The latest statistics from the Office of Textiles and Apparel (OTEXA) show that COVID-19 continued to enlarge its negative impact on U.S. apparel imports in May 2020, and the path to recovery will NOT be straightforward and quick. Specifically:
The value of U.S. apparel imports decreased by more than 60% in May 2020 from a year ago, setting a new record of single-month loss in trade volumes. Between January and May 2020, the value of U.S. apparel imports decreased by 27.8% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
As the first country hit by Covid-19, China’s apparel exports to the U.S. dropped by 60.2% in May 2020 from a year ago, close to its performance in April 2020 (down 59% YoY). While the figure itself is far from exciting, it suggests the sinking of China’s apparel exports could have hit bottom. As an important sign, China regained its position as the largest apparel supplier to the U.S. in May 2020, with 27.2% market shares in value and 41.4% market shares in quantity. Notably, this is a significant rebound from only 11% market shares back in February 2020. Overall, it seems U.S. fashion brands and retailers continue to treat China as an essential and probably indispensable apparel sourcing base, despite a new low of U.S.-China relations and companies’ sourcing diversification strategy. Meanwhile, the official Chinese statistics report a 20.3% drop in China’s apparel exports in the first five months of 2020.
Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.1% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.6% YTD in 2020 and vs. 27.4% in 2019) and Bangladesh (9.4% YTD in 2020 vs.7.1% in 2019) all gain additional market shares in 2020 from a year ago.
However, no clear evidence has suggested that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first five months of 2020, still, only 9.1% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.0% from NAFTA members (down from 4.5% in 2019). Two factors might explain the pattern: 1) Due to factory lock-down, the production capacity in the Western Hemisphere is affected negatively; 2) With an unrepresented high level of unemployment, U.S. consumers are becoming ever more price sensitive. However, apparel produced in the Western Hemisphere, in general, are less price competitive than those made in Asia.
As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first five months of 2020 (price index =101.5) compared with 2019 (price index =104.7). Imports from China have seen the most notable price decrease so far (price index =71.0 YTD in 2020 vs. 83.5 in 2019).
1. The garment industry matters significantly to Cambodia, both economically, and socially. As of 2019, as much as 70% of Cambodia’s merchandise exports were apparel items. Likewise, around one-third of Cambodia’s manufacturing output currently comes from the garment sector alone. Further, as of 2016, the garment industry in Cambodia employed nearly 928,600 workers (almost 79% were female), an increase of 239% from 2007.
2. Cambodia’s apparel exports have enjoyed steady growth in recent decades, reaching US$7.83 billion in 2018 – a jump of 256% from US$2.2 billion in 2005. Yet, it faces several major challenges:
Due to limited production techniques and capital availability, apparel producers in Cambodia are still mostly engaged in cut-make-trim (CMT) activities, meaning they rely heavily on imported textile raw material and are only able to make a marginal profit based on low-value-added sewing work.
Cambodia’s apparel exports are highly concentrated on the EU and the US markets, which together accounted for 73.4% of the country’s total garment exports in 2019.
Cambodia is facing intense competition in its main apparel export markets—there has been little growth in Cambodia’s share of EU and US apparel imports over the past two decades, remaining as low as 3% as of 2019.
3. Cambodia has benefited significantly from the EU Everything But Arms (EBA) program. Established in 2001, the EBA trade initiative provides least developed countries (LDCs), such as Cambodia, with duty-free and quota-free access to the vast EU market for all products except weapons and ammunition. Like other EBA beneficiary countries, the majority (around 95%) of Cambodia’s apparel exports to the EU currently claim the duty- and quota-free EBA benefits.
4. Out of concerns over Cambodia’s “serious and systematic violations of the human rights principles enshrined in the International Covenant on Civil and Political Rights,” the European Commission on 12 February 2020 formally announced the withdrawal of part of the tariff preferences granted to Cambodia under the EBA program. Starting from 12 August 2020, a select group of Cambodia’s apparel exports to the EU, together with all travel goods, sugar, and some footwear will be subject to the EU’s Most-Favored-Nation (MFN) tariff rat, which were at the rate of 11.5% on average for apparel items in 2019.
5. Even the partial suspension of Cambodia’s EBA eligibility could result in significant and lasting negative impacts on its apparel exports to the EU:
The apparel items directly affected by the EBA suspension accounted for around 15% of the value of Cambodia’s total apparel exports to the EU in 2019. For those apparel categories directly targeted by the EBA suspension, EU fashion brands and retailers may quickly shift sourcing orders from Cambodia to other supplying countries to avoid paying the additional tariffs.
Social responsibility is being given more weight in fashion companies’ sourcing decisions. This means even those apparel items not directly targeted by the EU EBA suspension could face widespread order cancellations as sourcing from Cambodia is deemed to involve higher social compliance risks. In a worse but possible scenario, Cambodia’s apparel exports to the whole world could be under threat as many EU fashion brands and retailers operate globally and adopt a unified ethical standard and code of conduct for apparel sourcing across different markets.
Additionally, the timing cannot be worse: Due to the devastating hit by Covid-19, as of April 2020, Cambodia had reported nearly 130 garment factory closures and more than 100,000 workers laid off. These numbers may increase further as the effect of the pandemic continue to unfold.
EVFTA will eliminate nearly all tariffs (over 99%) between the EU and Vietnam. However, textile and apparel (T&A) are among a few exceptions that will not be able to enjoy duty-free treatment on day one. Specifically:
The EU will eliminate duties with more extended staging periods (up to 7 years) for some sensitive products in the textile apparel and footwear sectors (see the graphs above).
By adopting the fabric-forward rules of origin (or the so-called “double transformation”) for apparel items, EVFTA intends to prevent products from a third party (such as China) from flooding the EU market. Specifically, to benefit from preferential access, garments will need to use fabrics produced in Vietnam or the EU. However, through the EVFTA cumulation provision, fabrics originating in South Korea or other ASEAN countries with which the EU has a free trade agreement in force will be considered as originating in Vietnam. (Note: South Korea is a free trade agreement partner of the EU). While China remains the top textile supplier for Vietnam, the EVFTA apparel-specific rules of origin will provide more incentives for Vietnam to reduce its China dependence and restructure its textile and apparel supply chain. On the other hand, the totality of EU textile fabric exports to Vietnam will be liberalized immediately when the agreement enters into force.
Statistics show that Vietnam was EU’s sixth-largest extra-region apparel supplier in 2019 (after China, Bangladesh, Turkey, India, and Cambodia), accounting for 4.3% in value (or US$4.3 billion). Many of Vietnam’s primary competitors already enjoyed duty-free market access to the EU, such as Turkey (through the Customs Union), Bangladesh, and Cambodia (through the EU Everything But Arms program). EVFTA will provide a level playing field for Vietnam, which is expected to see a continuous robust growth of its apparel exports to the EU and gain additional market shares in the years to come. Meanwhile, not eligible for any EU preferential duty benefit, apparel exports from China are likely to face intensified competition in the EU market after the implementation of EVFTA.
The latest statistics from the Office of Textiles and Apparel (OTEXA) show that the negative impact of COVID-19 on U.S. apparel imports deepened further in April 2020. Specifically:
Unusually but not surprisingly, the value of U.S. apparel imports sharply decreased by 44.5% in April 2020 from a year ago. Between January and April 2020, the value of U.S. apparel imports decreased by 19.6% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
2. As the first country took a hit by COVID-19, China’s apparel exports to the United States continue to deteriorate—its value decreased by a new record of 59.0% in April 2020 compared with a year ago (and -46.4% drop year to date). This result is also worse than the official Chinese statistics, which reported an overall 22% drop in China’s apparel exports in the first four months of 2020).
3. For the second month in a row, Vietnam surpassed China and ranked the top apparel supplier to the U.S. market in April 2020. China’s market shares in the U.S. apparel import market remained as low as 18.2% in April 2020 (was 30% in 2019), although it slightly recovered from only 11% in March 2020. With U.S.-China relations at a new low, there have been more intensified discussions on how to move the entire textile and apparel supply chain out of China and diversify apparel sourcing from the Asia region as a whole. However, as China itself has grown into one of the world’s largest apparel consumption markets, there is little doubt that China will remain a critical player for apparel sourcing, especially for the “China for China” business model.
4. Continuing the trend emerged in recent years, China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (19.7% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.8% YTD in 2020 vs.7.1% in 2019). However, no clear evidence has suggested that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first four months of 2020, still only 9.4% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from NAFTA members (down from 4.5% in 2019).
5. As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first four months of 2020 (price index =102.1) compared with 2019 (price index =104.7). Imports from China have seen the most notable price decrease so far (price index =71.5 YTD in 2020 vs. 83.5 in 2019).
On May 22, 2020, Office of the U.S. Trade Representative (USTR) released the specific negotiating objectives of the proposed U.S.-Kenya Free Trade Agreement. Overall, the proposed free trade agreement (FTA) intends to “builds on the objectives of the African Growth and Opportunity Act (AGOA) and serve as an enduring foundation to expand U.S.-Africa trade and investment across the continent.” USTR also visions to conclude an agreement with Kenya that “can serve as a model for additional agreements in Africa, leading to a network of agreements that contribute to Africa’s regional integration objectives.”
Regarding the textiles and apparel (T&A) sector, USTR says it will “Secure duty-free access for U.S. textile and apparel products and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities.” The proposed agreement also will “Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.” The same/very similar language is used in the proposed U.S.-Japan Free Trade Agreement and U.S.-EU trade negotiation.
Of the total $667million U.S. merchandise imports from Kenya in 2019, nearly 70% were apparel items, making the sector the single largest stakeholder of the proposed FTA. While still being a relatively minor supplier, Kenya’s apparel exports to the U.S. reached a record high of $453million in 2019, which was an increase of 132% from ten years ago. For many U.S. fashion companies, Kenya is also its single largest apparel-sourcing base in Sub-saharan Africa (SSA), accounting for one-third of the region’s total apparel exports to the U.S. in 2019.
However, how to design the textile and apparel chapter in the proposed U.S.-Kenya FTA is anything but easy. A preliminary content analysis of the 133 public comments submitted to the U.S. International Trade Commission (USITC) as of May 2020 shows that various stakeholders have proposed competing views on several complicated issues, ranging from the rules of origin to the tariff elimination schedule. Specifically:
First, the fashion apparel industry has expressed strong unanimous support for the proposed U.S.-Kenya FTA. Notably, Kenya is widely regarded as a growing sourcing destination for U.S. fashion brands and retailers. As noted by the U.S. Fashion Industry Association (USFIA) in its comment “there is a tremendous opportunity to expand trade between the United States and Kenya” through the elimination of both tariff and non-tariff barriers under the FTA.
Second, the fashion apparel industry calls for the proposed U.S.-Kenya FTA to “do no harm” to the existing supply chain established based on AGOA and ensure a seamless transition between the two trade programs. For example, PVH, one of the largest U.S. fashion corporations, says in its comment, “no change should be made with respect to market access and duty‐free treatment for apparel made in Kenya effective from the date of entry into force of the agreement.” Likewise, USFIA calls for the new FTA to “Preserve the commercial opportunities developed through AGOA benefits.” The American Apparel and Footwear Association (AAFA) further proposes to extend AGOA for another ten years after 2025, regardless of the status of the U.S.-Kenya FTA.
Third, despite the overall support for the agreement, industry stakeholders hold different views on how liberal the apparel-specific rules of origin should be in the U.S.-Kenya FTA and how long to keep it. Data shows, between 2015 and 2019, 99.7% of U.S. apparel imports from Kenya claimed the AGOA benefits. Of these imports, almost 100% took advantage of the so-called “third-country” fabric provision, which allows lesser-developed SSA countries like Kenya to enjoy duty-free access to the U.S. market for apparel made from yarns and fabrics originating from anywhere in the world (also known as the “cut and sew” or “single transformation” rules of origin).
On the one hand, some argue that without AGOA-like liberal rules of origin, Kenya won’t survive as an apparel sourcing destination for U.S. fashion companies because of the lack of local textile manufacturing capacity. For example, according to the African Coalition for Trade representing businesses in several SSA countries, “Africa does not currently have the capacity to produce the volume and variety of yarn and fabric necessary to support its apparel industry. Any tightening of the third-country fabric rule of origin in the post-AOGA model FTA would decimate the African apparel industry and lead to the loss of hundreds of thousands of jobs.”
However, some other industry stakeholders suggest that U.S.-Kenya FTA should gradually adopt the more restrictive “yarn-forward” rules of origin to encourage the development of the local textile industry in Kenya and the broader SSA region. Should U.S.-Kenya FTA adopt the “yarn-forward” rules of origin, garment factories in Kenya would have to either import yarns and fabrics from the United States, an option that is commercially infeasible given the long-distance, or use textile inputs locally-made. PVH, in its comment, explains the rationale behind the proposal, “we should move to a yarn forward rule of origin in phases…to allow the orderly verticalization of the apparel industry (in Kenya).” AAFA further adds, “A strong, vertical supply chain for the apparel and footwear industry in Kenya will reduce costs, minimize disruption and improve efficiency.”
Notably, the National Council of Textile Organizations (NCTO), which represents the voice of the U.S. textile industry, has not commented on U.S.-Kenya FTA yet but may potentially join the rules of origin debate. For years, NCTO insists that all U.S. free trade agreements should adopt the strict “yarn-forward” rules of origin. NCTO is most likely to hold the same position for the proposed U.S.-Kenya FTA because of two reasons: 1) avoid setting a “bad precedent” that may have implications for future U.S. FTA negotiations; 2) prevent the case when U.S. apparel imports from Kenya substantially increase and negatively affect apparel suppliers in the Western Hemisphere (such as Mexico and countries in Central America).
Furthermore, the debate on rules of origin is connected with the discussion on how to promote a regional textile and apparel supply chain in SSA and enhance regional economic integration. Several stakeholders, including AAFA, urge that U.S.-Kenya FTA should support regional supply chain collaboration rather than intensify the competition between Kenya and other AGOA members in the U.S. apparel market. The Atlantic Council, a well-known think tank also argues, “the bilateral (FTA) approach should not undercut the US’ longstanding support for regional integration in African markets and the progress that has been made in the East African Community (EAC) and the African continental free trade agreement area (AfCFTA).” Mauritius embassy echoes and suggests that the U.S.-Kenya FTA “could be made conductive to regional integration in Africa by allowing cumulation provisions in the agreement that would allow the use of materials sourced from other African partners to achieve the rules of origin requirements.”
Fourth, industry stakeholders also suggest that U.S.-Kenya FTA could include modern trade agendas to make the agreement more relevant to the needs of the fashion apparel industry in the 21st-century world economy. The most commonly mentioned issues include: 1) Sustainability, labor, and environmental standard; 2) E-commerce, digital trade, and data protection; 3) Strengthened intellectual property rights (IP) protection; 4) Transparency and trade facilitation. The released USTR negotiation objectives have covered most of these topics.
Additionally, how to deal with Kenya’s secondhand clothing import restriction could be another thorny issue relevant to fashion apparel in the U.S.-Kenya FTA negotiation. In its submitted comment, the Secondary Materials and Recycled Textiles Association (SMART), whose members export 8-10 million kilograms of used clothing each year, urged the proposed U.S.-Kenya FTA to “prohibit the imposition of any import ban on secondhand clothing” and “phase-in duty eliminations on secondhand clothing.” However, SMART’s position could be at odds with apparel manufacturers in Kenya, along with U.S. fashion brands and retailers interested in expanding apparel sourcing from the country.
The latest statistics from the Office of Textiles and Apparel (OTEXA) show that the negative impact of COVID-19 on U.S. apparel imports deepened in March 2020. Specifically:
The value of U.S. apparel imports sharply decreased by 14.8% in March 2020 from a year ago. Between January and March 2020, the value of U.S. apparel imports decreased by 12.1% year over year, which has been worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
As the first country took a hit by COVID-19, China’s apparel exports to the United States continue to deteriorate—its value decreased by as much as 52.4% in March 2020 compared with a year ago (and -43.1% drop year to date in 2020). This result is also worse than the official Chinese statistics, which reported an overall 20.6% drop in China’s apparel exports in the first quarter of 2020.
For the first time in history, Vietnam surpassed China and became the top apparel supplier to the U.S. market in March 2020. Notably, China’s market shares in the U.S. apparel import market dropped to only 11% in March 2020 (and 18.3% year to date in 2020), a new record low in history (was 30% in 2019). However, it should be noted that long before COVID-19, U.S. fashion brands and retailers have begun to reduce their exposure to sourcing from China, especially since October 2019 due to concerns about the US-China tariff war.
China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (18.9% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.4% YTD in 2020 vs.7.1% in 2019). However, no clear evidence has suggested that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first three months of 2020, still, only 10.3% of U.S. apparel imports came from CAFTA-DR members (no change from 2019) and 4.4% from NAFTA members (down from 4.5% in 2019).
The unit price of U.S. apparel imports remains relatively stable. The price index (2010=100) in the first three months of 2020 was 103 compared with 104.7 in 2019. However, as a reflection of weak demand, the price index of U.S. apparel imports from China substantially dropped to 72.2 Year to Date in 2020 compared with 83.5 in 2019.
The spread of the coronavirus (COVID-19) has already resulted in a plummet of U.S. apparel imports that we have never seen in history. According to latest statistics from the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, as of February 2020:
The value of U.S. apparel imports sharply decreased by 11.2% in February 2020 from a year earlier. Between January and February 2020, the amount of U.S. apparel imports decreased by 10.9% year over year, which is nearly the same loss as in the 2008-2009 global financial crisis.
As the first country took a hit by COVID-19, China’s apparel exports to the United States nearly collapsed in February 2020–down as much as 46.1% compared with a year ago (and -40.6% drop YTD). This result is also worse than the official Chinese statistics, which reported an overall 20% drop in China’s apparel exports in the first two months of 2020).
China’s market shares in the U.S. apparel import market dropped to 21.3% in February 2020, a new record low in history (was 30% in 2019 and 23.9% in January 2020). However, it is important to note that such a downward trend started in October 2019, as U.S. fashion brands and retailers were eager to reduce their exposure to sourcing from China.
China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (18.8% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.1% YTD in 2020 vs.7.1% in 2019). However, there is no clear evidence suggesting that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first two months of 2020, only 9.5% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.2% from NAFTA members (down from 4.5% in 2019).
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.)
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.
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.
First, the total value of Japan’s apparel imports has been growing steadily in line with consumption patterns. Between 2010 and 2018, the value of Japan’s apparel imports enjoyed a 2.7% compound annual growth rate, which was lower than the US (3.4%), but higher than the EU (1.9%) and the world average (1.3%) over the same period.
Second, while China remains the top supplier, Japanese fashion brands and retailers are also diversifying their sourcing bases. Similar to their counterparts in the US and EU, Japanese fashion brands and retailers are actively seeking alternatives. Imports from Vietnam, Bangladesh, and Indonesia have been growing particularly fast, even though their production capacity and market shares are still far behind China.
Third, Japanese fashion companies are increasingly sourcing from Asia. As of 2018, only 7.5% of Japan’s apparel imports came from non-Asian countries (mostly western EU countries), a notable drop from 11.4% back in 2000. A good proportion of Japan’s apparel imports from Asia actually contain fibers and yarns originally made in Japan. For example, it is not difficult to find clothing labeled ‘Made in China’ or ‘Made in Vietnam’ that also includes phrases such as ‘Using soft, slow-spun Japanese fabric’ and ‘With Japanese yarns’ in the detailed product description.
Fourth, overall, Japan sets a lower tariff barrier for apparel than other leading import countries. As of September 2019, there were around 15 FTAs and TPAs in force in Japan, whose members include several 1st tier apparel supplying countries in Asia, such as Vietnam, Bangladesh, India, Indonesia, and Cambodia. Most of these trade programs adopt the so-called “fabric-forward” rules of origin (also known as “double-transformation” rules of origin). Additionally, Japan is actively engaged in negotiations on a trilateral free trade agreement with China and South Korea, and the Regional Comprehensive Economic Partnership (RCEP), which involves Japan, South Korea, China and members of the Association of Southeast Asian (ASEAN) countries. Once reached and implemented, these trade agreements will provide new exciting duty-saving sourcing opportunities, including from China, the top apparel exporter in the world.
The size of the U.S. textile and apparel industry has significantly shrunk over the past decades. However, U.S. textile manufacturing is gradually coming back. The value added of U.S. textile manufacturing totaled $19 billion in 2018, up 25% from 2009 and reaching its highest level in the past ten years. In comparison, U.S. apparel manufacturing dropped to $9.2 billion in 2018, its lowest level in history (Bureau of Economic Analysis, 2019).
Nevertheless, the share of U.S. textile and apparel manufacturing in the U.S. Gross Domestic Product (GDP) dropped to only 0.14% in 2018 from 0.57% in 1998 (Bureau of Economic Analysis, 2019).
The U.S. textile and apparel manufacturing is also changing in nature. For example, textiles had accounted for nearly 70% of the total output of the U.S. textile and apparel industry as of 2018, up from 58% in 1998 (Bureau of Economic Analysis, 2019). Meanwhile, clothing had only accounted for 12% of the total U.S. fiber production by 2012, suggesting non-apparel textile products, such as industrial textiles and home textiles have become a more important part of the industry (Census Bureau, 2019).
Despite the growing popularity of “Made in the USA”,manufacturing jobs are NOT coming back to the U.S. textile and apparel industry. From January 2005 to August 2019, employment in the U.S. textile manufacturing (NAICS 313 and 314) and apparel manufacturing (NAICS 315) declined by 44.3% and 59.3% respectively (Bureau of Labor Statistics, 2019). However, improved productivity is one important factor behind the job losses.
Consistent with the theoretical prediction, U.S. remains a net textile exporter and a net apparel importer. In 2018, the U.S. enjoyed a $1391million trade surplus in textiles and suffered a $79,406 million trade deficit in apparel (USITC, 2019). Notably, over 40% of U.S.-made textiles (NAICS 313 and 314) were sold overseas in 2018, up from only 15% in 2000. Meanwhile, from 2009 to 2018, the value of U.S. yarns and fabrics exports increased by 31.3% and 43.6% respectively (OTEXA, 2019). On the other hand, because of the regional trade patterns, close to 70% of U.S. textile and apparel export still, go to the western hemisphere today.
by Sheng Lu
Why or why not do you think the U.S. textile industry and the apparel industry are in good shape?
Based on the statistics, do you think textile and apparel “Made in the USA” have a future? Please explain.
What are the top challenges facing the U.S. textile industry and the apparel industry in today’s global economy?
According to the World Trade Statistical Review 2019 newly released by the World Trade Organization (WTO), the current dollar value of world textiles (SITC 65) and apparel (SITC 84) exports totaled $315 billion and $505 billion in 2018 respectively, increased by 6.4% and 11.1% from a year earlier. This has been the fastest growth of world textile and apparel trade since 2012. Specifically:
I. Textile export
China, European Union (EU28), and India remained the world’s top three exporters of textiles in 2018. Altogether, these top three accounted for 66.9% of world textile exports in 2018, a new record high since 2011. Notably, China and EU (28) also enjoyed a faster-than-world-average export growth in 2018, up 7.9% and 6.9% respectively. The United States remained the world’s fourth top textile exporter in 2018, accounting for 4.4% of the shares, down slightly from 4.6% in 2017.
II. Apparel export
China, the European Union (EU28), Bangladesh, and Vietnam unshakably remained the world’s top four largest exporters in 2018. Altogether, these top four accounted for as much as 72.3% of world market shares in 2018, which, however, was lower than 75.8% in 2017 and 74.3% in 2016—primarily due to China’s declining market shares. Notably, even though apparel exports from Vietnam (up 13.4%) and Bangladesh (up 11.1%) enjoyed a fast growth in absolute terms in 2018, their gains in market shares were quite limited (up 0.3 percentage point from 5.9% to 6.2% for Vietnam and up 0.1 percentage point from 6.4% to 6.5% for Bangladesh). This result once again suggests that due to capacity limits, no single country has emerged to become the “Next China.” Instead, China’s lost market shares in apparel exports were fulfilled by a group of countries, a phenomenon which can be linked with fashion brands and retailers’ sourcing diversification strategy.
III. Textile import
The European Union (EU28), the United States, and China were the top three largest importers of textiles in 2018, accounting for 37.5% of the world’s total textile imports that year. Although the market shares of the top three in 2018 were close to 37.7% a year earlier, it nevertheless was much lower than over 50% back in the 2000s. The increasing diversification of textile import market is associated with the shifting pattern of world apparel manufacturing and export closely.
IV. Apparel import
Affected by consumers’ purchasing power (often measured by GDP per capita) and size of the population, the European Union, the United States, and Japan remained the world’s top three importers of apparel in 2018. Altogether, these top three absorbed 61.5% of world apparel in 2018, which, however, was lower than 62.3% in 2017 and a significant drop from 84% back in 2005. Behind the result, it is not the case that consumers in the EU, U.S., and Japan are importing less clothing. Instead, several emerging economies (such as China) are becoming fast-growing apparel consumption markets and starting to import more. As consumers’ purchasing power in these emerging economies continues to improve, we could expect a more diversified world apparel import market in the years ahead.
This article tries to evaluate the potential impact of the U.S.-China tariff war on the U.S. textile and apparel (T&A) industry, including manufacturing and related trade activities.
The quantitative evaluation conducted is based on the Global Trade Analysis Project (GTAP) model. Data came from the latest GTAP9 database, which covers trade, employment and production in 57 sectors in 140 countries. In correspondence to the recent development of the U.S.-China tariff war, the analysis focuses on the following three scenarios:
Scenario 1: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, except textiles and apparel
Scenario 2: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel
Scenario 3: 25% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel
Three findings are of note:
First, the tariff war with China will increase the market price for T&A in the United States and consequentially incentivize more production of T&A “Made in the USA.” As shown in Figure 1, the annual U.S. T&A production will increase when the punitive tariff is imposed on textile and apparel imports from China. The most significant increase will happen in scenario 3 (textile output expands by US$8,829 million and apparel output expands by US$6,044 million) when a 25 percent punitive tariff is imposed and the market price of T&A in the U.S. also correspondingly goes up by nearly 1.5% compared with the base year level in 2017.
Second, the tariff war with China will hurt U.S. textile exports. The results show that the tariff war will increase the production cost of “Made in the USA,” and result in a decline of U.S. textile exports due to reduced price competitiveness. This is the case even in scenario 1 when the tariff war does not target T&A directly, but nevertheless, raises the price of intermediaries for producing textiles in the United States. The results further show that the annual U.S. textile exports will suffer the most significant decline in scenario 3 (down US$1,136 million), especially to China and other Asian countries where U.S. textile products are facing intense competition from local suppliers. In comparison, U.S. textile exports to the Western Hemisphere will suffer a loss as well in the tariff war, but to a much less extent due to the strong supply-chain relationship with the region.
Third, the trade diversion effect of the tariff war will bring in more apparel imports to the U.S. market from Asian suppliers other than China. As shown in the figure above, when the punitive tariff imposed on textile and apparel products, the value of U.S. apparel imports from China will decline ranging from US$4,573 million (10 percent punitive tariff imposed) to US$8,858 million (25 percent punitive tariff imposed) annually compared with the base year level in 2017. This result reflects U.S. apparel importers and retailers’ mounting concerns about sourcing cost in the setting of the tariff war. However, apparently, the tariff war will do little to help U.S. domestic apparel manufacturers reduce the competitive pressure with imports. Particularly, in scenario 3, U.S. apparel imports from suppliers other than China will increase as much as US$10,400 million, worsening the U.S. trade deficit in the apparel sector further.
Sub-Saharan Africa (SSA) is widely regarded as a growing apparel-souring destination. Particularly, U.S. Congress established theAfrican Growth and Opportunity Act (AGOA), a non-reciprocal trade preference program, in 2000, to help developing SSA countries grow their economy through expanded exports to the United States. Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA. Notably, the “third-country fabric provision” under AGOA allows US apparel imports from certain SSA countries to be qualified for duty-free treatment even if the apparel items use yarns and fabrics produced by non-AGOA members, such as China, South Korea, and Taiwan. This special rule is deemed as critical as most SSA countries still have no capacity in producing capital and technology-intensive textile products.
That being said, to play a bigger role as an apparel sourcing base, SSA is not without significant challenges:
Challenge 1: limited industry upgrading and local textile production capacity
Theoretically, as a country’s economy advances, it should gradually be producing and exporting more capital and technology-intensive textiles versus labor-intensive apparel products. This is the notable trends in many Asian countries (such as China and Vietnam), where the textile/apparel export ratio has been rising steadily between 2005 and 2017. However, as a reflection of the stagnant industry upgrading, the textile/apparel export ratio remains fairly low in SSA, including in Lesotho, Kenya, and Mauritius, the top three largest apparel exporters in the SSA region.
Challenge 2: Slow and no progress in export diversification
Ideally, as the economy becomes more sophisticated, textiles and apparel (T&A) should account for a declining share in a country’s total merchandise exports. Countries such as China, Vietnam, and ASEAN demonstrate perfect examples. However, in some SSA countries (e.g., Lesotho), T&A has stably accounted for over 80% of their total merchandise exports over the past 17 years, a sign of slow or no progress in export diversification. In other SSA countries, T&A accounted for less than 10% of their total merchandise exports, suggesting the sector is not a priority to the local economy.
Challenge 3: Intense competition both in key export markets and domestic market
As of 2017, over 96% of SSA countries’ T&A exports went to three markets: the United States, the EU, and other SSA members. However, because of the intense competition, except for the regional SSA market, SSA countries account for merely 1.4% and 0.2% of total U.S. and EU textile and apparel imports in 2017 respectively.
Even more concerning, the T&A industry in SSA countries is facing growing competition in the domestic market with cheap imports, mostly from Asia. Notably, SSA countries import MORE apparel than they export, a phenomenon rarely seen among developing countries in a similar stage of economic development.
Challenge 4: U.S. companies remain low interest in investing in the region directly
According to several recent studies, leading U.S. fashion brands and retailers remain low interest in investing in the SSA region directly, even though companies admit more investments in areas such as infrastructure are critical to the success of SSA countries serving as competitive apparel sourcing bases. Some argue that the “temporary” nature of AGOA make companies hesitant to build factories in SSA. However, should AGOA become a permanent free trade agreement, which follows the principle of reciprocity, SSA countries would have to lower their trade barriers to U.S. products, including eliminating the tariffs and non-tariff barriers, in exchange for the reciprocal market access benefits from the United States. It doesn’t seem most AGOA members are ready for that stage yet.
First, U.S. fashion brands and retailers are sourcing less from China, particularly in quantity. Notably, the number of “Made in China” apparel newly launched to the market had significantly dropped from 26,758 SKUs in the first quarter of 2018 to only 8,352 SKUs in the first quarter of 2019 . Nevertheless, consistent with the macro-level trade statistics, China remains the single largest apparel supplier to the U.S. retail market.
Second, apparel “Made in China” are becoming more expensive in the U.S. retail market, yet remain price-competitive overall. Notably, apparel “Made in Vietnam” is becoming more expensive in the U.S. retail market too—an indication that as more production is moving from China to Vietnam, apparel producers and exporters in Vietnam are facing growing cost pressures.
Third, U.S. fashion retailers are shifting what apparel products they source from China. U.S. apparel retailers have been sourcing less lower value-added basic fashion items (such as tops, and underwear), but more sophisticated and higher value-added apparel categories (such as dresses and outerwear) from China since 2018. The shifting product structure could also be a factor that contributed to the rising average retail price of “Made in China” in the U.S. market.
On the other hand, U.S. retailers adopt a very different product assortment strategy for apparel sourced from China versus other regions of the world. There seems to be much fewer alternative sourcing destinations for more sophisticated product categories, such as accessories and outerwear. Somehow ironically, moving to source more sophisticated and higher value-added products from China could make U.S. fashion brands and retailers even MORE vulnerable to the tariff war because of fewer alternative sourcing destinations.
In conclusion, the results imply that China will remain a critical sourcing destination for U.S. fashion brands and retailers in the near future, regardless of the scenario of the U.S.-China tariff war. Meanwhile, we should expect U.S. fashion companies continue to adjust their sourcing strategy for apparel “Made in China” in response to the escalation of the tariff war.
The UK government on March 13, 2019 released the temporary
rates of customs duty on imports if the country leaves the European Union
with no deal. In the case of no-deal Brexit, these tariff rates will take
effect on March 29, 2019 for up to 12
According to the announced plan, around 87% of UK’s imports by value would be eligible for zero-tariff in the no-deal Brexit scenario.
Specifically for apparel products, 113 out of the total 148 tariff lines (8-digit HS code) in Chapter 61 (Knitted apparel) and 145 out of the total 194 tariff lines (8-digit HS code) in Chapter 62 (Woven apparel) will be duty-free. However, other apparel products will be subject to a Most-Favored-Nation (MFN) tariff rate ranging from 6.5% to 12%.
Meanwhile, the UK will offer preferential tariff duty rates for apparel exports from a few countries/programs, including Chile (zero tariff), EAS countries (zero tariff), Faroe Islands (zero tariff), GSP scheme (reduced tariff rate), Israel (zero tariff), Least Developed Countries (LDC) (zero tariff), Palestinian Authority (zero tariff), and Switzerland (zero tariff).
On the other hand, the EU Commission said it would apply the Most-Favored-Nation (MFN) tariff rates on UK’s products in the no-deal Brexit scenario rather than reciprocate.
While the majority of apparel consumed in the United States come from overseas, “Made in the USA” is growing in popularity. According to the 2018 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association (USFIA) in July 2018, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume. Likewise, the State of Fashion 2019 report published by Business of Fashion (BOF) and McKinsey & Company in November also forecasts that over 20 percent of U.S. fashion companies’ sourcing volume could be from nearshore by 2025, thanks to automation technology and consumers’ increasing demand for speed to market.
However, the detailed practice of the “Made in the USA” apparel sourcing strategy–including who is sourcing, what products are sourced, and what the typical price range of these products remain largely unknown.
To answer these questions, we recently analyzed the pricing, product assortment and inventory information of over 90,000 fashion retailers and 300,000,000 fashion apparel products at the Stock-Keeping Unit (SKU) level based on EDITED, a big data and business analytics tool developed for the fashion industry. For the research purpose, we selected apparel products newly launched to the U.S. market in the past twelve months (i.e., between 1 December 2017 and 30 November 2018) with “Made in the USA” explicitly mentioned in the product description. Below are the key findings:
First, “Made in the USA”
apparel overall are treated as a niche product in U.S. fashion brands and
retailers’ sourcing portfolio.
the 12 months we examined (1 December 2017-30 November 2018), 94 out of the
total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S.
market. The top 10 sellers list includes BOTH retailers that focus on the value
market such as Walmart and relatively high-end department stores such as
Bloomingdale and Saks Fifth Avenue. However, even for these top sellers, “Made
in the USA” apparel accounted for less than 8 percent of their total product
offers on average.
Second, U.S. fashion brands and retailers are most
likely to source“Made in the
USA” apparel for relatively fashion-oriented items, particularly bottoms (such
as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and
dungarees), swimwear and suits-sets.
edge for these product categories in the retail market, in general, increasingly depends on unique designs, high
product quality, and speed to market,
which makes sourcing from the United States commercially beneficial. In comparison, imported products are more concentrated
on basic fashion items often competing on price in the U.S. retail market,
including tops (such as T-shirt and polo shirt), underwear, and nightwear.
It is also interesting to note that
“Made in the USA” apparel were predominately women’s wear (92 percent), whereas imported
clothing adopted a more balanced gender combination (63 percent women’s wear
and 37 percent men’s wear). Because the fashion trends for women’s wear usually
are shorter-lived and harder to predict, this result once again indicates that seeking
quick response and shorter lead time for stylish and trendy items could be an
important incentive for local sourcing by U.S. fashion brands and retailers.
Third, consistent with the common perception,
“Made in the USA” apparel overall are pricier than imported ones in the U.S.
Taking the U.S.
apparel retail market as a whole, close to 40 percent of “Made in the USA” offering
in the past 12 months targeted the premium or luxury market, compared with only
20 percent of imported products. In
contrast, as few as 18 percent of “Made in the USA” offering were in the value
market, which, however, accounted for approximately 60 percent of all imported apparel
sold in the U.S. market. In totality, it
seems U.S. fashion brands and retailers are purposefully targeting “Made in the
USA” apparel for less price-sensitive segments of the market to balance the
high domestic production cost.
On the other hand, when examining
U.S. fashion brands and retailers’ pricing strategy at the product level, “Made
in the USA” clothing was still priced much higher than imported ones for almost
all major apparel categories, except hosiery. Notably, in the past 12 months, the
average unit retail price of “Made in the USA” clothing was 99.2 percent higher
than imported ones in the value and mass market and 36.0 percent higher in the
premium and luxury market. This interesting phenomenon supports the arguments that
U.S. consumers somehow are willing to pay a premium price for products with the
“Made in the USA” label.
Additionally, during the past 12
months, around 46.3 percent of “Made in the USA” apparel were sold at a
discount compared with more than 54.6 percent of imported ones. The advantage
of proximity to the market, which makes speedy replenishment for in-season items
possible, is an important factor behind the more successful control of
markdowns for “Made in the USA” products. For example, data shows that U.S.
fashion brands and retailers replenished approximately 12.7 percent of their “Made
in the USA” offering in the past 12 months but only 2.8 percent of imported
In conclusion, the findings of this study concur with the view that “Made in the USA” apparel are still relevant today. Meanwhile, it does not seem to be the case that “Made in the USA” apparel and imported ones are necessarily competing with each other in the U.S. retail market. With apparel sourcing increasingly requiring striking a balance among various factors ranging from cost, flexibility, compliance to speed to market, it is hopeful that “Made in the USA” apparel will continue to have its unique role to play in U.S. fashion brands and retailers’ merchandising and sourcing strategies.
1: What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2019, and why?
In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2019, ranging from a more volatile global economy, the unpredictable outlook of the U.S.-China trade talks to the various possible scenarios of Brexit. While uncertainty creates exciting new research opportunities for scholars like me, it could be a big headache for companies seeking a foreseeable market environment to guide their future business plan and investments.
Meanwhile, the increasing digitalization of the apparel supply chain based on big-data tools and artificial intelligence (AI) technologies means a huge opportunity for fashion companies. Indeed, the apparel industry is quickly changing in nature—becoming ever more globalized, supply-chain based, technology-intensive and data-driven. Take talent recruitment as an example. In the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), as much as 68 percent of surveyed leading U.S. fashion brands and apparel retailers say they plan to increase hiring of data scientists in the next five years. Googling “apparel industry” together with terms such as “big data” and “data science” also returns much more results than in the past. It is hopeful that the advancement of digital technologies and the smarter use of data will enable apparel companies to overcome market uncertainties better and improve many aspects of their businesses such as speed to market, operational efficiency and even sustainability.
2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2019, and what can apparel firms and their suppliers do to stay ahead?
Based on my research, I have three observations regarding apparel companies’ sourcing trends and the overall sourcing landscape in 2019:
First, apparel companies overall will continue to maintain a diverse sourcing base. For example, in a recent study, we examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Notably, on average these companies sourced from over 20 different countries or regions using more than 200 vendors in 2017. Similarly, in the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), we also found companies with more than 1,000 employees typically source from more than ten different countries and regions. Since no sourcing destination is perfect, maintaining a relatively diverse sourcing base allows apparel companies to strike a balance among various sourcing factors ranging from cost, speed, flexibility, to risk management.
Second, while apparel companies are actively seeking new sourcing bases, many of them are reducing either the number of countries they source from or the number of vendors they work with. According to our study, some apparel companies have been strategically reducing the number of sourcing facilities with the purpose of ensuring closer collaborations with their suppliers on social and environmental compliance issues. Some other companies are consolidating their sourcing base within certain regions to improve efficiency and maximize productivity in the supply chain. Related to this trend, it is interesting to note that approximately half of the 50 largest U.S. apparel companies report allocating more sourcing orders to their largest vendor in 2017 than three years ago.
Third, nearshoring or onshoring will become more visible. Take “Made in the USA” apparel for example. According to the 2018 U.S. Fashion Industry Benchmarking Study, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume. In a recent study, we find that 94 out of the total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S. market between December 2017 and November 2018. These “Made in the USA” apparel items, in general, focus on fashion-oriented women’s wear, particularly in the categories of bottoms (such as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and dungarees), swimwear and suits-sets. The advantage of proximity to the market, which makes speedy replenishment for in-season items possible, also allows retailers to price “Made in the USA” apparel substantially higher than imported ones and avoid offering deep discounts. Looking ahead, thanks to automation technology and consumers’ increasing demand for speed to market, I think nearshoring or onshoring, including ”Made in the USA” apparel, will continue to have its unique role to play in fashion brands and retailers’ merchandising and sourcing strategies.
3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?
2019 will be a year to test apparel companies’ resources, particularly in the sourcing area. For example, winners will be those companies that have built a sophisticated but nimble global sourcing network that can handle market uncertainties effectively. Likewise, companies that understand and leverage the evolving “rules of the game”, such as the apparel-specific rules of origin and tariff phase-out schedules of existing or newly-reached free trade agreements, will be able to control sourcing cost better and achieve higher profit margins. Given the heavy involvement of trade policy in apparel sourcing this year, companies with solid government relations should also enjoy unique competitive advantages.
On the other hand, as apparel business is changing in nature, to stay competitive, apparel companies need to start investing the future. This includes but not limited to exploring new sourcing destinations, studying the changing consumer demographics, recruiting new talents with expertise in emerging areas, and adopting new technologies fitting for the digital age.
4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2019 to be better than 2018, and why?
Two things are at the top of my watchlist:
First, what is the future of China as an apparel sourcing base? While external factors such as the U.S.-China tariff war have attracted most of the public attention, the genuine evolution of China’s textile and apparel industry is something even more critical to watch in the long run. From my observation, China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. Similar trends are seen in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame. A key question in my mind is how quickly China’s textile and apparel industry will continue to evolve and upgrade by following the paths of most other advanced economies in history.
Second, how will the implementation of several newly-reached free trade agreements (FTAs) affect the big landscape of apparel sourcing and the existing regional apparel supply chains? For example:
The newly-reached U.S.-Mexico-Canada Free Trade Agreement (USMCA or commonly called NAFTA2.0) includes several interesting changes to the textile and apparel specific rules of origin provisions, such as the adjustment of the tariff-preference level (TPL) mechanism. Whether these changes will boost textile and apparel production in the Western-Hemisphere and attract more sourcing from the region will be something interesting to watch.
In 2017, close to 80% of Asian countries’ textile imports came from other Asian countries, up from around 70% in the 2000s. Similarly, in 2017, 85.6% of Asian countries’ apparel imports also came from within the region. The negotiation of the Regional Comprehensive and Economic Partnership (RCEP) is likely to conclude in 2019, whose membership includes member states of the Association of Southeast Asian Nations (ASEAN) and other six economies in the Asia-Pacific region (Australia, China, India, Japan, South Korea and New Zealand). Will RCEP result in an ever more integrated Asia-based textile and apparel supply chain and make the Asia region even more competitive as an apparel sourcing destination?
October 16, 2018, the Trump
Administration notified U.S. Congress its intention to negotiate the
U.S.-EU Free Trade Agreement. Between
2013 and 2016, the United States and EU were also engaged in the negotiation of
a comprehensive free trade agreement– Trans-Atlantic Trade and Investment Partnership
(T-TIP) with the goal to unlock market access opportunities for
businesses on both sides of the Atlantic through the ambitious elimination of
trade and investment barriers as well as enhanced regulatory coherence. The T-TIP
negotiation was stalled since 2017, although
the Trump Administration has never officially announced to withdraw from the
II. Negotiating Objectives
January 11, 2019, the Office of the U.S. Trade Representative (USTR) released
objectives of the proposed U.S.-EU Free Trade Agreement after
seeking inputs from the public. Overall, the proposed agreement aims to address
both tariff and non-tariff barriers and to “achieve fairer, more balanced trade”
between the two sides.
Regarding textiles and apparel, USTR says it will secure duty-free access for U.S. textile and
apparel products and seek to improve competitive opportunities for exports of
U.S. textile and apparel products while taking into account U.S. import
sensitivities” during the negotiation. The proposed U.S.-EU free trade
agreement also will “establish origin procedures for the certification and
verification of rules of origin that promote strong enforcement, including with respect to textiles.” T-TIP
had adopted similar negotiating objectives for the textile and apparel sector.
III. Industry viewpoints on the agreement
January 2019, leading trade associations
representing the U.S. apparel industry and the EU textile and apparel industries
have expressed support for the proposed U.S.-EU Free Trade Agreement. In general,
these industry associations recommend the agreement to achieve the following
First, eliminate import duties. For example:
Apparel and Footwear Association (AAFA): “We
support the immediate and reciprocal elimination of the high duties that both
countries maintain on textiles, travel goods, footwear, and apparel.”…” We also
support the immediate elimination of any retaliatory duties imposed by the
E.U., as well as any duties imposed by the U.S. (that led to that retaliation).
The duties impose costs on activities, including manufacturing activities in
the U.S., and undermine markets for U.S. exporters in Europe.”
Apparel and Textile Confederation (Euratex):“The
European Textile and Clothing sector faces high tariffs while exporting to the
US market from 11% to up to 32% for some products, namely sewing thread of
man-made filaments, suits, woven fabrics of cotton, trousers and t-shirts. Zero
customs duties while ensuring modern rules of origin will allow EU companies to
boost exports and offer more choice to American consumers and professional
Second, promote regulatory coherence (Harmonization). For example:
AAFA: “The E.U. and the
United States both maintain an extensive array of product safety, chemical management,
and labeling requirements regarding apparel (including legwear), footwear,
textiles, and travel goods.”…” Yet they often contain different requirements,
such as testing or certification, that greatly add compliance costs.”…” We
believe the U.S.‐E.U. trade agreement presents an important opportunity to achieve
harmonization or alignment for these regulations.”
Euratex: “Maintaining high
level of standards while eliminating unnecessary burdens, removing additional
requirements and facilitating customs procedures that impede business are top
priorities. Mutual recognition of the EU and US standards will preserve high
level of consumer protection on both sides of the Atlantic. Convergence on labelling (fibre
names, care symbols and wool labelling),
consumer safety on children products and flammability standards is key for the
T&C sector.” “EURATEX believes the EU and US standardization bodies should
cooperate on setting standards for Smart Textiles taking into account the
industry views for facilitating development and trade of such products of the
Third, adopt flexible/modern rules of origin. For example:
AAFA: “We should also support higher usage of the agreement by making sure the rules of origin reflect the realities of the industry today…”the yarn forward” rules, although theoretically promote usage of trade partner inputs, in practice they operate as significant barriers that restrict the ability of companies to use a trade agreement in many cases”…” We need to incorporate sufficient flexibilities into the rules of origin so that different supply chains –and the U.S. jobs they support – can take advantage of the agreement.”
Euratex: “Zero customs
duties while ensuring modern rules of
origin will allow EU companies to boost exports and offer more choice to
American consumers and professional buyers.”
The National Council of Textile Organizations (NCTO), which represents the U.S. textile industry, hasn’t publically stated its position on the proposed U.S.-EU Free Trade Agreement. However, NCTO had strongly urged U.S. trade negotiators to adopt a yarn-forward rule of origin in T-TIP. NCTO also opposed opening the U.S. government procurement market protected by the Berry Amendment to EU companies.
IV. Patterns of U.S.-EU textile and apparel trade
United States and the EU are mutually important textile and apparel (T&A)
trading partners. For example, the United States is EU’s largest extra-region
export market for textiles, and EU’s fifth largest extra-region supplier of
textiles in 2017 (Euratex, 2018).
the EU is one of the leading export markets for U.S.-made technical textiles as
well as an important source of high-end apparel products for U.S. consumers (OTEXA,
2018). Specifically, in 2017, U.S. T&A exports to the European Union
totaled $2,572 million, of which 73.2% were textile products, such as specialty
& industrial fabrics, felts & other non-woven fabrics and filament
yarns. In comparison, EU’s T&A exports to the United States totaled $4,163
million in 2017, among which textiles and apparel evenly accounted for 48.7%
and 51.3% respectively.
V. Potential economic impact of the agreement
By adopting the Global Trade Analysis Project (GTAP) model, Lu (2017) quantitatively evaluated the potential impact of a free trade agreement between the U.S. and EU on the textile and apparel sector. According to the study:
the trade creation effect of the agreement will expand the EU-U.S.
intra-industry trade for textiles. Meanwhile, the agreement is likely to
significantly expand EU’s apparel exports to the United States.
the trade diversion effect of the U.S.-EU Free Trade Agreement will affect other
T&A exporters negatively, including Asia’s T&A exports to the U.S. market
and EU and Turkey’s T&A exports to the EU market.
Third, the U.S.-EU Textile and Apparel Trade might affect the intra-region T&A trade in the EU region negatively but in a limited way.
Overall, the study suggests that the EU T&A industry will benefit from the additional market access opportunities created by the U.S.-EU Free Trade Agreement.One important factor is that the U.S. and EU T&A industries do not constitute a major competing relationship. For example, the United States is no longer a major apparel producer, and EU’s apparel exports to the United States fulfill U.S. consumers’ demand for high-end luxury products. The U.S.-EU Free Trade Agreement is also likely to create additional export opportunities for EU textile companies in the U.S. market, especially in the technical textiles area, which accounted for approximately 40% of EU’s total textile exports to the United States in 2017 measured in value. Compared with traditional yarns and fabrics for apparel making purposes, technical textiles are with a greater variety in usage, which allows EU companies to be able to differentiate products and find their niche in the U.S. market.
Further, the study suggests that we shall pay more attention to the details of non-tariff barrier removal under the U.S.-EU Free Trade Agreement, which could result in bigger economic impacts than tariff elimination.
To better understand companies’ latest sourcing practices, we recently examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Specifically, we conducted a content analysis of each company’s publicly released annual reports and their financial statements from 2014 to 2017 (the latest information available), with a focus on the following two research questions: 1) How have the sourcing strategies of U.S. apparel companies evolved? 2) How have the evolving sourcing strategies affected companies’ financial performance? Here are the key findings:
apparel companies overall adopt a diverse sourcing base. Among the 50
companies we examined, on average they sourced from over 20 different countries
or regions using more than 200 vendors in 2017. These results echo the findings
of the 2018 U.S. Fashion Industry Benchmarking Study released by the U.S.
Fashion Industry Association (USFIA) in July. Based on a survey of nearly 30
executives from leading U.S. fashion brands and apparel retailers, the study
also found companies with more than 1,000 employees typically source from more
than ten different countries and regions. Also, larger companies, in general,
adopt a more diverse sourcing base than smaller ones.
Second, while U.S.
apparel companies are actively seeking new sourcing bases, many of them are
reducing either the number of countries they source from or the number of
vendors they work with. Specifically, among the top 50 U.S. apparel
companies examined, around 28 percent increased the number of countries or
regions they use as sourcing bases between 2014 and 2017. However, over the
same period, 52 percent chose to consolidate their existing sources base, but
on a small scale. Likewise, among the top 50 U.S. apparel companies examined,
approximately half reduced the number of vendors they use between 2014 and
2017, compared with 33 percent that chose to source from more vendors.
Third, for risk
control purposes, most U.S. apparel companies avoid relying too much on any
single vendor; however, some companies have begun to allocate more sourcing
orders to its largest vendors. The top 50 U.S. apparel companies we
examined on average assigned no more than 10 percent of their total sourcing
value or volumes to any single vendor in 2017. This practice suggests that
minimizing supply chain risks is a critical consideration of U.S. apparel
companies’ sourcing strategy. Nevertheless, between 2014 and 2017, around 45
percent of apparel companies we examined raised the cap slightly.
Fourth, regarding the financial implications of the adjustment of sourcing strategies, companies that diversified their sourcing bases between 2014 and 2017, in general, were able to reduce sourcing cost and improve gross margin. In comparison, U.S. apparel companies we examined that consolidated their sourcing base between 2014 and 2017 suffered a slight decline in their gross margin percentage.
On the other hand, however, there was no clear pattern between a company’s choice of sourcing strategy and their net profit margin. While multiple factors could come into play, one possible explanation for the results is that that either diversifying or considering the sourcing base would incur additional management cost for the company.
The textile mills market primarily includes yarns and
fabrics. The market size is estimated based on the value of domestic production
plus imports minus exports, all valued at manufacturer prices.
The value of the
global textile mills market totaled $748.1 billion in 2016 (around 83.7%
were fabrics and 16.3% were yarns), up 3.5%
from a year earlier. The compound annual growth rate of the market was 2.7%
between 2012 and 2015. The Asia-Pacific
region accounted for 59.6% of the global textile mills market value in 2016
(up from 54.6% in 2015), Europe and the United States accounted for a further
19.1% and 10.8 of the market respectively.
The global textile
mills market is forecast to reach $961.0 billion in value in 2021, an increase
of 28.5% since 2016. The compound annual growth rate of the market between
2016 and 2021 is forecast to be 5.1%.
Apparel manufacturing market
The apparel manufacturing market covers all clothing except
leather, footwear and knitted items as well as other technical, household, and
made-up products. The market size is estimated based on the value of domestic
production plus imports minus exports, all valued at manufacturer prices.
The value of the
global apparel manufacturing market totaled $785.9 billion in 2016, up 3.3%
from a year earlier. The compound annual growth rate of the market was 4.4%
between 2012 and 2016. The Asia-Pacific region accounted for 61% of the market
value in 2016 and Europe accounted for a further 15.2% of the market.
The global apparel manufacturing
market is forecast to reach $992 billion in value in 2021, an increase of 26.2%
since 2016. The compound annual growth rate of the market during the period
of 2016 and 2021 is forecast to be 4.8%.
Apparel retail market
The apparel retail industry consists of the sale of all
menswear, womenswear and childrenswear. The market value is calculated at
retail selling price (RSP), and includes all taxes and duties.
The value of the global apparel retail market totaled $1,414.1 billion in 2017 (52.6% womenswear, 31.3% menswear and 16.1% childrenswear), up 4.9% from a year earlier. The compound annual growth rate of the market was 4.4% between 2013 and 2017. The Asia-Pacific region accounted for 37.1% of the global apparel retail market in 2017 (up from 36.8% in 2015), followed by followed by Europe (28.5%) and the United States (23.6%).
The global apparel
retail market is forecast to reach $1,834 billion in value in 2022, an increase
of 29.7% since 2017. The compound annual growth rate of the market between
2017 and 2022 is forecast to be 5.3%.
The deepening of the regional production and trade network(RPTN) is a critical factor behind the increasing concentration of world textile and apparel exports. RPTN refers to the phenomenon that geographically proximate countries form a regional supply chain.
In general, three primary textile and apparel regional
supply chains are operating in the world today:
Asia: within this regional supply chain, more economically advanced Asian countries (such asJapan, South Korea, and China) supply textile raw material to the less economically developed countries in the region (such as Bangladesh, Cambodia, and Vietnam). Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets around the world.
Europe: within this regional supply chain, developed countries in Southern and Western Europe such as Italy, France, and Germany, serve as the primary textile suppliers. Regarding apparel manufacturing in EU, products for the mass markets are typically produced by developing countries in Southern and Eastern Europe such as Poland and Romania, whereas high-end luxury products are mostly produced by Southern and Western European countries such as Italy and France. Furthermore, a high portion of finished apparel is shipped to developed EU members such as UK, Germany, France, and Italy for consumption.
Western-Hemisphere(WH): within this regional supply chain, the United States serves as the leading textile supplier, whereas developing countries in North, Central andSouth America (such as Mexico and countries in the Caribbean region) assemble imported textiles from the United States or elsewhere into apparel. The majority of clothing produced in the area is eventually exported to the UnitedStates or Canada for consumption.
Associated with these
regional production and trade networks, three particular trade flows are
important to watch:
First, Asian countries are increasingly sourcing textile inputs from within the region. In2017, close to 80 percent of Asian countries’ textile imports came from other Asian countries, up from around 70 percent in the 2000s.
Second, the pattern of EU intra-region trade for textile and apparel stays strong and stable. Intra-region trade refers to trade flows between EU members. In 2017, 55 percent of EU countries’ textile imports and 47 percent of EU countries’ apparel imports came from within the EU region. Over the same period, 68 percent of EU countries’ textile exports and 75 percent of their apparel exports also went to other EU countries.
Third, trade flows under the Western-Hemisphere textile and apparel supply chain are becoming more unbalanced. On the one hand, textile and apparel exporters in the Western-Hemisphere still rely heavily on the region. In 2017, respectively as much as 80 percent of textiles and 89 percent of apparel exports from countries in the Western Hemisphere went to the same region. However, on the other hand, the operation of the Western-Hemisphere supply chain is facing growing competition from Asian suppliers. For example, in 2017, only 24.8 percent of North, South and Central American countries’ textile imports and 15.7 percent of their apparel imports came from within the region, a record low in the past ten years.
Look ahead, it will be interesting to see how will the reaching and implementation of several new free trade agreements, such as CPTPP, RCEP, EU-Vietnam FTA, and the potential US-EU and US-Japan FTAs, affect the regional pattern of world textile and apparel trade.
While apparel products are not subject to the Section 301 tariff yet, the trade action nevertheless has created huge market uncertainties for U.S. fashion brands and apparel retailers. Here is how the monthly trade flow of U.S. apparel imports has reflected the impacts of the U.S.-China tariff war:
First, U.S. companies did NOT stop importing from China. Seasonally adjusted data shows that between January and September 2018, the value of U.S. apparel imports from China decreased by 0.6 percent in volume and 0.05 percent in value year on year. Despite the decline, China remained the No.1 apparel supplier for the U.S. market in the first nine months of 2018, accounting for 32.3 percent market share in value and 41.3 percent shares in quantity, only marginally dropped by 1 and 0.7 percentage points from a year earlier respectively .
Second, apparel “Made in China” are becoming even cheaper. Notably, the average unit price of U.S. apparel imports from China dropped from $2.5/SME in 2016,$2.38/SME in 2017 to $2.36/SME in the first nine months of 2018. On the one hand, this result suggests that cost concern is not the most influential factor that drives U.S. companies to source less from China. However, it is also likely that Chinese exporters are intentionally reducing their price to keep their orders and overcome the challenges caused by the Section 301.
Third, there is no perfect replacement for “Made in China”. In response to the market uncertainty created by the Section 301 trade action, U.S. apparel importers are diversifying their sourcing base. That being said, it is difficult to identify a single largest beneficiary–notably, the market shares of apparel exports from Vietnam, Bangladesh, NAFTA, and CAFTA regions only marginally increased in the first nine months of 2018 compared with a year ago.
Additionally, it remains unclear whether the section 301 trade action has benefited U.S. textile and apparel manufacturing. Data shows that in the first ten months of 2018, the production index (2012=100) of textile manufacturing in the United States slightly increased from 92.8 in 2017to 94.3. However, over the same period, the index of apparel manufacturing decreased from 73.6 to 72.4.
Looking ahead, the volume of US textile and apparel imports from China is likely to increase in the short run since U.S. importers are eager to complete their sourcing orders before the new tariff hit. Usually, companies place sourcing orders several months ahead of the selling season. However, it will be interesting to see if the trade data in the first half of 2019 will reveal the negative impact of the Section 301 action on China’s apparel exports to the U.S. market.
First, the world used
clothing trade has grown significantly over the past ten years. Statistics
from the United Nations show that the value of world used clothing trade (HS
code 630900) has quickly increased from $1.8bn in 2006 to $3.7bn in 2016, an
increase of 106 percent. Between 2006 and 2016, the value of world used
clothing trade enjoyed a 7.6 percent compound annual growth rate (CAGR), which
was almost double the pace of 3.4 percent CAGR for new clothing trade (HS
chapters 61 and 62) over the same period.
Second, the world
used clothing trade flow is highly unbalanced. On the one hand, the developed
economies are the dominant suppliers of used clothing to the world. In
2016, nearly 40 percent of the world’s used clothing exports came from three
countries alone: the United States (15 percent), the United Kingdom (13
percent) and Germany (11 percent). Data also shows that the European Union and
the United States together stably accounted for as much as 65 percent of the
value of world clothing exports between 2006 and 2016. The other country worth
mentioning is China, which is quickly becoming another leading used clothing
exporter in the world. In 2016, China’s used clothing exports totaled US$218m
from only US$0.32m in 2006, an increase of more than 684 percent!
On the other hand,
most of the world used clothing exports end up sold in the developing
countries, especially the least developed ones. For example, in 2016,
Sub-Saharan Africa (SSA) as a whole imported approximately 20 percent of the
world’s used clothing, far more than any other regions in the world. By value,
the top three individual importers of used clothing in 2016 are all developing
countries as well, namely Pakistan (6.0 percent), Malaysia (5.8 percent) and
Ukraine (4.9 percent).
Third, trade policies
regulating used clothing trade often raise controversies. While trade
barriers on new clothing attract much of the public attention, the used
clothing trade is facing even heavier and trickier restrictions of various
kinds. The World Trade Organization (WTO) data shows that in 2016 the average
applied tariff rate for used clothing imports was 19.3 percent, higher than
15.4 percent of new clothing (HS Chapters 61 and 62). Of the total 180
countries covered by the WTO tariff database, 115 (or 64 percent) set an equal
or higher tariff rate for used clothing than the new one. Further, it is not
rare to see extremely high import tariff rates and other quantitative
restrictions applied to used clothing trade. For example, in 2016 the applied
most-favored-nation (MFN) ad valorem equivalent tariff rate for used clothing
was as high as 356.9 percent in Uzbekistan, 167.3 percent in Zimbabwe, 149.2
percent in South Africa, 116.8 percent in Rwanda and 100 percent in Vietnam.
After all, because of
the complicated social, economic and political factors involved, how to
regulate and manage used clothing trade remains a key challenge facing the
First, Canada is one of the largest and fastest growing apparel import markets in the world. Data from the UN Comtrade show that the value of Canada’s apparel imports totaled $10.7bn in 2017, which ranked the fifth in the world, only after the European Union (EU), the United States, Japan, and Hong Kong.
Second, the Asian region as a whole is the dominant apparel supplier for Canada. Measured in value, as much as 80.9 percent of Canada’s apparel imports in 2017 came from Asia. Specifically, China (40.6 percent), Bangladesh (11.1 percent), Cambodia (8.1 percent) and Vietnam (7.7 percent) were the top individual supplier for Canada in 2017, and all of them are located in Asia. Meanwhile, Canadian apparel companies are gradually diversifying their sourcing base: the Herfindahl Index (HHI), a commonly adopted measure of market concentration, declined from 0.3 in 2010 to 0.19 in 2017.
Third, the NAFTA-region remains an important apparel-sourcing base for Canada, but its overall influence is in decline. Measured in value, the United States and Mexico were the 6th and 9th top apparel supplier for Canada in 2017 respectively. However, facing the competition from Asia, the United States and Mexico combined accounted for only 6.4 percent of Canada’s apparel imports in 2017, a significant drop from 9.8 percent back in 2007.
Fourth, free trade agreements and trade preference programs provide duty-saving opportunities for apparel sourcing in Canada. In 2017, Canada applied an average tariff rate of 17.1 percent on imports of knitted apparel (HS Chapter 61) and 15.9 percent on woven apparel (HS chapter 62). As of August 2018, Canada has 17 free trade agreements (FTAs) and trade preference programs (TPAs) in force, offering preferential or duty-free market access to Canada. Traditionally, a substantial portion of Canada’s FTA partners come from the Western Hemisphere, such as Chile, Costa Rica, Colombia, Peru, Honduras, and Panama. However, in recent years, Canada has been actively negotiating and reaching new FTAs with countries in Asia (such as South Korea, India, and Japan) and Europe (including the European Union and Ukraine).
Compared with the United States, in general, Canada adopts more liberal rules of origin (RoO) for apparel products. Quite a few Canada FTAs allow companies to source yarns or even fabrics from anywhere in the world – with the finished products still enjoying duty-free treatment when exported to Canada.
Following the steps of many countries in history, China is gradually shifting its role in the world textile and apparel supply chain. While China unshakably remains the world’s largest apparel exporter, its market shares measured by value fell from 38.6 percent in 2015 to 33.7 percent in 2017. China’s market shares in the world’s top three largest apparel import markets, namely the United States, EU, and Japan, also indicate a clear downward trend in the past five years. This result is consistent with several recent survey studies, which find that fashion brands and retailers are actively seeking alternative apparel sourcing bases to China. Indeed, no country, including China, can forever keep its comparative advantage in making labor-intensive garments when its economy becomes more industrialized and advanced.
However, it is also important to recognize that China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. We observe similar trends in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame.
So maybe the right question to ask in the future is: how much value of “Made in China” actually contains in Asian countries’ apparel exports to the world?
A fact-checking review of trade statistics in 2017 of a total 167 categories of textile and apparel (T&A) products categorized by the Office of Textiles and Apparel (OTEXA) suggests that T&A products “Made in China” still have no near competitors in the U.S. import market. Specifically, in 2017:
Of the total 11 categories of yarn, China was the top supplier for 3 categories (or 27.3%);
Of the total 34 categories of fabric, China was the top supplier for 26 categories (or 76.5%);
Of the total 106 categories of apparel, China was the top supplier for 87 categories (or 82.1%);
Of the total 16 categories of made-up textiles, China was the top supplier for 11 categories (or 68.8%);
In comparison, for those Asian T&A suppliers regarded as China’s top competitors:
Vietnam was the top supplier for only 5 categories of apparel (less than 5% of the total);
Bangladesh was the top supplier for only 2 categories of apparel (less than 2% of the total)
India was the top supplier for 1 category of fabric (2.9% of the total), 1 category of apparel (1% of the total) and 5 categories of made-up textiles (41.7% of the total)
Notably, China not only was the top supplier for many T&A products but also held a lion’s market shares. For example, in 2017:
For the 26 categories of fabric that China was the top supplier, China’s average market shares reached 40.5%, 22 percentage points higher than the 2nd top suppliers for these categories
For the 87 categories of apparel that China was the top supplier, China’s average market shares reached 52.4%, 36 percentage points higher than the 2nd top suppliers for these categories.
For the 11 categories of made-up textiles that China was the top supplier, China’s average market shares reached 58%, 43 percentage points higher than the 2nd top suppliers for these categories.
Furthermore, T&A “Made in China” are demonstrating even bigger price competitiveness compared to other suppliers in the U.S. market. For example, in 2017, the unit price of apparel “Made China” was only 74% of the price of “Made in Vietnam” (in 2015 was 80%), 86% of “Made in Bangladesh” (in 2015 was 93%), 85% of “Made in Mexico” (in 2015 was 90%) and 86% of products by members of CAFTA-DR (in 2012 was 98%).
Last but not least, the U.S.-China tariff war apparently has NOT affected China’s textile and apparel exports to the United States significantly. From January to August this year, China’s apparel exports to the U.S. declined by 1% in value and 0.3% in quantity from a year earlier, but China’s textile exports to the U.S. increased by 12.3% in value and 7.2% in quantity. China’s market shares in the U.S. market also remains overall stable.
Are the results surprising? How to explain China’s increasing price competitiveness despite its reported rising labor cost? What’s your outlook for the future of China as a sourcing destination for U.S. fashion brands and retailers? Please feel free to share your views.
According to the newly released World Trade Statistical Review 2018 by the World Trade Organization (WTO), the current dollar value of world textiles (SITC 65) and apparel (SITC 84) exports totaled $296.1bn and $454.5bn respectively in 2017, increased by 4.2% and 2.8% from a year earlier. This is the first time since 2015 that the value of world textile and apparel exports enjoyed a growth.
Textiles and apparel are not alone. Driven by rising demand for imports globally, the current dollar value of world merchandise exports also grew by 4.7% in 2017–its most robust growth in six years, to reach $17.43 trillion. Particularly, the ratio of trade growth to GDP growth finally returned to its historic average of 1.5, compared to the much lower 1.0 ratio recorded in the years following the 2008 financial crisis.
China, European Union (EU28), and India remained the world’s top three exporters of textiles in 2017. Altogether, these top three accounted for 66.3% of world textile exports in 2017, up from 65.9% in 2016. All the top three also enjoyed a faster-than-average export growth in 2017, including 5.0% of China, 5.8% of EU(28) and 5.9% of India. The United States remained the world’s fourth top textile exporter in 2017, accounting for 4.6 percent of the shares, the same as a year earlier.
Regarding apparel, China, the European Union (EU28), Bangladesh and Vietnam unshakably remained the world’s top four largest exporters in 2017. Altogether, these top four accounted for as much as 75.8% of world market shares in 2017, which was higher than 74.3% a year earlier and a substantial increase from 68.3% back in 2007.
Continuing with the emerging trend in recent years, China is exporting less apparel and more textiles to the world. Notably, China’s market shares in world apparel exports fell from its peak—38.8% in 2014 to a record low of 34.9% in 2017. Meanwhile, China accounted for 37.1% of world textile exports in 2017, which was a new record high. It is important to recognize that China is playing an increasingly critical role as a textile supplier for many apparel-exporting countries in Asia.Measured by value, 47% of Bangladesh’s textile imports came from China in 2017, up from 39% in 2005. We observe similar trends in Cambodia (up from 30% to 65 %), Vietnam (up from 23 % to 50 %), Pakistan (up from 32 % to 71 %), Malaysia (up from 25 % to 54 %), Indonesia (up from 28 % to 46 %), Philippines (up from 19 % to 41 %) and Sri Lanka (up from 15 % to 39 %) over the same period.
Business challenges facing U.S. fashion companies: Protectionism is the top challenge for the U.S. fashion industry in 2018. More companies worry about increases in production or sourcing cost, too. For the second year in a row, “protectionist trade policy agenda in the United States” ranks the top challenge for U.S. fashion companies in 2018.
Industry outlook:Despite concerns about trade policy and cost, executives are more confident about the five-year outlook for the U.S. fashion industry in 2018 than they were a year ago, although confidence has not fully recovered to the level seen in 2015 and 2016. In addition, 100 percent of respondents say they plan to hire more employees in the next five years, compared with 80-85 percent in previous studies; market analysts, data scientists, sustainability/compliance related specialists or managers, and supply chain specialists are expected to be the most in-demand.
U.S. fashion companies’ sourcing strategy: When it comes to sourcing, diversification is key for many companies.
Most respondents continue to maintain a diverse sourcing base, with 60.7 percent currently sourcing from 10+ different countries or regions, up from 57.6 percent in 2017.
Larger companies, in general, continue to be more diversified than smaller companies.
Reflecting the U.S. fashion industry’s growing global reach, respondents report sourcing from as many as 51 countries or regions in 2018, the same as in 2017. Asia as a whole continues to take the lead as the dominant sourcing region. Meanwhile, with the growing importance of speed-to-market and flexibility, the Western Hemisphere is becoming an indispensable sourcing base.
Keeping a relatively diverse sourcing base will remain a key element of U.S. fashion companies’ sourcing strategy. Nearly 80 percent of respondents plan to source from the same number of countries, or more countries, in the next two years. However, respondents are equally divided on whether to increase or decrease the number of suppliers they will work with.
“China plus Vietnam plus Many” has become an ever more popular sourcing model among respondents. And this model is evolving as companies further diversify their China production. In particular, China now typically accounts for only 11-30 percent of companies’ total sourcing value or volume, compared with 30-50 percent in the past.
Although China’s position as the top sourcing destination is unshakable, companies are actively seeking alternatives to “Made in China.” This does not seem to be due to concerns about cost, but rather the worries about the escalating U.S.-China trade tensions.
Benefiting from the diversification away from China, Vietnam and Bangladesh are expected to play a bigger role as apparel suppliers for the U.S. market in the near future.
Rules of origin and the utilization of trade agreements for sourcing: Rules of origin, and exceptions to the rules of origin, significantly impact whether companies use free trade agreements (FTAs) and trade preference programs for sourcing.
While FTAs and trade preference programs remain largely underutilized by U.S. fashion companies, more companies are using NAFTA (65 percent), CAFTA-DR (58 percent) and AGOA (50 percent) than in the past two years.
Still, it’s concerning that companies often do not claim the duty-free benefits when sourcing from countries with FTAs or preference programs. Companies say this is primarily due to the strict rules of origin.
Exceptions to the “yarn-forward” rules of origin, including tariff preference levels (TPLs), commercial availability/short supply lists, and cumulation, are priorities for respondents; 48 percent say they currently use these mechanisms for sourcing. These exceptions provide critical flexibilities that make companies more likely to use FTAs and source from FTA regions.
NAFTA: U.S. fashion companies call for a further reduction of trade barriers and urge trade negotiators to “do no harm” to NAFTA, the most-utilized free trade agreement by respondents.
Respondents predominantly support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to restrictive rules of origin in NAFTA and future free trade agreements.
More than half of respondents explicitly say NAFTA is important to their business—and they have grave concerns about the uncertain future of the agreement.
Sourcing in sustainable and socially compliant ways: Overall, U.S. fashion companies are making more commitments to sustainability and social responsibility.
85 percent of respondents plan to allocate more resources for sustainability and social compliance in the next two years, in areas including providing training to suppliers and internal employees, adding more employees, and working more closely with third-party certification programs on sustainability and social compliance. However, the availability of operational budget remains the primary hurdle for companies that want to do more.
100 percent of respondents map their supply chains (i.e., keep records of name, location, and function of suppliers), up from 90 percent in 2017. Over 80 percent of respondents track not only Tier 1 suppliers (i.e., factory where the final product is assembled), but also Tier 2 suppliers (i.e., subcontractors or major component suppliers, such as fabrics). However, it’s less common for companies to map Tier 3 (i.e., yarn spinners, finding and trimming suppliers) and Tier 4 suppliers (i.e., raw materials suppliers, such as cattle/pig hides, rubber, cotton, wool, goose down, minerals/metals and chemicals).
100 percent of respondents audit their suppliers for issues including building safety, fire safety, and treatment of workers. The vast majority of respondents (96 percent) currently use third-party certification programs to audit, with both announced and unannounced audits.
The US Fashion Industry Benchmarking Study from 2014 to 2017 can be downloaded from HERE