TPP.

Why does the US Textile Industry Want Yan-forward Rule of Origin (RoO) in TPP?

The US textile industry insists yarn-forward RoO in TPP is not because they expect a substantial increase of textile exports to Vietnam as the case of NAFTA and CAFTA which help capture the export markets in Mexico and Central America. But rather it is because:

1) Without yarn-forward, situation will get even worse. Particularly, a less restrictive RoO will make Vietnam’s apparel exports which contain textiles made in China, Taiwan or South Korea qualified for duty free access to the US market. Definitely this will be a more imminent and bigger threat to the US textile industry than simply facing competition from Vietnam’s apparel which contains Japanese made textiles. And still many US textile companies don’t treat the Japanese textile industry very seriously, although I think they should. Remember, Japan currently is the fourth largest textile supplier to Vietnam and the NO.1 textile supplier to China.

2) With yarn-forward RoO in place, at least US textile companies can invest in Vietnam (remember, globalization is about movement of capital as well. Many apparel companies in Mexico and Central America actually are invested by US companies). Without yarn-forward RoO however, Vietnam can simply rely on imported textiles as the case mentioned in (1) and there will be no incentive for US textile companies to move factories to Vietnam (meaning, capital holders will lose).

So overall yarn-forward RoO may win a few more years for the US textile industry. But in the long run, it is my view that the US textile production and its exports to the Western Hemisphere countries may still inevitably decline (especially those output to be used for apparel assembly purposes) after the implementation of TPP. In the 21st century, the nature of competition is supply chain v.s. supply chain.

Regional Production-Trade Network Remains an Important Feature of Global Textile and Apparel Trade

Regional production-trade network (RPTN) refers to a vertical industry collaboration system between countries that are geographically close to each other. Within a RPTN, each country specialized in certain portions of supply chain activities based on its respective comparative advantages so as to maximize the efficiency of the whole supply chain.

There are three major textile and apparel (T&A) RPTNs in the world today:

Asia: more economically advanced countries/regions such as Japan, South Korea, Taiwan, Hong Kong and China supply textiles to the less economically developed countries such as Vietnam, Bangladesh and Sri Lanka for apparel manufacturing, where the wage level was much lower. On the other hand, Japan is a leading apparel importer and consumption market in Asia.
Europe: among EU members, textile inputs can be supplied by developed countries in Southern and Western Europe such as Italy and Germany. In terms of apparel manufacturing in the European Union, low and medium-priced products can be undertaken by developing countries in Southern and Eastern Europe such as Poland and Romania, whereas high-end luxury products can be produced by Southern and Western European countries such as Italy and France. Furthermore, finished apparel can be shipped to developed EU members such as UK, Germany, France and Italy.
America: within the region, the United States as a developed country supplies textile materials to developing countries in North, Central and South America (such as Mexico and countries in the Caribbean region), which assemble imported textiles into apparel by taking advantage of the local low labor cost. The finished apparel articles are eventually exported to the United States for consumption.

Latest data from the World Trade Organization (WTO) shows that RPTN in the above three regions remain an important feature of today’s global T&A trade as the graphs shown below:

(Note: Data comes from the World Trade Organization)

Particularly, three specific trade flows are worth watching:

One is Asian countries’ growing dependence on textile supply from within the region, which rose to 90.2% in 2014 from 87.7% in 2000. This is a reflection of a growing integrated T&A supply-chain in Asia. As a result, apparel “Made in Asia” is becoming even more price-competitive in the world marketplace today and this has posted pressures on the operation of the T&A RPTNs in EU and America.

Second one is the stable intra-region trade pattern both for textile and apparel in EU. In 2014, 58.8% of EU’s (28 members) textile imports and 46.2% of apparel imports came from other EU members; at the same time, 68.8% of EU’s (28 members) textile exports and 74.7% of apparel exports also went to other EU members.

Additionally, developing countries in North, Central and South America still heavily rely on regional supply of textile inputs; at the same time, their finished apparel are also mostly consumed within the region. Data show that 80.3% of American countries’ textile imports still came from within the region in 2014; at the same time, 88.9% of American countries’ apparel exports were also shipped to the region, mostly the United States and Canada as the final consumption market.

Sheng Lu

Global Trade of Used Clothing (Updated: October 2015)

Please also check the updated study: Why is the used clothing trade such a hot-button issue?

United States

Generates 1.4 million tons of used clothing annually
Exports 800,000 tons of used clothing annually
20% of used clothing sold domestically in thrift stores
Non-wearable material of used clothing is reprocessed into fibers for upholstery, insulation, soundproofing, carpet padding, building and other materials.

Central and South America

Very large used clothing market in most countries
Imports of used clothing mostly come from the United States
Cotton wipers made from used clothing are exported back to the United States

Europe

Generates 1.5-2 million tons of used clothing annually
Large used clothing sorting centers located in Western and Eastern Europe
10-12% used clothing (only those top quality) sold in local secondhand shops

Africa

One of the largest used clothing markets in the world
80% of population wear secondhand clothes
Most used clothing imported from the United States, Europe, India and Pakistan

East Asia

Most used clothing is collected in Japan, South Korea and Taiwan
Countries in the region also import used clothing from the United States, Europe, India and Pakistan
Some large used clothing sorting centers are located in Malaysia and Philippines.

India and Pakistan

Residual used clothing are imported and sorted by grading companies
Wearable used clothing is extracted from “mixed rags” and sold locally or shipped to Africa
Recycled yarns are used to make new sweaters
Cotton wipers made from used clothing are exported to the United States

Australia

Used clothing is collected and sold through local shops and exported

Source: Planet Aid (http://www.planetaid.org); UNComtrade (2015)

USTR Adjusts Language of TPP Negotiation Objectives for Textile and Apparel

On September 22, the U.S. Trade Representative Office (USTR) releases a detailed summary of its latest TPP negotiation objectives. Specifically for the textile and apparel chapter, compared with the negotiation objectives released in 2014, some wording changes are made this time:

Does the change imply that the U.S. side has agreed to allow more exceptions to the “yarn-forward” rules of origin in TPP, but in the format other than “short supply list”? For example, will it be “earned import allowance” or tariff preference level (TPL)?

On the other hand, does the change imply that the “short supply list” under TPP will be stricter than previously expected? (in the 2014 version of the negotiation objectives, it read like the “short supply list” may include those products that are not commercially available in the US but are commercially available in other TPP members. However, in the 2015 version, only those products that are absolutely not commercially available in the whole TPP region are eligible for the “short supply list”.)

Sheng Lu

Apparel Sourcing Opportunities in Madagascar and Mauritius

Please feel free to share your thoughts on the following discussion questions:

Why does the United States Agency for International Development (USAID) promote apparel sourcing from Africa?
From the video, how do you see the social and economic impact of the textile and apparel industry on Madagascar and Mauritius?
Do we need African Growth and Opportunity Act (AGOA)? Why or why not?
With regard to the status of the textile and apparel industry in Madagascar and Mauritius, anything shown in the video interests or surprises you?

China to Become the World’s Largest Apparel Market in 2019

According to forecast made by the Euromonitor, China will exceed the United States and become the world’s largest apparel market by 2019. Specifically, annual apparel sales in China will reach $333,312 million in 2019, an increase of 25% from $267,246 million in 2014. In comparison, apparel sales in the United States is estimated to reach $267,360 million in 2019, which is only 3% higher than $260,050 million in 2014.

However, it shall be noted that China seems to be an even more competitive apparel market than the United States. For example, no apparel brand was able to achieve a market share more than 1% in 2014 in China, whereas in the United States, market shares of several leading apparel brands exceeded 2%. Moreover, domestic brands overall outperform international brands in the Chinese apparel market.

On the other hand, despite its overall market size, as a developing country, dollar spending on apparel per capita will remain much lower in China than many developed economies around the world. In 2014, each Chinese consumer on average spent $240 on apparel versus $815 in the United States, even though apparel spending accounted for a larger share in household income in China (around 10%) compared with the United States (less than 3%).

Several personal thoughts based on the data:

First, it is the time that U.S. apparel companies/fashion brands should start to seriously think about their sourcing strategy specifically for the Chinese market.

Second, for many Chinese apparel companies, serving the domestic market will help them more effectively achieve functional upgrading (i.e. shifting from low-value added manufacturing to higher-value added functions such as design, branding and distribution) than through exporting.

Third, controlling sourcing cost will be as important in China as in the United States. When China’s applied tariff rate is still as high as 9.63% for textiles and 16.05% for apparel (WTO, 2015), U.S. fashion companies/fashion brands may not have many options but to use “Made in China” to serve the Chinese consumers. In the long run, however, “Made in China” shall be gradually replaced by “Made in Asia”, especially when several free trade agreements (FTAs) involving China eventually take into effect (such as CEPA). However, China may strategically use rules of origin in these FTAs and encourage apparel manufacturers in the region to use Chinese made textile inputs (just like what U.S. did in NAFTA and CAFTA). Nevertheless, either for managing the apparel supply chain based on “Made in China” or “Made in Asia”, it doesn’t seem U.S. apparel companies/fashion brands will easily enjoy competitiveness over their Chinese competitors.

Data source: Euromonitor Passport(2015)

2015 Top Markets Report for Technical Textiles and Apparel Released

The U.S. Department of Commerce recently released its first-ever market report for technical textile and apparel, covering product categories including: non-wovens, specialty and industrial fabrics, medical textiles and protective apparel. According to the report:

The U.S. exports of technical textiles totaled $8.5 billion or 46% of U.S. textile mill product exports in 2014.
By size, the top 10 export markets for U.S. technical textiles from 2015 to 2016 include: Mexico, Canada, China, Germany, Japan, Hong Kong, United Kingdom, Belgium, Brazil and Honduras.
North America is the largest regional consumer of technical textiles due to the presence of the majority of end-use industries. Europe and Asia Pacific follow North America in terms of current consumption; however, development in emerging markets including India, China, Japan, Korea and Taiwan is expected to increase overall technical textile demand. Among the best prospect in the emerging markets for U.S. companies are Vietnam, India, Taiwan and Brazil.
Major challenges facing U.S. technical textile exports include: 1) trade protection such as high tariffs and non-tariff barriers, such as import license requirements; 2) foreign competition and continual investment in research and development in many developing countries; and 3) lack of transparency by foreign customs agencies which could slow the flow of trade and lead to processing delays.

Eight country studies are provided by the report, including: Brazil, Canada, China, India, Korea, Mexico, Taiwan and Vietnam.

The full report can be downloaded from HERE.

Euratex Released Position Paper on Textile and Apparel Rules of Origin in T-TIP

The European Apparel and Textile Confederation (Euratex) recently released its position paper on textile and apparel (T&A) rules of origin in the Trans-Atlantic Trade and Investment Partnership (T-TIP). According to the paper:

First, Euratex supports “double transformation rules” as the basis of T&A rules of origin in T-TIP, with the accompany of flexibilities in some cases. In general, “double transformation” is equivalent to “fabric-forward” rules of origin, which is less restrictive than the “yarn-forward” rules of origin adopted in the United States. Euratex believes that “double transformation rules” is “aligned with market realities and developments of the European industry.”

In contrast, the National Council of Textile Organizations (NCTO) which represents the interests of the U.S. textile industry insists that T-TIP shall adopt the strict “yarn-forward” rule. Particularly, NCTO is worried that a less restrictive rules of origin in T-TIP will have ramifications for the negotiation of future FTAs, including the Trans-Pacific Partnership (TPP).

Second, Euratex opposes applying the “value-added rule” to the T&A sector in T-TIP. Based on the value-added approach, country of origin can be granted when “manufacture in which the value of all the materials used does not exceed certain % of the ex-works price of the products.” Value added is typically calculated based on a subtraction formula, i.e. value added=ex-works price of the product obtained minus the value of all the non-originating material.

Euratex does not think the “value added rule” will work for T&A, because: 1) “variability of the value of originating/non-originating products (fibers, yarns or fabrics) used in spinning or weaving or making-up” will make it practically difficult to calculate value added. 2) “the value added principle is uncontrollable as the added value can be influenced by many factors such as raw materials price, financing, exchange rate manipulations etc.”

Appendix:

Impact of TPP on U.S. Textile and Apparel Manufacturing: A Preliminary Estimation

Potential impact of the Trans-Pacific Partnership (TPP) remains a hot topic among the U.S. textile and apparel industry. A recent news report suggests that implementation of the agreement will negatively affect clothing manufacturers in LA, where most remaining U.S. apparel manufacturing capacity is located.

According to the news report, “small, independent apparel manufacturers (in LA) did not see big gains from TPP because they did not want to outsource their work, but it put them at a competitive disadvantage.” One local industry estimation quoted in the report claims that “Southern California’s apparel manufacturing will shrink an additional 20 percent if the TPP goes into effect.”

The report further says that “A key question for the apparel industry is whether the agreement includes a yarn-forward provision, which requires material to come from a TPP country in order to be duty-free.” However, the report does not explain why the “yarn-forward” rule could potentially benefit apparel manufacturing in the United States.

The followings are my personal preliminary estimation* of the potential impact of TPP on U.S. T&A manufacturing. Results show that, compared to the base year level in 2011:

TPP overall will have a negative impact on U.S. domestic textile and apparel manufacturing. In all simulated scenarios, the annual manufacturing output in the United States will decline by $846 million–$3,780 million for textile and $1,154 million–$1,828 million for apparel than otherwise.
The “yarn-forward” rule may not substantially benefit U.S. domestic textile and apparel manufacturing as some people had suggested, for two reasons: 1) results show that Vietnam is more likely to use Japanese textiles than U.S. textiles when yarn-forward rule is in place. 2) U.S. apparel imports from Vietnam directly compete with those imported from NAFTA and CAFTA regions, the largest export market for U.S.-made yarns and fabrics. When NAFTA and CAFTA’s market share in the U.S. apparel import market is taken away by Vietnam, U.S. textile exports to NAFTA and CAFTA will decline anyway, regardless of whether Vietnam uses U.S.-made textiles.
Results suggest that compared with the “yarn-forward” rule, development of Vietnam’s local textile industry will have an even larger impact on the future of U.S. domestic textile and apparel manufacturing. Particularly, when Vietnam becomes more capable of making textile inputs by its own, not only Vietnam’s overall demand for imported textiles will decline, but also Vietnam’s apparel exports will become even more price-competitive in the U.S. as well as the world marketplace.

*Note:1. The estimation is conducted based on the latest Global Trade Analysis Project (GTAP) 9.0 database which includes complete bilateral trade information, transport and protection linkages of 140 countries and 57 sectors. Four scenarios are estimated:

Scenario 1 (Tariff reduction only): assumes tariff rate for textile and apparel traded between the twelve TPP members are eliminated, whereas tariff rate for other textile and apparel trade flows remain unchanged.
Scenario 2 (Tariff reduction + yarn forward): assumes that in addition to tariff reduction among TPP members for T&A, Vietnam substantially increases tariff rate by 100 percent for textile imports from its leading suppliers that are non-TPP members (i.e. China, South Korea and Taiwan). This policy shock provides strong financial incentives for Vietnam to import less textile from non-TPP suppliers and instead import more from other TPP members—an equivalent effect as the yarn forward rule.
Scenario 3(Tariff reduction + Vietnam develops local textile industry): assumes that in addition to tariff reduction among TPP members for T&A, productivity of Vietnam’s textile industry increases by 10 percent whereas productivity of other sectors remain unchanged.
Scenario 4 (Tariff reduction + yarn forward + Vietnam develops local textile industry): this scenario combines all policy shocks mentioned in scenario 1-3, i.e. tariff rate for textile and apparel traded between the twelve TPP members are eliminated, Vietnam substantially increases its tariff rate by 100 percent for textile imports from its leading suppliers that are non-TPP members (i.e. China, South Korea and Taiwan) and productivity of Vietnam’s textile industry increases by 10 percent.

2. TPP1 includes Australia, New Zealand, Malaysia, Singapore, Burnie, Chile and Peru; NAFTA1 includes Canada and Mexico; CAFTA1 includes all other CAFTA members except the United States.

Sheng Lu

2015 US Fashion Industry Benchmarking Study Released

[Note: The 2016 U.S. Fashion Industry Benchmarking Study has been released]

The U.S. Fashion Industry Association (USFIA) released its 2015 benchmarking study today. The report examines the industry’s business environment and outlook, sourcing practices as well as U.S. fashion companies’ viewpoints on critical trade policy agendas. Among the key findings:

Overall, respondents remain optimistic about the five-year outlook for the U.S. fashion industry. Like last year, they are most concerned about increasing production or sourcing costs, but they expect increases to be more modest this year.
Consistent with our 2014 findings, U.S. fashion companies are NOT moving away from China, and Bangladesh remains a popular sourcing destination with high growth potential, though not quite as high as last year.
Companies continue to diversify their sourcing, though free trade agreements (FTAs) and preference programs remain underutilized.
The U.S. fashion industry is a critical Trans-Pacific Partnership (TPP) stakeholder, as close to 80 percent of respondents expect implementation will impact their business practices. However, the restrictive rules in the agreement limit the potential.
U.S. fashion companies continue to express interest in expanding sourcing in the United States in the next two years as they further diversify their sourcing. However, there is no evidence that companies are shifting their business models back to manufacturing.

This benchmarking study was based on a survey of 30 executives at the leading U.S. fashion companies from March 2015 to April 2015. The findings well reflect the views of the most influential players in the U.S. fashion industry, with 90 percent of respondents having more than 100 employees (including 60 percent with more than 1,000 employees).

The full report can be downloaded from HERE.

Euratex Releases Key Indicators of the EU Textile and Apparel Industry in 2014

In its annual release, the European Apparel and Textile Federation (Euratex) provides a skeletal statistical profile of the EU textile and apparel (T&A) in 2014. Most statistics cited in the report comes from the Eurostat.

Production

In 2014, T&A production in EU enjoyed a slight growth. Output of Man-made fiber (MMF), textile (yarns, fabrics and made-ups) and apparel went up by 2.8 percent, 2.8 percent and 1.9 percent respectively from a year earlier. In 2014, about 48 percent of T&A industry output was contributed by the textile sector, followed by the apparel sector (46 percent) and the MMF sector (6%).

Employment and productivity

Employment in the EU T&A industry continues to move downward in size, shrinking from 1.66 million in 2013 to 1.63 million in 2014. The most significant drop happened in the apparel sector (-1.7%) and the textile sector (-1.3%), whereas employment in the MMF sector increased by 5 percent. As one important factor contributing to the job decline, productivity (measured by the value of output per person) in the EU T&A industry has constantly improved since 2010, especially in the textile sector (+22%).

Consumption
Consumption data in 2014 is not available yet. Value of T&A consumption in EU (28) stood at €483.9 billion in 2013, a slight increase of 0.2 percent from 2012.

Trade

The two-way EU T&A trade enjoyed a robust growth from 2013 to 2014. Specifically, EU T&A exports increased by 3.5 percent (+2.2% for textile and +4.7% for apparel), which may attribute to the depreciation of euros against major currencies around the world. Interesting enough, EU’s T&A imports went up even faster in 2014—an overall 8.5 percent increase from 2013 (+7.6% for textile and +8.8% for apparel). With regard to EU’s key trading partners:

China remained THE dominant external T&A supplier for EU in 2014. However. China’s market share in the EU apparel import market declined from 39.7 percent in 2013 to 38.8 in 2014, whereas China’s share in the EU textile import market went up from 31.5 percent to 32.6 percent. It seems China is gradually shifting towards more textile exports and less for apparel along with its industry adjustment in recent years.
The United States remained the largest textile export market (11.1%) and the 5^th largest apparel export market (11.7%) for EU in 2014. In the meanwhile, the United States is the 5^th largest supplier of textiles to EU (however, U.S. market share declined from 4.0% in 2013 to 4.2% in 2014).
Bangladesh’s apparel exports to EU increased by 12.7 percent from 2013 to 2014, which helped Bangladesh gained 15.1% market share, up from 14.6% a year earlier.

From Trade Protection to Going global: the Changing Nature of the U.S. Textile Industry

Last week, Milliken & Company, one of the largest U.S. textile manufacturers founded in 1865, was featured in a Wall Street Journal article on the changing position of the U.S. textile industry on international trade. As you may remember in our case study, it was Roger Milliken, the chairman of the Milliken & Company, that founded the Crafted with Pride in the U.S.A. campaign in the 1980s. The campaign not only encouraged U.S. consumers to purchase more “Made in USA” products, but also intended to raise the public awareness of “import threat”. However, titled “free trade gains a convert”, the WSJ article argues that Milliken & Company today has “dropped protectionist stance as business went global”.

The article is a great reminder of the changing nature of the U.S. textile industry in the 21^st century. One of them is going global. According to the Hoover’s Academics (2015). Milliken & Company today operates about 40 manufacturing plants in the US, Belgium, China, France, and the UK, as well as sales and services offices worldwide. In particular, as mentioned in the WSJ article, China nowadays is seen as Milliken & Company’s future. The company opened an industrial-carpet factory near Shanghai in 2007 and also moved its Asia headquarters from Tokyo to Shanghai in 2012. And rather than using Chinese labor to make goods for export back to the United States, most Milliken & Company’s products made in China target the local market. As estimated by GlobalData, urbanization and an increase in house ownership in developing countries like China, India, Vietnam, Thailand and Indonesia have led to an annual 7.9% growth of carpets and rug sales in the region.

It is also important to recognize that Milliken & Company’s business model is no longer based on manufacturing basic yarn or fabrics used for apparel. Instead, the company mostly produces highly tech-driven and capital intensive industrial textiles as well as chemicals and colorants that offer more than 100 applications including infusing washable markers and liquid laundry detergent, killing bacteria, melting ice, and blocking UV rays. In many industry sources, Milliken & Comopany is even counted as a chemical company that directly competes with industry giants such as DuPont, Dow Chemical and Shaw industries. Overall, it is product and business innovation that drive this hundred-old company moving forward.

Additionally, we shall not misread title of the WSJ article—i.e. the U.S. textile industry 100% supports free trade with no condition. As a matter of fact, the rules regulating global textile and apparel trade are still very complicated and restrictive in nature. For example, the U.S. textile industry still insists strict yarn-forward rules of origin to be adopted in the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (T-TIP). However, many U.S. apparel companies and fashion brands see the restrictive yarn-forward rule of origin outdated and incompatible with the 21^st century global apparel supply chain.

No matter how, it is a noticeable change that the U.S. textile companies like Milliken start to shift their position on international trade, even just in a subtle way. Globalization has demonstrated its impact on shaping the new landscape of the U.S. textile industry and will continue to do so in the years to come.

Sourcing Opportunity in Africa

Although Africa only accounted for 0.55% of world textile and apparel (T&A) exports in 2013(WTO, 2014), numerous studies have suggested that this is a region of strategic importance as a sourcing base in the long term. For example, according to one recent study released by McKinsey & Company, among 40 surveyed apparel chief purchasing officers from January to February 2015, around 40 percent expect to be sourcing a greater share of their portfolio from sub-Saharan Africa in the next 5 years.

Africa is gaining attention as a sourcing base largely because of its growing working-age population, which is expected to surpass China today by 2035 (Note: In comparison, affected by its one-child policy, China’s labor pool could shrink by one-fifth over the next 50 years). The current wage level in Africa is around USD 120 to 150 monthly for garment workers, higher than Bangladesh (USD 91/month), but lower than Vietnam (USD 254/month) and China (USD 324/month).

However, sourcing from Africa is not without challenges. One big disadvantage of African countries when competing with “factory Asia” is its nascent local textile industry, meaning most fabrics and raw material needed for apparel assembling in Africa has to be imported. As reported by the McKinsey & Company study, among those surveyed companies which involved in sourcing from Sub-Saharan Africa, only around 50% directly source from the region, 15% source via Asian suppliers’ headquarters and 32% source via agents.

Poor infrastructure in Africa further amplifies the problem of heavy reliance on imported fabrics, trims and other supplies. For example, It can add up to 40 days in transit, for fabrics manufactured overseas to come from abroad and make their way through customs and to the factory in Africa.

Look into the future, the collaboration between local governments, suppliers and buyers is suggested as the key to fully tap the potential of Africa as a sourcing base. Particularly, the McKinsey & Company report suggests US and EU-based apparel companies to evaluate Africa as a strategic option and think about the region beyond the next 2-3 years. Improving workers’ productivity, upgrading the industry to go beyond cut-make-and-trim (CMT) and establishing long-term partnership with buyers are suggested to be prioritized.

TPP Textile Negotiation Updates (March 2015)

According to Inside US Trade, negotiators continued their work on the technical details of the textile chapter under the Trans-Pacific Partnership (TPP) during the latest round of negotiation in Hawaii. Although progress has been achieved, key issues remain unsolved. Exceptions to Yarn-Forward Rule of Origin Since the 807A program under the Caribbean Basin Imitative (CBI) enacted in 1998, the so called “yarn-forward” rule of origin has been adopted in almost all free trade agreement (FTA) and trade preference program (TPA) reached between the United States and its trading partners. “Yarn forward” rule requires that each step of apparel production from spinning of the yarn must take place in one of the FTA countries. At the same time, FTA/TPA often adopt exceptions in addition to “yarn-forward” rule so as to provide flexibility to importers, especially in the case when certain textile and apparel products are not available in commercial quantities from the FTA/TPA region. It is almost certain at this point that TPP will continue to adopt the “yarn forward” rules of origin. However, what kind of exceptions to the yarn forward rule will be allowed in TPP remain unclear: 1) How long will be the “short supply” list in TPP? Short supply list is a mechanism which allows fibers, yarns, and fabrics determined not to be available in commercial quantities in a timely manner from within the FTA partner countries to be sourced from outside the countries for use in qualifying textile and apparel products. According to Inside US Trade, some TPP countries want to declare the short-supply list complete as soon as possible so that they can shift the discussion to other possible exceptions to the yarn-forward rule. However, others doubt that the U.S. would be willing to contemplate additional exceptions and therefore believe that the best approach is to keep the short-supply list open and try to add as many products as possible. 2) Whether there will be other exception mechanisms in TPP in addition to the “short supply” list? According to Inside US Trade, there were some discussions on creating a separate mechanism such as the tariff-preference levels (TPL) in TPP. TPL allows for a certain quantity of textile and apparel goods (usually yarns, fabrics and cut pieces) from a third-country (a country who is not a party to the agreement) to qualify for the FTA benefits. Additionally, it is more than just Vietnam that is seeking more exceptions to the “yarn forward” rule in TPP. For example, Australia and New Zealand are also doing so, which may be in large part for tactical reasons — essentially holding up the textile talks as leverage to secure acceptable outcomes in other areas that are more important to them, for instance, agricultural market access or intellectual property. Tariff Phrase-out Mechanism Inside US Trade says that U.S. is sticking to the framework that it laid out in its initial tariff offer, which put products into three categories subject to different phrase-out schedule:

X-basket, which covers the most sensitive products that would be subject to an initial cut upon entry into force, but then remain in place until they are eliminated in the tenth year for knit apparel and fifteenth year for woven apparel
B-basket, which consists of slightly more sensitive apparel items that would be subject to a linear tariff phase-out over five years
A-basket, which consists of least sensitive items whose tariff rate would go to zero immediately upon TPP entries into force

Key questions remain as to which items the United States will place into what basket. Other issues in the textile chapter The TPP textile chapter may also include languages on the following two issues: 1) a special safeguard mechanism under which the importing country can raise tariffs up to the most-favored nation (MFN) level in the case of an import surge; 2) customs language on the inspection mechanism.

Mexican New Import Rules on Textiles and Apparel Raise Concerns

In January 2015, Mexico announced a set of new measures aimed at combating “unfair” trade practices in T&A imports and enhancing the competitiveness of domestic T&A sector in the face of increasing foreign competition.

The proposed measures will particularly target those imports considered to be “undervalued” by the Mexican government. According to Inside US Trade and Sourcing Journal Online, one of these measures is to establish a minimum reference price for imported T&A products. If shipments enter at below that price, they would be subject to an investigation by the Mexican government that could lead to the imposition of additional duties and taxes. To be noted, the proposed new measures will be taken separately from traditional trade remedy measures such as anti-dumping, countervailing duty and safeguard.

Other proposed measures intend to strengthen custom enforcement, including:

Mexico will required a mandatory registry for T&A imports. A similar registry system has been required for footwear;
Mexico will postpone the import duty reduction that was expected to be implemented at the beginning of 2016 on 73 apparel items and seven textile made-ups. Originally slated to enter into force on January. 1, 2013, the duty reduction from 25 percent to 20 percent has been twice postponed for one-year periods and will now be delayed until 2018;
Importers will be required to provide advance notice of shipments to the Mexican Economy Secretariat in the future;
Mexico will break down the current eight-digit tariff lines for textile and apparel products into 10 digits, which an industry source said would allow tariff rates to be more specific in light of the fact that apparel products have evolved to be more specialized;

Moreover, Mexico will implement a new financing mechanism with total available credit of 450 million pesos (around $30 million USD) over the next 12 months to help the domestic T&A industry (especially small- and medium-sized enterprises) upgrade their machinery and equipment, pursue innovative strategies and develop new products. The Mexican Service Agency for the Commercialization and Development of Agricultural Markets (Aserca) will further support the purchase of cotton from domestic growers by textile manufacturers.

According to WWD, the US T&A industry has three major concerns about Mexican’s proposed measures: one is the potential delay in custom clearance and more complicated documentation requirements; second is the additional tariff rate and increased cost of exporting from the United States or anywhere else in the world to Mexico; third is the lack of policy transparency adding to the potent business risks.

Industry Background

T&A industry accounted for 3.7 percent of Mexico’s GDP in 2013 (1.3 percent for textiles and 2.5 percent for apparel). About 415,000 workers directly employed in the sector in 2013, among which 74 percent worked for the apparel sector.

One important feature of Mexico’s T&A industry is the so called “Maquiladora” operation: simple sewing of garments made from imported fabrics and using cheap labor. The “Maquiladora” operation is largely coordinated by US-based apparel brands and retailers. Most of “Maquiladora” factories are located in the free trade zones, in which equipment and imported materials (such as fabrics) can be duty-free. Output of “Maquiladora” are exported, mostly to the United States.

Mexico imported $8.6 billion T&A in 2013, among which $2.4 billion were fabrics, followed by made-up textiles ($0.55 billion) and yarns ($0.39 billion). This pattern reveals Mexico’s heavy reliance on imported textiles due to limited domestic textile manufacturing capacity.

At the same time, Mexico’s apparel imports increased from $2.4 billion in 2008 to $2.9 billion in 2013. Particularly, Mexico’s apparel imports from China surged by 558.8 percent between 2008 and 2013. In 2013 alone, apparel imports from China went up by 42.1% to $0.97 billion. It is said that China is the main target of Mexico’s proposed new import measures.

[Comment for the post is closed]

Pattern of U.S. Textile and Apparel Imports (Updated: February 2015)

Total U.S. textile and apparel imports enjoy steady growth from 2000 to 2014. From 2013 to 2014, value of apparel imports increased 2.5 percent and imports of fabric increased 5.4 percent. However, value of fiber imports declined 1.9 percent over the same period. Almost all fastest growing import categories from 2004 to 2014 are basic apparel.

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 76.1 percent of total U.S. textile and apparel imports in 2014. Fabrics and yarns accounted for 5.8 percent and 1.3 percent respectively.

While developing countries dominated apparel supply to the United States in 2014, developed countries remain important suppliers of textiles. For certain industrial textile products such as non-woven textiles, nearly 50 percent of imports still came from European Union (28), Canada and Japan. This pattern reflects different product nature of apparel (labor intensive) and textiles (capital intensive) as well as the respective comparative advantage of developing and developed economies.

Overall, pattern of apparel imports is in parallel with apparel retail sales in the U.S. market. This reflects the fact that demand for imports is largely shaped by macro-economic conditions. It should also be noted that despite the heated discussion on “reshoring” apparel manufacturing in the U.S., apparel imports is NOT declining.

By value, China accounted for 38.9 percent of total U.S. textile and apparel imports in 2014, which was slightly lower than the level of 39.8 percent in 2013. It should be noted that China’s market shares significantly varies by category. Within the total 167 number of textile and apparel product categories complied by the Office of Textiles and Apparel (OTEXA), China enjoyed market share increase for 119 categories and suffered market share losses for 49 categories from 2004 to 2014 (many are sewing thread products).

Exclusive Interview with Erin Ennis, Vice President, US-China Business Council

Erin Ennis has been Vice President of the US-China Business Council (USCBC) since May 2005. In that position, she directs the Council’s government affairs and advocacy work for member companies and oversees the Council’s Business Advisory Services. She also leads a coalition of other trade associations on issues of interest to companies doing business with China. Founded in 1973, the US-China Business Council provides extensive China-focused information, advisory, and advocacy services, along with comprehensive events, to nearly 250 US corporations operating within the United States and throughout Asia.

Prior to joining the Council, Ms. Ennis worked at Kissinger McLarty Associates, the international consulting firm headed by former Secretary of State Henry Kissinger and former White House Chief of Staff Thomas “Mack” McLarty. At Kissinger McLarty, Ms. Ennis was responsible for implementing strategies for international business clients on proprietary trade matters, primarily in Vietnam and Japan.

Before entering the private sector, Ms. Ennis held several positions in the US Government. From 1992 to 1996, Ms. Ennis was a legislative aide to former U.S. Senator John Breaux, working on international trade and commerce. She also worked on health care issues during the Senate’s consideration of President Bill Clinton’s health care reform, an issue on which Senator Breaux actively worked to broker a compromise.

At the Office of the US Trade Representative from 1996 to 2000, Ms. Ennis first worked in Congressional Affairs on Asia issues, including annual approvals of China’s most favored nation status and the ill-fated 1997 push to renew presidential “fast track” negotiating authority. Beginning in 1998, she was assistant to Deputy US Trade Representative Richard Fisher, who led US trade negotiations and enforcement with Asia, the Americas, and on intellectual property rights.

Interview Part

Sheng Lu: Our students wonder whether increased trade with China is good or bad for the U.S. economy. Many of them consider the U.S. trade deficit with China to be a serious problem and they are worried about the loss of U.S. jobs to China. What’s your view and insights?

Erin Ennis: We should be realistic about what trade balance data shows and what it doesn’t. There is almost no correlation between a high US trade deficit and a strong US economy. In fact, we tend to have the lowest trade deficits when our economy is doing the worst – take a look at the data from the recent global recession between 2009 and 2010 for example versus what the trade deficit looked like in the 1990s when our economy was booming. We also don’t save much of our earnings, which also factors into the data.

Focusing on a single country as the source of our concerns leads to an inaccurate view that what other countries do has more of an effect on our economy than our own domestic policies. We should indeed be concerned about job creation in the US, but to do that, we should be implementing policies that ensure that we have as competitive an economy as possible. That will require a combination of education, energy, tax and other domestic policies. It also requires our economy to be as open as possible and pursuing market openings globally so that US goods and services have opportunities for sales overseas.

Sheng Lu: The USCBC 2014 China Business Environment Survey describes China as “an extremely difficult business environment along with a vital, growing market for foreign businesses”. We all know that China is an emerging market, but what are the top challenges faced by U.S. companies doing business in China?

Erin Ennis: Our survey goes into detail about the various challenges that companies experience in China. Competition with Chinese companies was the top issue in 2014, an issue that was not only cited independently, but also factors into several other issues that were cited such as foreign investment restrictions, uneven enforcement of laws, licensing disparities, and discrimination in the market. IPR enforcement is also a top concern for companies. Beyond those, there are also issues that both Chinese and foreign companies are grappling with in the market: a very tight labor market and significant increases in the cost of doing business.

Sheng Lu: Related to the previous question, two numbers in the USCBC survey seem to be very interesting: Although 90 percent of respondents consider rising costs in China a concern, only 14 percent of respondents say they actually reduced or stopped planned investment in China in the past year. How to explain this phenomenon?

Erin Ennis: The simple answer is that companies don’t make decisions on where to do business solely on cost. Most companies report that they are doing business in China to access Chinese customers. While costs may have increased, their opportunities for increased sales have increased too. China’s market grew at about 7% in 2014 – still a rapid rate of growth, even though it is slower than in previous years. Companies are likely to stay in the market, even as costs increase, to continue to access those opportunities.

Sheng Lu: While it is under heated discussion whether China should join the Trans-Pacific Partnership (TPP) or not, USCBC suggests that a successful conclusion of the Bilateral Investment Treaty (BIT) negotiations should be the top priority in the US-China economic relationship. What is BIT and why does it matter for U.S. companies?

Erin Ennis: The short answer is that a BIT matters because it will require China to provide the same treatment to foreign companies that it provides to domestic ones and it will require China to open many sectors of its economy to foreign investment that remain closed. More detailed explanations of what the BIT is and why it matters can be found on USCBC’s website here: https://www.uschina.org/advocacy/bilateral-investment-treaty.

Sheng Lu: December 2015 will mark the 15th anniversary of China’s accession to the World Trade Organization (WTO). In your view, what are the most important changes in US-China economic relations since China joins the WTO?

Erin Ennis: China’s WTO access required it to open significant parts of its economy to foreign companies. In general China has done a good job of implementing those commitments. As a consequence, China has grown to be the United States’ third largest trading partners after Canada and Mexico, with whom we have a free trade agreement. More needs to be done, however, to open China’s market. The US-China BIT negotiations will be a useful tool in achieving that goal.

Sheng Lu: China’s recent sweeping anti-graft campaign has attracted the world attention. How does the US business community look at this campaign? Will this campaign have any long-term impact on China’s business environment?

Erin Ennis: In general, the anticorruption campaign is viewed very positively by foreign companies because it is an additional way to ensure that all companies are treated equally in China – bribes and other illegal activities should never be tolerated. To date, the only impact that foreign companies have reported is that it takes longer to get some projects or licenses approved because Chinese officials are being overly cautious in ensuring that there is no appearance of impropriety. Those kinds of delays are ones that companies are willing to deal with.

Sheng Lu: Our students wonder if China presents as a career opportunity for them as well. What’s your observation and do you have any suggestions for our students interested in working/interning in China?

Erin Ennis: If you are serious about working in China, then learning Chinese should be at the top of your to do list – but the same could be said about going to work in any foreign country: learn their language. Beyond that, go to China and experience it. There are plenty of ways to do both of those, but language and on the ground experience will establish your credibility as someone who is serious about the specific opportunities in China, rather than someone who just wants a chance to live in a different country. Final suggestions: read as much as you can and question what you read. China is not a monolith and, as anywhere, there are always multiple sides to every story – that’s especially true in business and politics. Having an informed view of those dynamics will serve you well.

–The End–

Textile and Apparel in the 2015 US Trade Policy Agenda

Two hearings were held on January 27 where US Trade Representative Michael Froman testified before the Senate Finance Committee and the House Ways & Means Committee on the 2015 US Trade Policy Agenda. During the Senate hearing, two questions were directly related to the textile and apparel (T&A) industry:

Senator Robert Menendez (D-NJ) expressed concerns that inclusion of several concessions requested by Vietnam regarding rule of origin and short supply list for T&A in the Trans-Pacific Partnership (TPP) will result in severe job losses and potentially hurt the T&A industry in the Western Hemisphere. In response, Froman said that:

“We worked in the textile area through the yarn forward rule, the short supply list, rules of origin and customer enforcement and corporation to take these things into consideration. We’ve worked very closely with textile manufacturers in the US who are part of this supply chain with Central America to get the best of our understanding of what are the sensitivities are and take that into account in our negotiations.”

John Isakson (R-GA) raised the question about China’s recent cotton reserve & subsidy policy and its negative impact on the world cotton price which “has declined from 83-85 cents/pound not a long ago to 55-57 cents/pound recently.” Isakson wondered if anything USTR would do to address the problem, such as bringing the case to the World Trade Organization (WTO) Dispute Settlement Body (DSB). In response, Froman said that:

“The whole pattern of agriculture subsidies has changed a lot over the last ten to fifteen years. When (WTO) Doha Round was first started, focus on the subsidy was really the United States and the European Union. But in both of those areas subsidies have come down, while subsidies from China and India in the agriculture area have been increased. By some measures, China is now the largest subsidizer of cotton. We are engaging with them. We have conversations in the last couple of days also about that, about taking a fresh look at where subsidies have been provided, how it distorted the market and how that should play into the global trading negotiations. It is important to update our views on where the subsidies come from and what impact it has. For poor farmers in Africa, it doesn’t matter whether the subsidies come from the US or from China. It matters that the subsidy exists and so we will be engaged with China on this and create some disciplines around us. We are looking at all options out there. We are not yet determined whether there will be a (WTO DSB) case brought in that area.”

Other hot topics covered by the hearing include passing Trade Promotion Authority (TPA) bill, creating jobs through trade, addressing agriculture, digital trade & data flow, State owned enterprises (SOE), currency manipulation, transparency and Intellectual property right (IPR) protection issues in TPP, strengthening trade enforcement, renewing African Growth and Opportunity Act (AGOA), and making further progress of Trade in Service Agreement (TiSA) and Information Technology Agreement (ITA) at WTO.

The followings are some personal comments on the overall atmosphere in the Senate hearing:

It doesn’t seem possible to be able to conclude TPP without TPA, for at least two reasons: 1) Congress doesn’t want to give up its authority on trade policy. If TPP negotiation were concluded before the passage of TPA, Congress would feel it had little influence on shaping TPP through the mechanism of TPA trade negotiating objectives. This will add to the difficulty of potentially passing the TPP implementing bill under expedited legislative procedures. 2) Other TPP members, such as Japan, are unlikely to put the final offer on the negotiation table, especially for politically sensitive issues, without having the assurance provided by TPA.
There is a growing call for “strong” labor and environmental provisions in TPP. This is not surprising given the fact that the general public is attaching greater importance to labor and environmental impact of international trade. NGOs, such as labor and environmental groups have become more critical players in trade politics nowadays as well. Practically, strong labor and environmental provisions are regarded as important means to create “a level playing field” for US products competing in the world marketplace. These provisions can also be used as leverages to push for better human right practices in some foreign countries. That being said, as noted by many trade experts, trade policy shall not be expected to solve environmental and labor problems.
Currency manipulation becomes a hot discussion topic again, but USTR doesn’t seem to be interested in including the currency provision in TPP. Many senators raised the currency issue during the hearing, however, it shall be noted that: 1) Free trade agreement (FTA) and even WTO is not an appropriate venue to deal with currency issues; 2) the business community actually does not see currency as a priority issue to address. They care more about things like market access, IPR protection, national treatment and dealing with SOEs. 3) Currency manipulation provision is not an effective way to solve currency concerns. For example, it would be impossible to determine what shall be the “right” exchange rate–ten economists may give twelve different answers. 4) It will be interesting to see what language the potential TPA bill will use to define currency issue as a trade negotiating objective.
Benefit of trade is still largely misunderstood. During the hearing, almost all support for TPA & TPP came from the export side: “export is good for the US economy”, “export can create higher-paid middle class jobs”, “US runs trade surplus with all FTA partners and all trade deficits came from those non-FTA partners”…However, nobody in the hearing talked about the benefits of imports and the global nature of supply chain in the 21^st Mercantilism is still a popular view in Congress.

Sheng Lu

2014 World Textile Industry Labor Cost Comparison

According to the latest Werner International Labor Cost Comparison Report, labor cost gaps remained huge among textile industries worldwide in 2014. Within the 40 countries covered by the report, labor cost in Switzerland ($51.36/hour), the highest, was 82 times higher than in Bangladesh and Pakistan ($0.62/hour), the lowest, in 2014. Overall, labor cost in Western European countries (such as Italy, France and Germany)+Japan remained the highest in the world, followed by (from high to low):

the United States
advanced economies in East Asia (South Korea and Taiwan)
Eastern European countries (such as Poland)
South American countries (such as Brazil and Peru)
developing countries in East and Southeast Asia (such as Bangladesh and Pakistan).

[Note: The report does not cover African countries].

On the other hand, consistent with statistics from other sources, Werner’s report also suggests remarkable labor cost increase in China, which is rapidly approaching the $3 per operator hour (up from $2.1 in 2011 and up from only 0.69 US$ in the year 2000). From 2000 to 2014, labor cost in the U.S. textile industry went up about 25 percent. However, in terms of absolute difference, China’s labor cost was still only 15 percent of the level in the United States in 2014. As noted by the publisher, the labor cost comparison report covers all primary textile industry sectors, consisting of spinning, weaving and dyeing & finishing. Cut & sewing operations are not part of these comparisons. Labor cost in the clothing industry is not covered by the report however.

[Comment for this post is closed]

Tariff or Not

Tariff is a tax levied on imports only. Tariff will make imports more expensive in the market. For example, if the original price of a “Made in China” T-shirt is $5, with a 20% tariff, it becomes $5*(1+20%)=$6 when sold in the U.S. market.

Tariff has multiple impacts. On one hand, tariff may protect the domestic industry from foreign competition and help government of the importing country gain some tax revenues. On the other hand, consumers will have to pay more (or consume less) because of increased market price as result of tariff. Tariff also hurts exporters and those sectors operating on a global basis. For example, a high tariff rate on imported fabrics may raise the production cost of a clothing manufacturer which sells its finished products to the world market. According to the World Trade Organization, nearly 60 percent of world trade today are inputs and components.

Questions for discussion:

How to explain the phenomenon that tariff rates are so different across different types of product in the picture? Should they be so different?
Should tariffs on flats, sneakers, boots and moccasins be lowered or eliminated in the U.S. or even world wide? What issues need to be considered?

Latest Trends in the US Apparel Industry (update: January 2015)

Latest statistics released by the American Apparel and Footwear Association (AAFA) indicate several trends in the U.S. apparel industry:

First, the retail market is gradually recovering. According to AAFA, on average, every American spent $907 on clothing (or purchased 64 garments) in 2013. Although this figure is still less than the one before the 2008 financial crisis, it is the highest level since 2012.
Second, “Made in USA” is growing but US consumers still rely on imports. Data from AAFA shows that US apparel production increased 6.2 percent from 2012 to 2013, accounting for 2.55% share of U.S. apparel market. However, nearly 98% of apparel consumed in the US were still imports in 2013.
Third, China remains the top apparel supplier to the United States. Despite the concerns about the rising production cost in China, latest data from OTEXA shows that, in 2014 (January to November) China still accounted for 42.5% of US apparel imports in terms of quantity and 39.1% in terms of value–almost the highest level in history. These two numbers were 41.7% and 39.9% a year earlier. On the other hand, Vietnam’s market share has reached 9.3% (by value) and 10.7% (by quantity) in 2014 (January to November), about ¼ of China’s exports to the United States.
Fourth, job market reflects continuous shift of the apparel industry. According to AAFA, among the total 2.8 million workers directly employed by the US apparel industry in 2013, only 5% were in the manufacturing sector, 5% were in the wholesaling sector and as many as 90% were working for retailers. However, within the apparel retail sector, total employment by the department stores is quickly shrinking—dropped 7.6 percent from 2012 to 2013 and cumulatively 21.3 percent from 1998 to 2013. At the same time, specialty clothing stores and sporting goods stores are hiring more people: 13.8% and 64.5% increase of employment from 1998 to 2013 respectively. The contrasting employment trend reflects the changing nature of the U.S. apparel retail market and the channels through which U.S. consumers purchase clothing.
Fifth, US consumers are paying higher taxes on imported clothing. Calculated by AAFA, while the overall U.S. imports were only charged by a 1.4% tariff rate, the effective duty rate on all apparel imports rose to 13.6% in 2013. The higher effective duty rate may be caused by the fact that less apparel were imported utilizing free trade agreement or trade preference programs.

Appendix: Facts on the US Apparel Market in 2012

Data Source: http://www.statista.com/

US Department of Labor: 28 countries were Found Using Child or Forced Labor in Making Textiles and Apparel

In its updated List of Goods Produced by Child Labor or Forced Labor (ILAB) released on December 1, 2014, the U.S. Department Labor said that at least 28 countries are found using child or forced labor in making textiles and apparel. All countries on the list appear to be developing countries. Particularly, the problem of using child labor or forced labor was found most serious in the cotton sector (18 countries), followed by garment manufacturing (9 countries).

Bangladesh, a focus of corporate social responsibilities practices these days, was found using child labor in making garment according to ILAB.

(Data compiled by Sheng Lu)

Note: * ILAB maintains a list of goods and their source countries which it has reason to believe are produced by child labor or forced labor in violation of international standards. The List is intended to raise public awareness about child labor and forced labor around the world, and to promote and inform efforts to address them. A starting point for action, the List creates opportunities for ILAB to engage and assist foreign governments. It is also a valuable resource for researchers, advocacy organizations and companies wishing to carry out risk assessments and engage in due diligence on labor rights in their supply chains

Follow up:

After the release of the ILAB report, four House Democrats sent a letter to USTR Michael Forman on December 4th, 2014, asking him to provide details on labor provisions in the TPP. As noted by the lawmakers in the letter: “Vietnam, Mexico, Peru, and Malaysia, one-third of the nations included in the TPP, were all cited for labor abuses in the report…”. “We are following up with you because we believe it is important that you take action to ensure that real, meaningfully enforceable labor protections are in the TPP”.

U.S. Textile and Apparel Exports in 2013 (Updated in November 2014)

U.S. textile and apparel (T&A) exports increased by $543 million (3 percent) to $19.8 billion in 2013. However, because import increased by $3.2 billion (3 percent) to $97.5 billion, U.S. trade deficit in T&A increased rose to $97.5 billion in 2013. Imports supplied about 98 percent of U.S. consumer demand for T&A in 2013.

Textiles account for 83 percent of all U.S. T&A exports in 2013. Exports of these textiles products (particularly fabrics and yarns) are used primarily as intermediate inputs for finished products manufactured abroad, which are then imported back into the United States (USITC, 2014). In terms of value, specialty & industrial fabrics, spun yarns & thread, felts & other non-woven textiles and other made-up textile articles altogether account for nearly half of U.S. T&A exports in 2013. Statistics further show that U.S. apparel exports also grow fast in recent years. However, it shall be noted that a good proportion of them might be used clothing.

Mexico and Canada remain the top two largest export markets for U.S. T&A in 2013. 66 percent of U.S. T&A exports in 2013 went to the Western Hemisphere (i.e. North America, Central America, South America, and the Caribbean countries). However, this share has declined from 77.6 percent in 2000. Other leading export markets for U.S. T&A include Honduras, China and Japan.

Reference:

USITC (2014). Shifts in U.S. Merchandise Trade. http://www.usitc.gov/press_room/news_release/2014/er1112ll232.htm

OTEXA (2014). U.S. Imports and Exports of Textiles and Apparel. http://otexa.trade.gov/msrpoint.htm

Think Big about International Trade

I hope you all enjoy the guest lecture given by Ambassador Friedrich Löhr on his global travel stories as a career diplomat over the past 37 years. Actually, topic of our class is closely connected with “international relations”. As observed by Michael Forman, US Trade Representative, “trade is what most of international relations are about and trade policy is national security policy”; “leaders have come to see the economic clout that trade produces as more than merely a purse for military prowess; they now understand prosperity to be a principal means by which countries measure and exercise power”.

Several readings/case studies/discussions in our class have touched the strategic aspects of international trade in the 21^st century. For example, I hope at this point you not only understand the technical aspects of the Trans-Pacific Partnership (TPP) such as “yarn-forward” and “short supply list”, but also can see TPP as a strategic movement for the US to become more deeply embedded in the Asia-Pacific region. Similarly, the Trans-Atlantic Trade and Investment Partnership (T-TIP) is a free trade agreement, but a successful conclusion of T-TIP will also send “an unmistakable signal to the world about the strength of the US-EU bond—a timely reminder as the crisis in Ukraine has triggered deep unease across the continent.”

The strategic aspects of international trade can also be understood from the development perspective. There is a direct correlation between integration into the multilateral trading system and economic growth and between growth and poverty reduction. What then UN Secretary Kofi Annan said remains very true “The main losers in today’s very unequal world are not those who are too much exposed to globalization. They are those who have been left out”. No example can be more convincing than the case of textile and apparel (T&A) to illustrate this point. In many low-income countries in the world, T&A accounts for two-thirds of local employment and over 60 percentage of total merchandise exports. This is why trade preference programs such as AGOA, GSP and HOPE play a critical roles in providing greater market access opportunities to those most vulnerable countries.

To understand the strategic aspects of trade, you may further recall our case study 2 and the discussions on the necessity of maintaining a sound operation of the GATT system in the setting of 1970s. Without a rule-based multilateral trading system, international trade simply couldn’t happen. Yet the current multilateral trading system established shortly after World War II needs an update to better reflect the changing nature of world economy and format of trade. This is why so much attention has been given to mega-trade agreements such as TPP and TTIP. These free trade agreements will have a huge impact shaping the future rules of the game, no matter in terms of adding new agendas such as state-owned enterprises, digital trade and facilitating supply chain, or more effectively establishing a level playing field for issues such as environmental and labor standards.

So think strategically about international trade and think big about the impact of our T&A industry in the 21^st century global economy.

Japan’s Textile Exports to Vietnam Keep Growing Fast

According to a recent report released by the Textile Outlook International, Japan’s textile and apparel (T&A) exports increased by 9.6% to a five-year high in 2013 (¥763,307 million or $8,571 million USD), added by a sharp depreciation in the value of the yen (Note: Yen or “¥” is Japan’s currency) against US dollar. Specifically, Japan’s textile exports increased by 9.8%, from ¥729,761 million in 2012 to ¥801,450 million in 2013. Japan’s apparel exports rose by 3.7%, from ¥33,546 million in 2012 to ¥34,792 million in 2013. Textiles account for a lion’s share of Japan’s total T&A exports– 95.8% in 2013 and 95.6% in 2012 in terms of value.

Statistics also show that Vietnam not only is Japan’s second largest T&A export market, but also is one of the fastest growing export markets for Japan. In 2013, 9.1% of Japan’s T&A exports went to Vietnam (mostly were textiles), increased from 8.5% in 2012. In terms of absolute value, Japans’ T&A exports to Vietnam has also kept growing fast in recent years: 17.1% increase in 2013, 9.7% in 2012 and 27.3% in 2011, much higher than the growth rate of Japan’s overall T&A exports over the same period. Additionally, about 26% of Japan’s textile exports to Vietnam in 2013 were man-made fiber fabrics (SITC 653), followed by special yarns and fabrics (SITC 657) which accounted for 21% in terms of value. This product structure well matches with Japan’s overall textile exports to the world.

On the other hand, Japans’ T&A exports to the US also grew by 8.1% in 2013, following a 3.2% rise in 2012. Fastest growing category of Japan’s T&A exports to the US in 2013 include blue denim fabric, non-textured filament yarn, wool knitted shirts and blouses and miscellaneous manufactured products made from man-made fibers.

However, the solid performance of Japan’s T&A exports in 2013 “failed to reinvigorate domestic production”. According to the report, Japan’s total T&A exports declined by 2.0% from 2012 to 2013, following a 2.3% fall a year earlier. However, production of miscellaneous textile products in Japan went up 0.6% in 2013.

Questions for discussion:

Will Japan further strengthen its ties with Vietnam in T&A production and trade because of TPP?
Should the US textile industry care about Japan in the TPP?

Welcome for any comments and suggestions.

What does Vietnam’s Textile Factory Actually Look Like?

Vietnam attracts a lot of attention these days in the textile and apparel world. But what does Vietnam’s textile and apparel factory actually look like?

This video features PPC (Phong Phu Corporation), one of the largest textile mills in Vietnam. It is said that PPC accounts for over 50% of Vietnam’s total textile exports.

Anything in the video interests you or surprises you?
How is PPC different from textile mills in the US?( You may think about the video we watched in class about the textile mills in NC. For example, are there any differences in working environment, the facility, what it is producing, required labor skills, efficiency and productivity?)
How should the US textile industry treat Vietnam? A competitor? A threat? A potential partner? or a great opportunity for investment?

Please feel free to share your thoughts.

[Please leave no more comment for this post unless you have NEW ideas to share]

Unleashing Fashion Growth City by City

According to a recent study conducted by McKinsey, the global women’s apparel market growth rate is forecasted to increase by 50 percent over the next 12 years, largely driven by the increasing weight of emerging markets such as China and Russia. Historically, the global women’s apparel market has grown at just over 3 percent per year; However, by 2025 the growth rate is expected to approach 5 percent per year. By 2025, women’s apparel is expected to account for 55% of global apparel sales and 60% of sales growth.

For fashion players, cities are mattering more than any other product category. Top 600 growth cities will account for 62% of women’s apparel market’s growth by 2025; and 16 out of top 20 growth cities are from the emerging markets, adding an additional $100 billion to the global women’s apparel market.

However, when looking at total size, mature-market cities will still have half the women’s apparel market worldwide, according to McKinsey. Particularly, growth in the luxury markets is still heavily dependent on the mature market, where 70 percent of top growth cities are located.

With the help of city level analysis, rather than discussing Europe or Asia as alternative destinations, or even the U.K. versus France, companies can now ask themselves, “in what 10 key cities should we next establish a strong presence?”

Five Key Trends in Luxury Goods

Five key trends in Luxury Goods

Luxury market remains optimistic with forecast sales set to reach $405 billion USD by 2019.
The United States remains the largest luxury goods market in the world, valued at $78 billion USD in 2014.
Designer apparel accounted for the most sales of all luxury categories in 2014.
Luxury jewelry and timepieces grew by 63% and 42% respectively in the last 5 years.
China dropped from 3rd to 4th place in the global rankings, due to the government clampdown on extravagant spending and slowing growth of the economy.

According to a featured story written by Just-Style on the Euromonitor report, global luxury goods sales in 2013 rose 3% year-on-year in value terms and most of this growth came from emerging markets such as China, India, Indonesia and Malaysia. Data shows that luxury spending in the BRIC countries experienced a massive increase of 104% over the last five years, compared to just 18% in developed markets. It is further suggested that BRIC countries will account for more than 35% of projected global sales of luxury goods from 2014-2018. Specifically, India is forecast to grow by a further 86% in constant value terms over the five years to 2018, followed by China at 72%, Brazil at 31% and Russia at 28%.

The outlook for the luxury goods industry over the short to medium term is positive. A rapidly expanding A and B class across sub-Saharan Africa, Latin America and emerging Asia, with incomes 150% to over 200% higher than the average gross incomes of individuals aged 15 and over, is fuelling a new culture of luxury aspiration, leading to an increase in luxury spend.

Source: Euromonitor International; Just-Style

	Tariffs Make New Yar… on Updated Impact of Increasing T…
	Tariffs Make New Yar… on Patterns of U.S. Apparel Impor…
	Atul Singh on New Paper: Evolving Patterns o…
	eagleeclecticae1f527… on New Paper: Evolving Patterns o…
	10 Reasons Why Europ… on EU Textile and Apparel Industr…
	Like Entrepreneurs,… on Updated Impact of Increasing T…
	Clothing prices fall… on Minimum Wage Level for Garment…

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: