Beth Hughes – Vice President, Trade & Customs Policy, American Apparel and Footwear Association
Dr. Sheng Lu (Moderator), Associate Professor, Department of Fashion & Apparel Studies, University of Delaware
About the session
The Regional Comprehensive Economic Partnership (RCEP), signed in November 2020, is the world’s largest free trade agreement. Nearly half of the world’s textile and apparel exports currently come from the fifteen RCEP members. How will the new “rules of the game” in RCEP shape the future landscape of the textile and apparel supply chain in Asia? Who are the winners and losers of the agreement? Why US fashion brands and retailers also need to care about RCEP? The panel will interpret the key textile and apparel provisions in RCEP and share insights about the agreement’s broad implications on the textile and apparel sector.
What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2021?
I see COVID-19 and market uncertainties caused by the contentious US-China relations as the two most significant challenges facing the apparel industry in 2021.
The difficulties imposed by COVID-19 on fashion businesses are twofold. First, with the resurgence of COVID cases worldwide, when and how quickly apparel consumption can rebound to the pre-COVID level remain hard to tell, particularly in leading consumption markets, including the United States and Europe. As the apparel business is buyer-driven, the industry’s full recovery is impossible without a strong return of consumers’ demand. Numerous studies also show that switching to making and selling PPE won’t be sufficient to make up for losses from regular businesses for most fashion companies.
Second, COVID-19 will also continue to post tremendous pressures on the supply side. In the 2020 Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), the surveyed sourcing executives reported severe supply chain disruption during the pandemic. These disruptions come from multiple aspects, ranging from a labor shortage, a lack of textile raw materials, and a substantial cost increase in shipping and logistics. Even more concerning, many small and medium-sized (SME) vendors, particularly in the developing countries, are near the tipping point of bankruptcy after months of struggle with the order cancellation, mandatory lockdown measures, and a lack of financial support. The post-covid recovery of the apparel business relies on a capable, stable, and efficient textile and apparel supply chain, in which these SME vendors play a critical role.
In 2021, fashion companies also have to continue to deal with the ramifications of contentious US-China relations. On the one hand, the chance is slim that the punitive tariffs imposed on Chinese products, which affect most textiles and apparel, will soon go away. On the other hand, we cannot rule out the possibility that the US-China commercial relationship will deteriorate further in 2021, as more sensitive, complicated, and structural issues began to get involved, such as national security, forced labor, and human rights. Compared with President Trump’s unilateral trade actions, the new Biden administration may adopt a multilateral approach to pressure China. However, it also means more countries could be “dragged into” the US-China trade tensions, making it even more challenging for fashion companies to mitigate the trade war’s supply chain impacts.
Meanwhile, I see digitalization as a big opportunity for the apparel industry, not only in 2021 but also in the years to come. Fashion brands and retailers will increasingly find digitalization ubiquitous to their businesses—like air and electricity. In 2021, I expect fashion companies will make more efforts to creatively use digital technologies to interact with consumers, make transactions, develop products, and improve consumers’ online shopping experiences. Thanks to the adoption of digital tools, apparel companies may also find new opportunities to improve sustainability, better understand their customers through leveraging data science, and develop a more agile and nimble supply chain.
What’s happening with supply chains? How is the sourcing landscape likely to shift in 2021, and what can apparel firms and their suppliers do to stay ahead, remain competitive and build resilience for the future?
Apparel companies’ sourcing and supply chain strategies will continue to evolve in response to consumers’ shifting demand, COVID-19, and the new policy environment. Several trends are worth watching in 2021:
First, fashion companies’ sourcing bases at the country level will stay relatively stable in 2021 overall. For example, although it sounds a little contradictory, fashion companies will continue to treat China as an essential sourcing base and reduce their “China exposure” further, a process that has started years before the tariff war. Most apparel sourcing orders left China will go to China’s competitors in Asia, such as Vietnam, Bangladesh, and Cambodia. This also means that Asia, as a whole, will remain the single largest source of apparel imports, particularly for US and Asia-based fashion companies. In comparison, still, “near-sourcing” is NOT likely to happen on a large scale, mainly because “near-sourcing” requires enormous new investments to rebuild the supply chain, and most fashion companies do not have the resources to do so during the pandemic.
Second, sourcing diversification is slowing down at the firm level, and more apparel companies are switching to consolidate their existing sourcing base. For example, as the 2020 USFIA benchmarking study found, close to half of the respondents say they plan to “source from the same number of countries, but work with fewer vendors” through 2022. Another 20 percent of respondents say they would “source from fewer countries and work with fewer vendors.” The results are understandable– competition in the apparel industry is becoming supply chain-based. Building a strategic partnership with high-quality vendors will play an ever more critical role in supporting fashion brands and retailers’ efforts to achieve speed to market, flexibility and agility, sourcing cost control, and low compliance risk. Thus, apparel companies find it more urgent and rewarding to consolidate the existing sourcing base and resources and strengthen their key vendors’ relations.
Third, apparel sourcing executives still need to keep a close watch on trade policy in 2021. However, we may see fewer news headlines about trade and more “behind the door” advocacy and diplomacy. Specifically:
US Section 301 actions: While the punitive tariffs on Chinese goods may not go away anytime soon, there could be a fight over whether the new Biden administration should continue granting certain companies exclusions from those tariffs. Further, in October 2020, the Trump Administration launched two new Section 301 investigations on Vietnam regarding its import and use of timber and reported “undervaluation currency.” The case is pending, but the stakes are high for fashion companies —Vietnam is often treated as the best alternative to sourcing from China and already accounting for nearly 20% of total US apparel imports.
CPTPP and RCEP: With the reaching of the Regional Comprehensive Economic Partnership (RCEP) in November 2020, there are growing calls for the new Biden administration to consider rejoining the Trans-Pacific Partnership (TPP) in some format to showcase the US presence in the Asia-Pacific region. To make the situation even more complicated, China has openly expressed its interest in joining the Comprehensive Progressive Agreement of the Trans-Pacific Partnership (CPTPP), commonly known as “the TPP without the US.” 2021 will be a critical time window for all stakeholders, including the apparel sector, to debate various trade policy options that could shape the future trade architecture in the Asia-Pacific region.
Brexit: Brexit will enter a new phase in 2021 as the transition period ends on 31 December 2020. On the positive side, we have a playbook to follow—the UK has announced its new tariff schedules for various scenarios, which provide critical market predictability. We might also see the reaching of a new US-UK free trade agreement in the first half of the year, which will be exciting news for the apparel sector, particularly those in the luxury segment. However, as the US Trade Promotion Authority (TPA) is set to expire in July 2021, when and how soon such an agreement will enter into force will be another story. By no means trade policy in 2021 will go boring.
First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. However, the speed of recovery slowed. Specifically, The value of U.S. apparel imports in November 2020 marginally went down by 0.3% from October 2020 (seasonally adjusted), compared with an 8.8% growth from Aug to September and a 4.6% growth from September to October (seasonally adjusted).
As of November 2020, the volume of U.S. apparel imports has recovered to around 85-90% of the pre-coronavirus level. This result echoes the trend of U.S. apparel retail sales (NAICS 4481), which also indicates a “V-shape” rebound since May 2020.
Data further shows that compared with the 2008 world financial crisis, Covid-19 has caused a more significant drop in the value of U.S. apparel imports. However, it seems the post-Covid recovery process has been more robust than the 2009 financial crisis. The Auto Regressive Integrated Moving Average (ARIMA) model forecasts that at the current speed of recovery, the value of U.S. apparel imports (seasonally adjusted) could start to enjoy a positive year over year (YoY) growth by February 2021 (or around 11 months after the outbreak of Covid-19 in March 2020). In comparison, when recovering from the 2008 world financial crisis, it took almost 15 months to turn the YoY growth rate from negative to positive).
With the new lockdown measures taken in response to the resurgence of the Covid cases, the outlook of US apparel imports remains uncertain. It should also be noted that the period from December to April usually is the light season for apparel imports.
Second, supporting the findings of some recent studies, data suggests that U.S. fashion brands and retailers continue to reduce their “China exposure” in 2020. For example, both the HHI index and market concentration ratios (CR3 and CR5) suggest that apparel sourcing orders are gradually moving from China to other Asian countries. Related, since August 2020, China’s market shares in total U.S. apparel imports have been sliding both in quantity and in value.
We should NOT ignore the impact of non-economic factors on China’s prospect as an apparel sourcing destination. For example, the reported forced labor issue related to Xinjiang, China, and a series of actions taken by the U.S. government (such as the CBP withhold release orders) have significantly affected U.S. cotton apparel imports from China. Measured by value, from January to November 2020, only 15.4% of U.S. cotton apparel came from China, compared with 22.2% in 2019 and 28% back in 2017. While China’s total textile and apparel exports to the US dropped by 32% in 2020 (Jan to Nov), China’s cotton textiles and cotton apparel exports to the US went down more sharply by 41.1% and 47.2%, respectively.
Third, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (19.8% YTD in 2020 vs. 16.2% in 2019), ASEAN (32.6% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.2% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.4% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 (Jan to Nov) from a year ago.
Fourth, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the U.S.-China tariff war. In the first eleven months of 2020, 9.4% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.4% from USMCA members (down from 4.5% in 2019). The limited local textile production capacity and the high production cost are the two notable disadvantages of sourcing from the region.
The Regional Comprehensive Economic Partnership (RCEP)is a free trade agreement between ten member states of the Association of Southeast Asian Nations (ASEAN)* and five other large economies in the Asia-Pacific region (China, Japan, South Korea, New Zealand, and Australia). RCEP was reached on November 15, 2020, after nearly eight years of tough negotiation. (Note: ASEAN members include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. India was an original RCEP member but decided to quit in late 2019 due to concerns about competing with Chinese products, including textiles and apparel.)
So far, RCEP is the world’s largest trading bloc. As of 2019, RCEP members accounted for nearly 26.2% of world GDP, 29.5% of world merchandise exports, and 25.9% of world merchandise imports.
Hopefully, RCEP will enter into force as early as late 2021 or early 2022. Officially, RCEP will enter into force 60 days after at least six members approved the agreement through their respective domestic legislature; However, these six members must include three ASEAN members and three non-ASEAN members.
Why RCEP matters to the textile and apparel industry?
RCEP matters significantly for the textile and apparel (T&A) sector. According to statistics from the United Nations, in 2019, the fifteen RCEP members altogether exported US$374 billion worth of T&A (or 50% of the world share) and imported US$139 billion (or 20% of the world share).
In particular, RCEP members serve as critical apparel-sourcing bases for many US and EU fashion brands. For example, in 2019, close to 60% of US apparel imports came from RCEP members, up from 45% in 2005. Likewise, in 2019, 32% of EU apparel imports also came from RCEP members, up from 28.1% in 2005.
Notably, RCEP members have been developing and forming a regional textile and apparel supply chain. More economically advanced RCEP members (such as Japan, South Korea, and China) supply textile raw materials to the less economically developed countries in the region within this regional supply chain. 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 worldwide.
As a reflection of an ever more integrated regional supply chain, in 2019, as much as 72.8% of RCEP members’ textile imports came from other RCEP members, a substantial increase from only 57.6% in 2005. Nearly 40% of RCEP members’ textile exports also went to other RCEP members in 2019, up from 31.9% in 2005.
What are the key provisions in RCEP related to textiles and apparel?
First, RCEP members have committed to reducing the tariff rates to zero for most textile and apparel traded between RCEP members on day one after the agreement enters into force. That being said, the detailed tariff phaseout schedule for textile and apparel products under RCEP is very complicated. Each RCEP member sets their own tariff phaseout schedule, which can last more than 20 years (for example, 34 years for South Korea and 21 years for Japan.) Also, different from U.S. or EU-based free trade agreements, the RCEP phaseout schedule is country-specific. For example, South Korea sets different tariff phaseout schedules for textile and apparel products from ASEAN, China, Australia, Japan, and New Zealand. Japan’s tariff cut for apparel products is more generous toward ASEAN members and less so for China and South Korea (see the graph above). Companies interested in taking advantage of the duty-free benefits under RCEP need to study the “rules of the game” in detail.
Second, in general, RCEP adopts very liberal rules of origin for apparel products. It only requires that all non-originating materials used in the production of the good have undergone a tariff shift at the 2-digit HS code level (say a change from any chapters from chapters 50-60 to chapter 61). In other words, RCEP members are allowed to source yarns and fabrics from anywhere in the world, and the finished garments will still qualify for duty-free benefits. Most garment factories in RCEP member countries can immediately enjoy the RCEP benefits without adjusting their current supply chains.
What are the potential economic impacts of RCEP on the textile and apparel sector?
On the one hand, the implementation of RCEP is likely to further strengthen the regional textile and apparel supply chain among RCEP members. Particularly, RCEP will likely strengthen Japan, South Korea, and China as the primary textile suppliers for the regional T&A supply chain. Meanwhile, RCEP will also enlarge the role of ASEAN as the leading apparel producer in the region.
On the other hand, as a trading bloc, RCEP could make it even harder for non-RCEP members to get involved in the regional textile and apparel supply chain formed by RCEP members. Because an entire regional textile and apparel supply chain already exists among RCEP members, plus the factor of speed to market, few incentives are out there for RCEP members to partner with suppliers from outside the region in textile and apparel production. The tariff elimination under the RCEP will put textile and apparel producers that are not members of the agreement at a more significant disadvantage in the competition. Not surprisingly, according to a recent study, measured by value, only around 21.5% of RCEP members’ textile imports will come from outside the area after the implementation of the agreement, down from the base-year level of 29.9% in 2015.
Further, the reaching of RCEP could accelerate the negotiation of other trade agreements in the Asia-Pacific region, such as the China-South Korea-Japan Free Trade Agreement. Many also say RCEP may create new pressure for the new Biden administration to strengthen the US economic ties with countries in the Asia-Pacific region, such as joining the CPTPP or negotiating new bilateral trade agreements.
TAL Apparel is one of the world’s largest apparel companies, with over 70 years of history. Owned by Hong-Kong based TAL group, TAL Apparel employs about 26,000 garment workers in 10 factories globally, producing roughly 50 million pieces of apparel each year, including men’s chinos, polo tees, outerwear, and dress shirts. TAL Apparel claims it makes one in six dress shirts sold in the United States, including for well-known U.S. fashion brands such as Brooks Brothers, Bonobos, and LL Bean.
Other than owning factories in Asian countries such as Vietnam, China, Malaysia, Indonesia, and Thailand, TAL Apparel opened its first garment factory in Ethiopia in 2018 – based at the country’s flagship Hawassa Industrial Park. Among the reasons behind the decision is Ethiopia’s duty-free access to the US under the African Growth and Opportunity Act (AGOA), and to Europe under the Everything But Arms (EBA) initiative.
Discussion questions [Anyone is more than welcome to join our online discussions; For FASH455, please address at least two questions in your comment; please also mention the question number in your comment.]
From TAL Apparel’s perspective, what are the major impacts of COVID-19 on the apparel industry, especially regarding sourcing and supply chain management? What are the key challenges apparel companies facing?
How has TAL Apparel responded to COVID-19? What lessons can we learn from their experiences?
From TAL Apparel’s story, how is the big landscape of apparel sourcing changing because of COVID-19?
What long term business decisions apparel companies like TAL Apparel have to make, and what are your recommendations?
Anything else you find interesting/intriguing/surprising/enlightening from the video?
I encourage everyone to watch the two short videos above, which provide an excellent wrap-up for FASH455 and remind us of the meaning and significance of our course. BTW, the names of several experts featured in the video should sound familiar to you, such as David Spooner (former U.S. Chief Textile Negotiator and Assistant Secretary of Commerce), Julia Hughes (president of the US Fashion Industry Association, USFIA) and Auggie Tantillo (former president of the National Council of TextileOrganizations, NCTO).
First of all, I hope students can take away essential knowledge about textile and apparel (T&A) trade & sourcing from FASH455. As you may recall from the video, in FASH455, we’ve examined the phenomenon of globalization and its profound social, economic and political implications. We also discussed various trade theories and the general evolution pattern of a country’s T&A industry and its close relationship with that country’s overall industrialization process. We further explored three primary T&A supply chains in the world (namely the Western-Hemisphere supply chain, the flying geese model in Asia, and the phenomenon of intra-region T&A trade in Europe). Last but not least, we looked at unique and critical trade policies that matter significantly to the T&A sector (e.g., U.S.-China tariff war and the yarn-forward rules of origin) as well as the complicated factors behind the making of these trade policies. Whether your dream job is to be a fashion designer, buyer, merchandiser, sourcing specialist, or marketing analyst, understanding how trade and sourcing work will be highly relevant and beneficial to your future career given the global nature of today’s fashion industry.
Second, I hope FASH455 helps students shape a big-picture vision of the T&A industry in the 21st-century world economy and provides students a fresh new way of looking at the world. Throughout the semester, we’ve examined many critical, timely, and pressing global agendas that are highly relevant to the T&A industry, from the impact of COVID-19 on apparel sourcing and trade, apparel companies’ social responsibility practices, the debate on the textile and apparel provisions in the U.S.-Mexico-Canada Trade Agreement (USMCA or NAFTA2.0) to the controversy of used clothing trade. It is critical to keep in mind that we wear more than clothes: We also wear the global economy, international business, public policy, and trade politics that make affordable, fashionable, and safe clothes possible and available for hardworking families. This is also the message from many of our distinguished guest speakers this semester, and I do hope you find these special learning events enlightening and inspiring.
Likewise, I hope FASH455 can put students into thinking about why “fashion” matters. A popular misconception is that “fashion and apparel” is just about “sewing,” “fashion magazine,” “shopping” and “Project Runway.” In fact, as one of the largest and most economically influential sectors in the world today, T&A industry plays a critical and unique role in creating jobs, promoting economic development, enhancing human development and reducing poverty. As we mentioned in the class, over 120 million people remain directly employed in the T&A industry globally, and a good proportion of them are females living in poor rural areas. For most developing countries, T&A typically accounts for 70%–90% of their total merchandise exports and provides one of the very few opportunities for these countries to participate in globalization. The spread of COVID-19, in particular, reveals the enormous social and economic impacts of the apparel sector and many problems that need our continuous efforts to make an improvement.
Last but not least, I hope from taking FASH455, students will take away meaningful questions that can inspire their future study and even life’s pursuit. For example:
How to make the growth of the global textile and apparel trade more inclusive and equal?
How to make sure tragedies like the Rana Plaza building collapse will never happen again?
How will automation, AI and digital technologies change the future landscape of apparel sourcing, trade, and job opportunities?
How to use trade policy as a tool to solve tough global issues such as labor practices and climate change?
Is inequality a problem caused by global trade? If global trade is the problem, what can be the alternative?
Unfortunately, these questions have no good answers yet. However, they are waiting for you, the young professional and the new generation of leaders, to write the history, based on your knowledge, wisdom, responsibility, courage, and creativity!
So what do you take away from FASH455? Please feel free to share your thoughts and comments.
“Hugo Boss’s sourcing strategies are relatively different from fashion brands and retailers in the US. Hugo Boss’s self-owned production facilities are all located in Europe, and they follow the general trend of Eastern Europe being responsible for mass production items and Western Europe being responsible for more of the fine craftsmanship/made-to-measure items. Hugo Boss’s production distribution, which is 53% in Europe, 40% occurs in Asia, 6% in Africa, and 1% in the Americas, is much more diverse than the production distribution of the United States’ T&A industry, which heavily relies on Asian suppliers. It is indicative of a strong regional supply chain in Europe, and because the regional supply chain in the Americas is not as strong due to complicated trade agreements and lack of production capacity, many fashion brands and retailers heavily depend on overseas production from Asian countries. “
“I think that EU’s sourcing strategies are different from the U.S.’s sourcing strategy in the sense that it is kept within Europe. In the U.S., they are currently trying to bring the sourcing supply chain back to the Western Hemisphere, but it is very difficult for fashion brands to concede when sourcing is cheaper in Asia, and there is not enough labor who are trained for the work that they need. Over at the EU, with everything kept within the organization, it is a lot easier to find factories within different countries without reducing GDP since it is kept within the organization.”
“I think that one of the biggest differences between EU and US fashion brand’s sourcing strategies is the fact that there is a much higher luxury or high-end apparel market in the EU. Since they produce mostly luxury apparel products, they naturally place a lot more emphasis on the quality of their products being made rather than the quantity and speed of production. Since the US is more fast-fashion heavy, we do a lot more outsourcing of production so retailer’s are able to produce as many clothes as possible within a short period of time at a very low cost which is simply not achievable in many US clothing factories.”
“Hugo Boss pays close attention to where they are sourcing from and where each of their products should be made within their 4 production facilities. This stuck out to me because I don’t know how many US fashion brands have their own production facilities. I know a lot of brands outsource to countries like China and Bangladesh to factories who are also making clothing for many different brands.”
“EU has developed countries as well as developing countries, unlike the US. Western EU countries like Italy, France, UK and Germany are developed and focus more so on textile production. Whereas developing countries in the EU like Poland and Hungary focus more heavily on apparel manufacturing. In addition, unlike the US, the developed countries in EU also produce apparel exports, of high level, luxury goods.”
“It seems that in the EU the main focus is quality and social standards for these fashion brands and production. In the US, promoting local economic growth seems to be more of the focus of the free trade agreements. Sourcing for HUGO BOSS at least has strategically chosen factories where they can ensure quality checks and know how to conditions are. In the US, outside of the region, it seems that there are a lot of brands who do not know their secondary producers…”
“As the EU is more focused on production in high end markets than is the US, they (EU fashion companies) source more high-end quality fabrics. Progress has been made through technological advances, as the HUGO BOSS group developed the “smart factory” to further improve the quality of their fabrics and recognize any potential flaws before production. This stood out to me as a major difference, considering the US focuses on producing more fast-fashion goods and prioritizes high productivity overall quality garments. Also, they are more careful in their selection of suppliers and strive to build more long-term relationships with their suppliers. In comparision, most US fashion companies just try to produce as cheap and fast as possible through a short-term transctional-based importer-vendor relationship.”
“I think the sourcing strategies are similar to the U.S. in the fact that they source from various countries, creating this sense of “Made in the World.” However, there are differences as well. HUGO BOSS uses their own production facilities in addition to sourcing from other countries which is something we do not see often in the US. In fact, most brands and retailers in the US do not have their own production facilities or vertical supply chain, but instead source from overseas. Additionally, HUGO BOSS carefully selects their suppliers and immediately focus on social responsibility. US sourcing strategies seem to emphsis more on finding a factory with the lowest labor costs. EU brands and retailers, on the other hand, test their suppliers with test orders before selecting them as a supplier for the brand, and immediately develop social responsibility practices, such as trainings and building relationships. In the US, brands and retailers tend to focus on social responsibility in response to bad press and typically do so by a top-down approach.”
“The sourcing strategy in the Europe cares more about social impact. Retailers and brands there promote and educate their suppliers to be sustainable and take over their social responsibility. Another one is the European fashion retailers and brands are more likely to locate their product facilities within the Europe. Since the Europe does have a relatively stable and complete supply chain, the retailers and brands are able to saving transportation cost and expand the lead time. Third, the technology becomes an important factors for retailers and brands to consider. They are attempting to utilize technology to enhance the performance and their production process. “
“Hugo Boss strives to be the most desirable fashion and lifestyle brand in the premium sector. This shows in their emphasis on design, comfort, fit, and durability, as well as being mindful of their social and environmental impacts. They maintain long term relationships with a careful selection of suppliers, demand social compliance, and stay up to date with their “smart factory” aka AIs to speed up production and quality. They also source heavily from Asia, but also developed countries such as Italy and Germany. These values and practices are manifested in American brands, however, I believe we aren’t as extensive with sourcing from developed countries (such as Italy). From what I have learned thus far, it seems we source from countries close by and/or developing, but not so much mingling with luxury known countries, such as France or Italy (and if we do, the prices are expensive, and American customers don’t want to pay higher prices). We (US), too, source heavily from Asia, because it is cheap, and still focus internally on our own country when it comes to being more competitive in technological advancements. American and EU consumers alike value transparency in the clothing brands they buy from, and American brands are mindful of this, too. I would say we are more alike than different.”
[Please feel free to critique the comments above and join our online discussion]
The Trans-Pacific Partnership (TPP) was a proposed free trade agreement between the United States and other eleven countries in the Asia-Pacific region, including Malaysia, Peru, Australia, Vietnam, Mexico, Canada, Japan, Singapore, Brunei, Chile, and New Zealand.
Once TPP is implemented, tariffs for textiles and apparel traded between TPP members would be reduced to zero from their current rate (around 5%-10% for textiles and 10-30% for apparel). The tariff rate for trade between TPP members and non-TPP members (such as China) will remain unchanged. However, TPP would NOT provide additional import duty saving benefits for textile and apparel products traded between Mexico, Canada, and the United States because tariffs are already reduced to zero under the U.S.-Mexico-Canada Trade Agreement (USMCA or commonly called NAFTA 2.0).
TPP adopts the strict “yarn-forward” rules of origin for apparel items. This means that fibers may be produced anywhere, but each component starting with the yarn used to make the apparel garments must be formed within the TPP area so that the finished apparel can be qualified for the preferential duty-treatment provided by TPP.
Among the TPP members, Vietnam is already the second-largest apparel exporter to the United States. Despite the high tariff rate, the value of U.S. apparel imports from Vietnam increased by 131% between 2010 and 2019, much higher than 17% of the world average. Vietnam’s shares in the U.S. apparel import market also quickly increased from only 4.0% in 2005 to 16.8% in 2019 (and 20.2% from Jan to August 2020).
As a developing country, Vietnam relies on imported yarns and fabrics heavily for its apparel production. Over 97% of Vietnam’s textile imports come from Asian countries, including China, South Korea, Taiwan, and Japan. Less than 1% of Vietnam’s textile imports came from the United States in 2019.
Meanwhile, thanks to foreign investments (mostly also from Asia), Vietnam is quickly building its local textile manufacturing capacity. Notably, data from the World Trade Organization (WTO) shows that for the first time in history, Vietnam ranked the world’s seventh-largest textile exporter in 2019, climbing 8.3% from a year earlier to reach $8.8billion. If it can maintain this momentum, Vietnam is likely to surpass South Korea and become the world’s sixth-largest textile exporter in 1-2 years.
President Trump announced to withdrawal the United States from TPP in January 2017. However, the rest of the 11 members decided to move on the agreement without the United States. The so-called Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP without the U.S.) was reached in March 2018 and officially took into effect in December 2018. Much of the original TPP provisions remain intact in CPTPP.
China’s, one of the world’s largest apparel exporters and textile exporters, is actively exploring the possibility of joining CPTPP. Meanwhile, China plays an increasingly important role as a textile supplier for apparel-exporting countries in Asia over the past decade. In 2019, China supplied 57% of Vietnam’s textile imports, up from 26% in 2010.
Since CPTPP goes into effect, there have been growing calls for the United States to consider rejoining the agreement. However, debates remain regarding the specific economic benefits and costs of doing so.
Discussion question: from the perspective of the U.S. textile industry and U.S. fashion brands and retailers, why or why not the United States should rejoin TPP?
First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. The value of U.S. apparel imports in September 2020 went up by 8.8% from August 2020 (seasonally adjusted), a new record high since March 2020 when COVID-19 broke out in the States. As of September 2020, the volume of U.S. apparel imports has recovered to around 84-85% of the pre-coronavirus level. This result echoes the trend of U.S. apparel retail sales (NAICS 4481), which also indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports hopefully will last for another 1-2 months.
Data also shows that compared with the 2008 world financial crisis, Covid-19 has caused a more significant drop in the value of U.S. apparel imports. However, it seems the post-Covid recovery process has been more robust than the 2008 financial crisis. Notably, the Auto Regressive Integrated Moving Average (ARIMA) model forecasts that at the current speed of recovery, the value of U.S. apparel imports (seasonally adjusted) could start to enjoy a positive year over year (YoY) growth by February 2021 (or around 11 months after the outbreak of Covid-19 in March 2020). In comparison, when recovering from the 2008 world financial crisis, it took almost 15 months to turn the YoY growth rate from negative to positive.
Second, still, no evidence suggests that U.S. fashion companies are giving up China as one of their essential apparel-sourcing bases. Notably, since May 2020, China had quickly regained its position as the top apparel supplier to the U.S. market. From June to September 2020, China’s market shares have stably stayed at around 27-28% in value and 40-42% in quantity.
According to the media, some sourcing orders are returning to China as China’s competitors in Asia are struggling with more limited production capacity, shortage of raw material and supply chain disruption caused by Covid-19.
That being said, trade data suggests that U.S. fashion companies continue to reduce their “China exposure” overall. For example, both the HHI index and the market concentration ratios (CR3–total market shares of top 3 suppliers and CR5–total market shares of top 5 suppliers) indicate that apparel sourcing orders are gradually moving from China to other Asian countries–it is interesting to see HHI, CR3 and CR5 all suggest a more diversified apparel sourcing base in 2020 (Jan-Sep) than in 2018 and 2019; however, the value of CR5 (exclude China) reached a new record high in 2020 (Jan-Sep).
Third, related to the point above, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.0% YTD in 2020 vs. 16.2% in 2019), ASEAN (33.1% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.4% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.4% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.
Fourth, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first nine months of 2020, only 9.1% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.4% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first nine months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 26% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the major contributing factors.
Just an anecdote–according to some industry insiders, the booming of E-commerce during the pandemic may also possibly explain why “near sourcing” is not reflected in trade data despite its reported growing popularity. Specifically, US fashion retailers would:1) import products from Asia and stock them in the bonded warehouses in Mexico (note: bonded warehouse means dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty). 2) When US consumers place orders, the retailer will ship products directly from these bonded warehouses in Mexico to the final destination. Most importantly, retailers could take advantage of the US de minimis rule (i.e., goods valued at $800 or less could enter the U.S. duty-free one person one day) and avoid paying tariffs– even though these products are counted as imports from Asian countries that do not have a free trade agreement with the United States. In other words, these products are not officially treated as imports from Mexico even though they are shipped from bonded warehouse in Mexico.
Speaker: Wilson Zhu, the Chief Operating Officer of Li & Fung
The originator of the US-China trade war was not actually about the “trade deficit”, but rather a lack of “trust” between the two countries.
Trade deficit could be a “misleading concept”–while the iPhone was claimed to be “Made in China”, it wasn’t manufactured there at all—instead, China only played the role of a “middle-man of the supply chain.” Such a misunderstanding is within the ancient country of origin rules used in international trade.
The “Made in China” label is becoming “obsolete.” As China continues to expand its supply chain globally, ports in China are evolving into “managers” of products “Made in the world.”
There is still great hope for the global apparel supply chain in the post-Covid world. Less economically developed countries like Vietnam are now mimicking the former industrialization of China in its factories with the help of advanced technology. And, the United States continues to advance the efficiency and sophistication of its textile production. It seems that all in all, the only way to make it through this crisis successfully, is through global collaboration, not conflict.
The surveyed U.S. fashion companies demonstrate more readiness and interest in using the US-Mexico-Canada Trade Agreement (USMCA) for apparel sourcing purposes in 2020 than a year ago:
For companies that were already using NAFTA for sourcing, the vast majority (77.8 percent) say they are “ready to achieve any USMCA benefits immediately,” up more than 31 percent from 2019.
Even for respondents who were not using NAFTA or sourcing from the region, about half of them this year say they may “consider North American sourcing in the future” and explore the USMCA benefits.
Nevertheless, when asked about the potential impact of USMCA on companies’ apparel sourcing practices, some respondents expressed concerns about the rules of origin changes. These worries seem to concentrate on denim products in particular. For example, one respondent says, “USMCA changes negatively affects our denim jeans sourcing particularly with the new pocketing rules of origin.” Another adds, “Denim pocketing ROO change is a concern but manageable.”
It also remains to be seen whether USMCA will boost “Made in the USA” fibers, yarns, and fabrics by limiting the use of non-USMCA textile inputs. For example, while the new agreement expands the Tariff Preference Level (TPL) for U.S. cotton/man-made fiber apparel exports to Canada (typically with a 100 percent utilization rate), these apparel products are NOT required to use U.S.-made yarns and fabrics.
1. The garment industry in the Asia-Pacific region is particularly vulnerable to the adverse impact of COVID-19 because of the size of the industry present and the high stakes involved. Notably, garment workers (over 60 million in total, including 35 million women) accounted for 21.1% of the manufacturing employment in the region as of 2019. Over 60% of the world’s apparel exports currently come from the Asia-Pacific region.
2. The cumulative impacts of COVID-19 on garment supply chains have been both far-reaching and complex: 1) As of September 9, 2020, more than 31 million garment workers in the Asia Pacific region were still affected by factory closure (i.e., mandatory closures of non-essential workplaces). 2) The drop in consumer demand and the decline in retail sales in the primary apparel consumption markets across the world have affected garment workers in the Asia-Pacific region negatively. As of September 9, 2020, 49% of all jobs in the Asia-Pacific garment supply chains (29 million) were dependent on demand for garments from consumers living in countries with the most stringent lockdown measures in place. Another 31 million jobs (51%) depended on consumer demand that is based in countries with a medium level of lockdown measures in place. 3) COVID-19 has further caused supply chain disruptions and prevented imported inputs into garment production from arriving in time. The heavy reliance on textile raw material supply from China makes many apparel producing countries in South-East Asian countries highly vulnerable to shortages of inputs.
3. The world apparel trade has fallen in the first half of 2020 sharply. This includes a 26% YoY drop in the US, a 25% drop in the EU, and a 17% drop in Japan. However, the timing and magnitude of these import declines vary significantly — China’s exports started to drop first at the beginning of the year,2020. Then, the exports from Vietnam, Bangladesh, Indonesia, and India began to decrease also since February (a joint effect of the shortage of raw material + decreased import demand). Data further shows that the drop in world apparel trade has been more significant than other products in the first half of 2020.
4. Apparel suppliers in the Asia Pacific region have been struggling with order cancellations AND longer payment terms insisted on by Western fashion brands and retailers. Garment factories say that they don’t have the leverage to ‘push back’ against these changes to contract terms and buyer policies.
5. Thousands of garment factories in the Asia-Pacific region closed at least temporarily because of COVID-19, some of them indefinitely. For example, In Cambodia, approximately 15-25% of factories had no orders at the end of the June 2020. Likewise, around 60% of garment factories in Bangladesh reported closing for more than 3 weeks. Related, layoffs have been widespread. For example, according to Indonesia’s Ministry of Industry, approximately 30% of their apparel and footwear workforce had been laid-off by July 2020 (812,254 in total). In Cambodia, approximately 15% of their garment workers (more than 150,000 workers) were reported to have lost their jobs during the pandemic. Further, garment factories have been operating at reduced capacity during the pandemic. For example, in Bangladesh, as of July 2020, the proportion of workers returning to work after re-opening was only 57% of the pre-pandemic level. Similarly, in Vietnam, as of July 2020, the proportion of workers returning to work after re-opening was also just around 50% of the pre-pandemic level.
First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. The value of U.S. apparel imports in August 2020 went up by 7.6% from July 2020 (seasonally adjusted), a new record high since March 2020 when COVID-19 broke out in the States. As of August 2020, the volume of U.S. apparel imports has recovered to around 80% of the pre-coronavirus level. This result echoes the trend of U.S. apparel retail sales (NAICS 448), which also indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports hopefully will last for another 1-2 months.
Nevertheless, between January and August 2020, the value of U.S. apparel imports decreased by almost 30% year over year, which has been MUCH worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
Second, no evidence suggests that U.S. fashion companies are giving up China as one of their essential apparel-sourcing bases. Notably, since May 2020, China had quickly regained its position as the top apparel supplier to the U.S. market. From June to August 2020, China’s market shares have stably stayed at around 27-28% in value and 40-42% in quantity.
Some industry sources show that “Made in China” enjoys two notable advantages that other apparel supplying countries cannot catch up in the short term. 1) unparalleled production capacity, meaning importers can source almost all products in any quantity from China vs. more limited production capacity (both in terms of variety and volume) in other alternative sourcing destinations. 2) China can mostly produce textile raw material locally vs. many apparel exporting countries still rely heavily on imported yarns and fabrics (supplied by China).
However, non-economic factors, particularly the reported Xinjiang forced labor issue, are complicating fashion companies’ sourcing decisions. Notably, US cotton apparel imports from China year-to-date (YTD) in 2020 (Jan to August) significantly decreased by 54% from a year ago, much higher than the 22% drop in US imports from the rest of the world. As a result, China’s market share in the US cotton apparel import market sharply declined from 22% in 2019 to only 15.1% in 2020 (Jan-Aug), a record low in the past ten years. This unusual trade pattern suggests that the concerns about social compliance risk are holding US fashion companies back from sourcing cotton apparel products from China. As the forced labor issue continues to evolve and become ever more sensitive and high profile, it is not unlikely that US fashion companies may substantially cut their China sourcing further, even if it is not a preferred choice economically.
Third, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.2% YTD in 2020 vs. 16.2% in 2019), ASEAN (33.6% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.6% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.
Likewise, thanks to a highly integrated regional textile and apparel supply chain, Asian countries all together were able to maintain fairly stable market shares on the world stage over the past decade despite all market disruptions, from the financial crisis, trade war to the wage increase.
Fourth, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first seven months of 2020, only 8.9% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first eight months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 28.0% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the contributing factors.
Further, industry sources show that the apparel products U.S. fashion companies import from members of USMCA and CAFTA-DR predominantly are tops and bottoms. The lack of production capacity for other product categories significantly limits the growth potential of these countries playing the role as a leading sourcing base.
#1 In class, we discussed that trade always creates both winners and losers. So who are the winners and losers in the US-China tariff war? Also, why should or should not the government use trade policy to pick up winners and losers in international trade?
#2 Why do you think U.S. fashion brands and retailers oppose Section 301 tariffs on apparel imports from China, whereas the National Council of Textile Organizations (NCTO), which represents the US textile industry, supports Trump’s tariff action?
#3 The U.S.-China tariff war continues during the pandemic, resulting in higher sourcing costs for U.S. fashion brands and retailers, which have been struggling hard financially. In such a case, if you were the CEO of Macy’s, why or why not would you pass the tariff burden to consumers, i.e., ask consumers to pay a higher price?
#4 Why or why not do you agree with the Trump Administration to lift the Section 301 tariffs on PPE imports from China? Isn’t a high tariff typically protects the domestic industry and would incentivize more U.S.-based PPE production?
#5 Most classic trade theories (such as the comparative advantage trade theory and the factor proportion trade theory) advocate free trade with no government interventions. However, international trade in the real world has been so heavily influenced by government policy, such as tariffs. How to explain this phenomenon? Are trade theories wrong, or is the government wrong?
[Anyone is welcome to join the online discussion. For students in FASH455, please address at least two questions in your comment. Please also mention the question number in your comment]
Jason Prescott founded JP Communications INC in 2005 and rapidly established TopTenWholesale.com and Manufacturer.com as the largest US-based B2B global trade network for manufacturers, retailers, department stores, discounters, importers, wholesalers, buyers and brands. A decade later, in 2016, he established the Apparel Textile Sourcing trade show platform with the China Chamber of Commerce for Import & Export of Textile & Apparel to connect the global B2B network of over 2 million with manufacturers around the globe via in-person events. By 2020, the ATS brand has created the fastest-growing trade shows in the industry producing annual events in Miami, Toronto, Montreal, Berlin and virtually.
Jason is active in search marketing models and technology and provides consulting and seminars in around the world for organizations looking to invest in the USA market. He is the author of two best-selling books, Wholesale 101 and Retail 101, published by McGraw Hill as well as articles on business and technology appearing in B2B Online, Omma, IMediaConnection, CEO Magazine, Entrepreneur Online, and been cited in Inc Magazine, Business Week and Forbes Online.
Kendall: What has motivated you to get involved in the apparel business, especially running the Apparel Textile Sourcing Trade (ATS) Shows, which has grown into one of the most popular and influential sourcing events today?
Jason: We started our company in 2005 w/ our flagship product – www.TopTenWholesale.com – which is a search engine for wholesale suppliers and products. In 2010 we acquired www.manufacturer.com – a sourcing platform to find global producers and manufacturers. It would be fair to say that never in our wildest imagination did we think we would be producing some of the world’s top sourcing trade fairs in the apparel and textile industry. I’d like to say it was a natural evolution but to be frank the opportunity came up over a cup of tea with a very good friend of mine, Mr. Chen Zhirong – Director for the China Chamber of Commerce for Import & Export of Textiles (CCCT) – in Dec 2015. What started from a cup of tea wound up growing into a trade show company that now produces events 4 cities, 3 countries and 2 continents (Miami, Toronto, Montreal, Berlin).
More than 200 of the world’s top producers of apparel, textiles, accessories, footwear, and personal protective equipment will exhibit virtually at Apparel Textile Sourcing trade shows this fall. Attendance is always free and the interactive event also specializes in seminars, sessions, workshops and panels from experts in the industries of sourcing, fashion, design and retail.
Kendall: COVID-19 is the single biggest challenge facing the textile and apparel industry today. From your observation, how has COVID-19 affected textile and apparel companies’ sourcing practices? What will be the medium to the long-term impact of COVID on textile and apparel sourcing?
Jason: The fallout from the pandemic – particularly in the textile and apparel industry – and how it impacts sourcing, has had such a far-reaching magnitude that it’s still very challenging to figure out how sourcing practices will be impacted. Over the long term, there is no question that this pandemic will speed up near-sourcing, on-shoring, digitization, and real-time production. The interim has resulted in massive layoffs, geo-political uncertainty and a turbulent political atmosphere that has rattled the cages of just about every sourcing director. The industry has seen purchase orders defaulted on, behavior in the supply chain that should not be tolerated, and a general lack of accountability. I also have no question that as we continue to emerge out of the pandemic there will be an advanced focus much more on the global revolution of sustainability, fair labor practices, plus a far-keener eye on the eco-systems in which the textile industry lives and breathes.
Kendall: There have been more heated debates on the future of China as an apparel sourcing base for US fashion companies, especially given the escalating U.S.-China trade war and the COVID-19. What is your view?
Jason: It should be noted that more than a billion dollars of trade in the textile sector in China was lost in export shipments to the USA during the first half of 2019 – primarily due to the trade war. The pandemic has since crippled exports of textile and apparel – in not just China – but also in every sourcing region on the planet. While many media outlets and others talk about the demise of China as a producer for textile and apparel that is just not the case. The Chinese have built an infrastructure, invested billions of dollars in the best technology, and have mastered the art of production over the last 3+ decades. We must not also forget that much of this infrastructure was built with trillions of dollars by the world’s leading brands, retailers, and governments. To bail on that would not be prudent. The Chinese are extremely adaptive and there is no question they have taken the time during the pandemic – and I should also note that they have emerged quicker than anyone else from the pandemic – to invest much more in technology, made-to-order, customization, and enhances on sustainable practices by utilizing more renewables.
Kendall: Many studies suggest that fashion companies continue to actively look for China’s alternatives. Do we have a “Next China” yet– Vietnam, Bangladesh, India, Ethiopia, or somewhere else?
Jason: No we do not have a next China yet. The production in many regions that have competent supply chains – like Vietnam – are full and at over-capacity. It should further be noted that a large portion in places like Vietnam are owned in partnerships thru the Chinese. Simply stated, many of the other regions such as Bangladesh, India, and the AGOA regions lack infrastructure and the decades of experience that the Chinese have.
Kendall: Some predict that near sourcing rather than global sourcing will become ever more popular as fashion companies are prioritizing speed to market and building a shorter supply chain. Why or why not do you think the shift to near sourcing or reshoring is happening?
Jason: This is correct. On-demand production, near-sourcing, and the evolution of digitization will of course lead to increased manufacturing domestically. Neither of these options are yet a solution for the high-volume production which is at the heart of the industry. I will agree that the continued emergence of micro-brands, and continually evolving shifts in consumer behavior which generally has resulted in ‘disloyalty’ to brands is another factor that makes on-shoring or near-shoring more attractive.
Kendall: Building a more sustainable and socially responsible textile and apparel supply chain is also growing in importance. From interacting with fashion brands and retailers, can you provide us with some updates in this area, such as companies’ best practices, issues they are working on, or the key challenges that remain?
Jason: The circularity of the industry encompassing the producer, the brand, logistics, and the consumer will continue to evolve in their social responsibilities and awareness of sustainable practices engaged in by the brand. There are great organizations out there like WRAP, TESTEX and Better Buying who are growing and have a much larger voice than what they have had in the past. Post-pandemic, I believe we will see social responsibility as one of the top priorities with so many millions of people displaces from COVID-19.
Kendall: For our students interested in pursuing a career in the textile and apparel industry, especially related to sourcing, do you have any suggestions?
Jason: The top suggestion I can offer is to pursue experience as you are actively engaged in your studies. One of the key elements I can advise of is to take the time and learn culture over language. Having a cultural understanding of the key regions where sourcing occurs will catapult your career and bring significant relationships to the table that you never thought you would have had before. Also, attend trade shows! Walking thru international apparel trade shows – like The Apparel Textile Sourcing – will help you immerse yourself with numerous different nationalities and personalities that you would otherwise never have the chance to meet. Jump on any opportunity you can to go abroad. Especially to regions in Asia and Latin America. Most importantly never forget that your credibility in life is everything and maintain the highest pedigree of integrity as possible.
The latest statistics from the Office of Textiles and Apparel (OTEXA) show that the patterns of U.S. apparel imports continue to involve because of COVID-19 and the escalating US-China tensions. Meanwhile, there appeared to be more potent signs of gradual economic recovery in the U.S. driven by consumers’ robust demand. Specifically:
While the value of U.S. apparel imports decreased by 32.0% in July 2020 from a year ago, the speed of the decline has significantly slowed (was down 60% and 42.8% year over year in May and June 2020, respectively). This result echoes the trend of U.S. apparel retail sales (NAICS 448), which indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports could continue in the next two to three months.
Nevertheless, between January and July 2020, the value of U.S. apparel imports decreased by 30.7% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
The latest trade statistics suggest that based on economic factors, U.S. fashion companies would like to continue to treat China as an essential apparel-sourcing base. As the first country hit by COVID-19, China’s apparel exports to the U.S. dropped by as much as 49.3% from January to July 2020 year over year. In February 2020, China’s market shares slipped to only 11%, and both in March and April 2020, U.S. fashion companies imported more apparel from Vietnam than from China. However, China had quickly regained its position as the top apparel supplier to the U.S., with a 26.3% market share in value and a 38.8% share in quantity in July 2020.
Different from the impact of the trade war, COVID-19 could benefit China as an apparel sourcing base as fashion companies have to “do more with fewer resources.” In general, China still enjoyed two notable advantages that other apparel supplying countries are unable to catch up in the short term. 1) unparalleled production capacity, meaning importers can source almost all products in any quantity from China vs. more limited production capacity (both in terms of variety and volume) in other alternative sourcing destinations. 2) China can mostly produce textile raw material locally vs. many apparel exporting countries still rely heavily on imported yarns and fabrics (supplied by China).
Contrary to common perceptions, apparel “Made in China” apparently are also becoming more price-competitive–the unit price slipped from $2.25/Square meters equivalent (SME) in 2019 to $1.88/SME in 2020 (January to July), or down more than 16.7% (compared with a 5.6% price drop of the world average). As of July 2020, the unit price of U.S. apparel import from China was only 65.7% of the world average, and around 25—35 percent lower than those imported from other Asian countries.
That being said, non-economic factors, from the deteriorating US-China relations to the reported Xinjiang forced labor issue, are increasingly complicating fashion companies’ sourcing decisions. Somehow as a warning sign, China’s market shares in the U.S. apparel import market slipped in both quantity and value terms in July 2020 compared with a month ago.
Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.5% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.3% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.6% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.
However, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first seven months of 2020, only 8.8% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first seven months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 28.9% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the contributing factors why near sourcing has been stagnant.
As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first six months of 2020. The price index declined from 104.7 in 2019 to 99.0 YTD (Jan to Jul) in 2020 (Year 2010 =100). The imports from Mexico (price index =86.4 YTD in 2020 vs. 112.1 in 2019) and China (price index = 69.7 YTD in 2020 vs. 83.5 in 2019) have seen the most notable price decrease so far.
Over the past decade, the US and UK bilateral trade in apparel enjoyed steady growth, reflecting ever closer business ties of fashion companies in the two countries. While US apparel exports still predominantly go to geographically nearby countries such as Mexico and Canada, the UK has emerged to become the single largest export market for “Made in the USA” apparel outside the Western Hemisphere. Similarly, the United States has always been the UK’s single largest export market outside the EU region.
On the other hand, the apparel products that the US and the UK export to each other target different segments of the market. Industry sources indicate that the clothing exported from the US to the UK primarily focuses on the premium market. Garments “Made in the USA” in the UK are mostly carried by premium brands and retailers such as Free People, J. Crew, and Moda Operandi. However, due to a lack of brand power, clothing “Made in the USA” is typically priced 30%-50% lower than similar products locally made in the UK or elsewhere in Western EU, such as France and Italy.
In comparison, approximately 70% of apparel exported from the UK to the US are luxury goods. With a relatively clear-cut market position, luxury and high-end designer UK brands, such as Burberry, Roland Mouret, and Victoria Beckham, can effectively reach out to their target markets.
How Might the US-UK FTA Affect the Bilateral Apparel Trade
According to the released negotiation objectives, both the US and the UK seem to be willing to consider a substantial cut or even a full elimination of the apparel tariff rate as part of the trade deal. Should this happen, fashion companies across the Atlantic could benefit from a proportional reduction of their sourcing cost, resulting in a considerable expansion of the US-UK bilateral apparel trade flows.
On the other hand, to enjoy the preferential duty benefit under a free trade agreement, rules of origin will always be a requirement. Notably, most US trade agreements currently adopt the so-called “yarn-forward” rules of origin. In contrast, most EU-based trade deals adopt a more liberal “fabric-forward” rule.
While it is hard to predict which specific rules of origin the proposed US-UK trade agreement will adopt, it seems the result will have a more significant impact on the US apparel exports to the UK than the other way around. Restrained by the limited domestic supply and high cost, a substantial proportion of US apparel exports contain imported textile raw materials. This means US apparel producers may have to either switch to use more expensive domestic textile inputs or forgo the FTA duty-saving benefits should restrictive rules of origin are adopted. Meanwhile, the UK apparel exports to the US will be less sensitive to the rules of origin in the proposed FTA, as most of these luxury items are already 100% “Made in the UK” to meet customers’ expectations.
Uncertainties associated with the US-UK FTA
The US-UK trade negotiations have to deal with an evolving Brexit. Given the EU’s economic cloud, understandably, some argue that the UK may have to reach a comprehensive trade agreement with the EU before it can consider a trade deal with the US. Additionally, several US domestic politics and policy factors may further slow down the progress of the US-UK trade negotiation, from the US presidential election to the upcoming expiration of the trade promotion authority (TPA).
Impact of COVID19 on Fashion Companies’ Businesses
The overwhelming majority of respondents report “economic and business impacts of the coronavirus (COVID-19)” as their top business challenge in 2020. The business difficulties caused by COVID-19 will not go away anytime soon, and U.S. fashion companies have to prepare for a medium to the long-term impact of the pandemic.
COVID-19 has caused severe supply chain disruptions to U.S. fashion companies. The disruptions come from multiple aspects, ranging from a labor shortage, shortages of textile raw materials, and a substantial cost increase in shipping and logistics.
COVID-19 has resulted in a widespread sales decline and order cancellation among U.S. fashion companies. Almost all respondents (96 percent) expect their companies’ sales revenue to decrease in 2020.
As sales drop and business operations are significantly disrupted, not surprisingly, all respondents (100 percent) say they more or less have postponed or canceled sourcing orders. Nearly half of self-identified retailers say the sourcing orders they canceled or postponed go beyond the 2nd quarter of 2020. Another 40 percent expect order cancellation and postponement could extend further to the fourth quarter of 2020 or even beyond. The order cancellation or postponement has affected vendors in China, Bangladesh, and India the most.
Impact of COVID-19 and US-China Trade War on Fashion Companies’ Sourcing
As high as 90 percent of respondents explicitly say, the U.S. Section 301 action against China has increased their company’s sourcing cost in 2020, up from 63 percent last year.
COVID-19 and the trade war are pushing U.S. fashion companies to reduce their “China exposure” further. While “China plus Vietnam plus Many” remains the most popular sourcing model among respondents, around 29 percent of respondents indicate that they source MORE from Vietnam than from China in 2020, up further from 25 percent in 2019.
As U.S. fashion companies are sourcing relatively less from China, they are moving orders mostly to China’s competitors in Asia. All respondents (100 percent) say they have “moved some sourcing orders from China to other Asian suppliers” this year, up from 77 percent in 2019.
However, no clear evidence suggests that U.S. fashion companies are sourcing more from the Western Hemisphere because of COVID-19 and the U.S.-China trade war.
Emerging Sourcing Trends
Sourcing diversification is slowing down, and more U.S. fashion companies are switching to consolidate their existing sourcing base. Close to half of the respondents say they plan to “source from the same number of countries, but work with fewer vendors,” up from 40 percent in last year’s survey.
China most likely will remain a critical sourcing base for U.S. fashion companies. However, non-economic factors could complicate companies’ sourcing decisions. Benefiting from U.S. fashion companies’ reduced sourcing from China, Vietnam and Bangladesh are expected to play a more significant role as primary apparel suppliers for the U.S. market.
Given the supply chain disruptions experienced during the pandemic, U.S. fashion companies are more actively exploring “Made in the USA” sourcing opportunities to improve agility and flexibility and reduce sourcing risks. Around 25 percent of respondents expect to somewhat increase sourcing locally from the U.S. in the next two years, which is the highest level since 2016.
US-Mexico-Canada Trade Agreement (USMCA)
For companies that were already using NAFTA for sourcing, the vast majority (77.8 percent) say they are “ready to achieve any USMCA benefits immediately,” up more than 31 percent from 2019. Even for respondents who were not using NAFTA or sourcing from the region, about half of them this year say they may “consider North American sourcing in the future” and explore the USMCA benefits. Some respondents expressed concerns about the rules of origin changes. These worries seem to concentrate on denim products in particular.
African Growth and Opportunity Act (AGOA)
Close to 37 percent of respondents say they have been sourcing MORE textile and apparel from sub-Saharan Africa (SSA) since the latest AGOA renewal in 2015, a substantial increase from 27 percent in the 2019 survey. More than 40 percent of respondents say AGOA and its “third-country fabric provision” are critical for their sourcing from the SSA region. More than 40 percent of respondents say AGOA and its “third-country fabric provision” are critical for their sourcing from the SSA region.
However, respondents still demonstrate a low level of interest in investing in the SSA region directly. Around 27 percent of respondents say the temporary nature of AGOA and the uncertainty associated with the future of the agreement have discouraged them.
With AGOA’s expiration date quickly approaching, the discussions on the future of the agreement and the prospect of sourcing from SSA begin to intensify. Among the various policy options to consider, “Renew AGOA for another ten years with no major change of its current provisions” and “Replace AGOA with a permanent free trade agreement that requires reciprocal tariff cut and continues to allow the third-country fabric provision” are the most preferred by respondents.
The latest statistics from the Office of Textiles and Apparel (OTEXA) show that while the negative impacts of COVID-19 on U.S. apparel imports continued in June 2020, there appeared to be early signs of economic recovery. Specifically:
While the value of U.S. apparel imports decreased by 42.8% in June 2020 from a year ago, the speed of the decline has slowed (was down 60% year over year in May 2020). Nevertheless, between January and June 2020, the value of U.S. apparel imports decreased by 30.4% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
The latest trade statistics support the view that U.S. fashion companies continue to treat China as an essential apparel-sourcing base, despite COVID-19, the trade war, and companies’ sourcing diversification strategy. As the first country hit by COVID-19, China’s apparel exports to the U.S. dropped by as much as 49.0% from January to June 2020 year over year. In February 2020, China’s market shares slipped to only 11%, and both in March and April 2020, U.S. fashion companies imported more apparel from Vietnam than from China. However, China’s apparel exports to the U.S. are experiencing a “V-shape” recovery: as of June 2020, China had quickly regained its position as the top apparel supplier to the U.S., with a 29.1% market share in value and 43.4% share in quantity.
Moreover, U.S. apparel imports from China are also becoming more price-competitive—the unit price slipped from $2.25/Square meters equivalent (SME) in 2019 to $1.88/SME in 2020 (January to June), or down more than 16% (compared with a 4.6% price drop of the world average). As of June 2020, the unit price of U.S. apparel import from China was only 65% of the world average, and around 25—35 percent lower than those imported from other Asian countries. On the other hand, the official Chinese statistics report a 19.4% drop in China’s apparel exports to the world in the first half of 2020.
Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.3% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.4% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.9% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.
However, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first six months of 2020, only 8.8% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.2% from NAFTA members (down from 4.5% in 2019).
Notably, U.S. fashion companies source products from Asia (including China) and the Western Hemisphere for different purposes. In general, US companies tend to source either price-sensitive or more sophisticated items from Asia, where factories overall have higher productivity and more advanced production techniques. Meanwhile, the Western Hemisphere is typically used to source products that require faster speed-to-market or more frequent replenishments during the selling season. Some studies further show that there is more divergence in the products imported into the United States from Asian countries and the Western Hemisphere from 2015 to 2019. In contrast, over the same period, China, ASEAN, and Bangladesh appear to be exporting increasingly similar products to the United States.
That being said, as USMCA enters into force on July 1, 2020, a more stable trading environment could encourage more U.S. apparel sourcing from Mexico down the road (assuming garment factories there can gradually resume production and no further COVID-19 related shutdown).
As a reflection of weak demand, the unit price of U.S. apparel imports dropped in the first six months of 2020 (price index =100, meaning the same nominal price as in 2010). The price index was 104.7 in 2019. The imports from Mexico (price index =87.1 YTD in 2020 vs. 112.1 in 2019) and China (price index = 69.9 YTD in 2020 vs. 83.5 in 2019) have seen the most notable price decrease so far.
First, in general, USMCA still adopts the so-called “yarn-forward” rules of origin. This means that fibers may be produced anywhere, but each component starting with the yarn used to make the garments must be formed within the free trade area – that is, by USMCA members.
Second, other than the source of yarns and fabrics, USMCA now requires that some specific parts of an apparel item (such as pocket bag fabric) need to use inputs made in the USMCA region so that the finished apparel item can qualify for the import duty-free treatment.
Third, USMCA allows a relatively more generous De minimis than NAFTA 1.0.
Fourth, USMCA seems to be a “balanced deal” that has accommodated the arguments from all sides regarding the tariff preference level (TPL) mechanism:
Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
Compared with NAFTA, USMCA will expand the TPL level for a few product categories with a high TPL utilization rate.
Fifth, USMCA will make no change to the Commercial availability/short supply list mechanism in NAFTA 1.0.
Sixth, it remains to be seen whether USMCA will boost “Made in the USA” fibers, yarns and fabrics by limiting the use of non-USMCA textile inputs. For example, while the new agreement expands the TPL level for U.S. cotton/man-made fiber apparel exports to Canada (currently with a 100 percent utilization rate), these apparel products are NOT required to use U.S.-made yarns and fabrics. The utilization rate of USMCA will also be important to watch in the future.
First, USMCA overall is a balanced deal for the textile and apparel sector, particularly regarding the rules of origin (RoO) debate. As USITC noted, USMCA eases the requirements for duty-free treatment for certain textile and apparel products, but tighten the requirements for other products.
Second, the USMCA changes to the Tariff Preference Level (TPLs) would not have much effect on related trade flows. As USITC noted in its report, where USMCA would cut the TPL level on particular U.S. imports from Canada or Mexico, the quantitative limit for these product categories was not fully utilized in the past. Meanwhile, the TPL level for product categories typically fully used would remain unchanged under USMCA. The only trade flow that might enjoy a notable increase is the U.S. cotton and man-made fiber (MMF) apparel exports to Canada—the TPL is increased to 20million SME annually under USMCA from 9 million under NAFTA.
Third, USITC suggested that in aggregate, the changes under USMCA for the textile and apparel sector will more or less balance each other out and USMCA would NOT affect the overall utilization of USMCA’s duty-free provisions significantly. Notably, the under-utilization of free trade agreements (FTAs) by U.S. companies in apparel sourcing has been a long-time issue. Data from the Office of Textiles and Apparel (OTEXA) shows that of the total $4,163 million U.S. apparel imports from the NAFTA region in 2019, around $3,742 million (or 89.9%) claimed the preferential duty benefits under the agreement. As noted in the U.S. Fashion Industry Benchmarking Study, some U.S. fashion companies do not claim the duty savings largely because of the restrictive RoO and the onerous documentation requirements.
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).
Textiles and apparel “Made in the USA” are gaining growing attention in recent years amid the escalating U.S.-China trade war, the rising cost of imports, and consumers’ increasing demand for “speed to market.” Statistics show that the value of U.S. textile and apparel (T&A) production totaled $US28.1bn in 2018, which was a record high since 2010. Meanwhile, different from the old days, more and more T&A “Made in the USA” are sold overseas today. According to the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, the value of U.S. T&A exports reached US$22.9bn in 2019, up nearly 20% from ten years ago.
Despite the strong performance in production and export, however, U.S. T&A manufacturers do not seem to be “visible” enough. Given the information gap, we recently analyzed the 122 U.S. T&A manufacturers included in the OTEXA “Made in the USA” database. Information in the database is self-reported by companies and then verified by OTEXA. Our analysis intends to gain more insights into the state of U.S. T&A mills, including their demographics, production and supply chain strategies, as well as their export behaviors.
First, U.S. T&A manufacturers display a relatively high concentration of geographic locations. Notably, as much as 61% of self-reported yarn manufacturers are from North Carolina (NC), followed by South Carolina (SC), which accounts for another 11%. The concentration of yarn manufacturing in the south, in particular, can be attributed to the abundant cotton supply in that region. Meanwhile, California (CA) has one of the most complete T&A supply chains in the country, with the presence of manufacturers across all T&A sub-sectors.
Second, large-size textile mills are gradually emerging in the United States, whereas U.S. apparel manufacturers are predominantly small and medium-sized. U.S. textile mills, in general, have a high concentration of factories with over 100 employees, particularly those engaged in producing yarns (53%), fabrics (37%), and technical textiles (38%). In the past decade, many relatively small-sized U.S. textile mills had merged into larger ones to take advantage of the economies of scale and reduce production cost. In comparison, over half of the apparel mills in the OTEXA database reported having less than 50 employees. Notably, because of the significant disadvantage in labor cost, U.S. apparel mills are not trying to replace imports, but instead focusing on their “niche market.” For example, designer-based micro-factories are popular these days in U.S. fashion centers such as New York City and California. These factories typically provide customized services, ranging from proto-typing to sample production.
Third, “fabric + apparel” and “fabric + technical textiles” are the two most popular types of vertical integration among U.S. T&A mills. A relatively small proportion of T&A mills included in the OTEXA database had adopted the vertical integration business strategy. Notably, fabric mills seem to be most actively engaged in the vertical integration strategy–around one-third of them reported also making apparel, technical textiles, or home textiles. Additionally, 20% of technical textile manufacturers in the OTEXA database have incorporated an apparel component to their product portfolio. This is a significant trend to watch as more and more sportswear brands are developing technology-driven functional apparel. However, we find few U.S. T&A mills have created a vertical integration model that covers three or more different nature of products.
Fourth, U.S. T&A mills have shifted from only making products to also offering various value-added services. Notably, the majority of companies included in the OTEXA “Made in the USA” database reported having the in-house design capability, including apparel mills (86%), fabric mills (80%), yarn manufacturers (61%), home textiles manufacturers (71%) as well as those making technical textiles (91%). U.S. T&A mills also commonly describe themselves as “innovators” and “solutions providers” on their websites to highlight that the nature of their core business is to serve customers’ needs rather than just “making” physical products.
Fifth, exporting has become an important economic activity of U.S. T&A manufacturers today. Notably, of all the 122 U.S. T&A manufacturers in the OTEXA “Made in the USA” database, as many as 70.5% reported engaged in export, a trend which echoes the rising value of U.S. textile and apparel exports in recent years. Regarding the particular export behaviors of U.S. T&A mills, several patterns are interesting to note:
U.S. textile mills (76%) are more actively engaged in export than those that make apparel products only (37%).
Larger U.S. T&A mills overall had a higher percentage engaged in export than those manufacturers smaller in size.
The Western Hemisphere is the dominant export market for U.S. yarn, fabric, and home textile mills, whereas the export markets for U.S. apparel mills and technical textile producers are relatively more diverse.
Except for apparel producers, the export diversification strategy is commonly adopted by U.S. T&A mills. As many as 77% of yarn manufacturers included in the OTEXA database reported exporting to three or more different markets in the world. Likewise, around 40% of the fabric, home textiles, and technical textiles mills did the same.
Free trade agreements support U.S. T&A exports. A high percentage of U.S. T&A mills that reported exporting to the Western Hemisphere said they took advantage of NAFTA and CAFTA-DR, two primary U.S. free trade agreements with the region. The utilization of NAFTA and CAFTA-DR is particularly high among U.S. yarn producers (83.3%).
Canada is one of the world’s top ten largest apparel consumption markets, with retail sales totaling USD$28.04bn in 2019 (Euromonitor, 2020). Similar to other developed nations, clothing sold in Canada is predominately imported, making Canada a significant market access opportunity for clothing manufacturers, wholesalers, fashion brands, and retailers around the world. Based on the latest market and trade data, this study intends to provide an in-depth analysis of the Canadian apparel sourcing patterns.
First, the volume of Canada’s apparel imports mirrors its economic growth. As the apparel business is buyer-driven, the performance of Canada’s national economy has a huge impact on its apparel imports. Canada’s GDP growth is an important predictor for its growth in apparel imports. When Canada’s national economy boomed, its apparel imports also enjoyed a proportional expansion thanks to consumers’ higher income and purchasing power. Such a strong correlation, however, also suggests a likely sharp decline in Canada’s apparel imports in 2020 due to its national economy took a hard hit by the Covid-19 pandemic. [Note: with a 6.2% drop in GDP growth as forecasted by IMF, Canada’s apparel imports in 2020 could decrease by 16.4% from 2019. At the 95% confidence level, the worst case in 2020 will be a 29% decline of apparel imports from a year earlier and the most optimistic case will be a 4% decline.]
Second, although China remains the top apparel supplier for Canada, Canadian fashion companies are increasingly sourcing from South Asia. Three trends to note: 1) China’s market share in Canada has been declining steadily from its peak in the 2010s. 2) Meanwhile. Canada is moving more sourcing orders to other Asian countries, particularly Vietnam and Bangladesh. 3) Additionally, thanks to the EU-Canada Free Trade Agreement (CETA), which provisionally entered into force in 2017, Canada’s apparel imports from the European Union (EU) has been rising steadily. In 2019, EU members altogether accounted for 6% of Canada’s apparel imports, an increase from 4% in 2010. Around half of Canada’s apparel imports from the EU are made in Italy, whose high-end luxury apparel exports could be among the biggest beneficiaries of the duty-saving opportunities provided by CETA.
Third,near sourcing from the Americas remains an essential component of Canadian fashion companies’ sourcing portfolio; However, sourcing from the NAFTA regions is in decline. Approximately 9% of Canada’s apparel imports come from North, Central, and South Americas altogether, a pattern that has stayed relatively stable since 2010. As consumers in Canada are seeking “faster fashion”, Canadian fashion companies are attaching even greater importance to leveraging near sourcing from the Americas and improving their speed to market. For example, Lululemon placed around 8% of its sourcing orders with factories in the Americas in 2018, higher than 3%-5% five years ago.
Canada’s apparel imports from members of the North American Free Trade Agreement (NAFTA), however, has suffered a notable drop from 12.3% back in 2005 to the record low of 5.4% in 2019. As President Trump repeatedly threatened to withdraw the United States from NAFTA since he took office in 2017, the mounting uncertainty had caused Canadian fashion companies to cut sourcing from the region. For years, many Canadian fashion companies have been actively using the tariff preference level (TPL) mechanism to import apparel from the NAFTA region, although only a limited amount of TPL quota is allowed each year. While the TPL utilization rate for Canada’s cotton and man-made fiber apparel imports from the United States always reached 100%, the utilization rate slipped to a record low of 84% 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.