Textile and Apparel Products Covered by the U.S.-China Tariff War–Reference List (updated Sep 2019)

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Appendix: Links for the Product List (updated August 23, 2019)

by Sheng Lu

American Giant: $108 Hoodie Made in the USA

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Discussion questions:

  1. Is it still meaningful to promote apparel 100% “Made in the USA” in today’s global economy? Why or why not?
  2. From the video, what is your evaluation of the strength, weakness, opportunity, and threat of American Giant’s business?
  3. From the video and our class discussions, why or why not do you think the U.S.-China tariff war has benefited textiles and apparel “Made in the USA”?
  4. Will you be interested in working in a textile mill/garment factory as featured in the video after graduation? Why or why not?
  5. Any other thoughts/reflections from the video?

[For FASH455: 1) Please mention the question number in your comments; 2) Please address at least TWO questions in your comments]

Additional readings:

U.S.-China Tariff War Escalates–Impact on Apparel and Footwear

Background: In response to China’s decision to impose 5%–10% retaliatory tariffs on $75 billion U.S. products, on August 23, 2019, the Trump administration announced to raise the Section 301 tariffs from 25% to 30% for around $250 billion Chinese products (tranche 1, 2 and 3), effective October 1, 2019. The scheduled Section 301 tariffs on $300 billion Chinese products (tranche 4) to take into effect on September 1, 2019 and December 15, 2019 will also be increased from 10% to 15%.

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Trump lashes out at China, sending markets reeling

U.S. fashion brands and retailers are deeply concerned about the negative impacts of the tariff war on their businesses. According to the 2019 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association, even without considering the upcoming 10-15% tariffs to be imposed on around $35.7 billion Chinese textiles and apparel covered by tranche 4:

  • The trade diversion effect of Section 301 has accelerated U.S. fashion companies’ pace of reducing sourcing from China. About 83 percent of respondents expect to decrease sourcing from China over the next two years, up further from 67 percent in 2018.
  • The Section 301 action is pushing up the price of U.S. apparel imports across the board, making “increasing production and sourcing cost” the top business challenge for respondents in 2019. As much as 63 percent of respondents explicitly say the U.S. Section 301 tariff action against China “increased my companies’ sourcing cost” in 2019. As companies are moving sourcing orders to Bangladesh, Vietnam, and India, the average price of U.S. apparel imports from these countries – the main alternatives to China — have all gone up very quickly.
  • No evidence shows that Section 301 has benefited near-sourcing from the Western Hemisphere and reshoring from the United States significantly. Instead, respondents say Section 301 has increased the production costs of textiles and apparel “Made in the USA.”
  • Respondents say they are reluctant but may have to increase their retail prices, should the U.S.-China tariff war escalate further.

Related reading:

U.S. Textile and Apparel Industry is NOT Immune to the U.S.-China Tariff War

The full article is available HERE

This article tries to evaluate the potential impact of the U.S.-China tariff war on the U.S. textile and apparel (T&A) industry, including manufacturing and related trade activities.

The quantitative evaluation conducted is based on the Global Trade Analysis Project (GTAP) model. Data came from the latest GTAP9 database, which covers trade, employment and production in 57 sectors in 140 countries. In correspondence to the recent development of the U.S.-China tariff war, the analysis focuses on the following three scenarios:

  • Scenario 1: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, except textiles and apparel
  • Scenario 2: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel
  • Scenario 3: 25% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel

Three findings are of note:

First, the tariff war with China will increase the market price for T&A in the United States and consequentially incentivize more production of T&A “Made in the USA.” As shown in Figure 1, the annual U.S. T&A production will increase when the punitive tariff is imposed on textile and apparel imports from China. The most significant increase will happen in scenario 3 (textile output expands by US$8,829 million and apparel output expands by US$6,044 million) when a 25 percent punitive tariff is imposed and the market price of T&A in the U.S. also correspondingly goes up by nearly 1.5% compared with the base year level in 2017.

Second, the tariff war with China will hurt U.S. textile exports. The results show that the tariff war will increase the production cost of “Made in the USA,” and result in a decline of U.S. textile exports due to reduced price competitiveness. This is the case even in scenario 1 when the tariff war does not target T&A directly, but nevertheless, raises the price of intermediaries for producing textiles in the United States. The results further show that the annual U.S. textile exports will suffer the most significant decline in scenario 3 (down US$1,136 million), especially to China and other Asian countries where U.S. textile products are facing intense competition from local suppliers. In comparison, U.S. textile exports to the Western Hemisphere will suffer a loss as well in the tariff war, but to a much less extent due to the strong supply-chain relationship with the region.

Third, the trade diversion effect of the tariff war will bring in more apparel imports to the U.S. market from Asian suppliers other than China. As shown in the figure above, when the punitive tariff imposed on textile and apparel products, the value of U.S. apparel imports from China will decline ranging from US$4,573 million (10 percent punitive tariff imposed) to US$8,858 million (25 percent punitive tariff imposed) annually compared with the base year level in 2017. This result reflects U.S. apparel importers and retailers’ mounting concerns about sourcing cost in the setting of the tariff war. However, apparently, the tariff war will do little to help U.S. domestic apparel manufacturers reduce the competitive pressure with imports. Particularly, in scenario 3, U.S. apparel imports from suppliers other than China will increase as much as US$10,400 million, worsening the U.S. trade deficit in the apparel sector further.

by Sheng Lu

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

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Sub-Saharan Africa (SSA) is widely regarded as a growing apparel-souring destination. Particularly, U.S. Congress established the African Growth and Opportunity Act (AGOA), a non-reciprocal trade preference program, in 2000, to help developing SSA countries grow their economy through expanded exports to the United States. Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA. Notably, the “third-country fabric provision” under AGOA allows US apparel imports from certain SSA countries to be qualified for duty-free treatment even if the apparel items use yarns and fabrics produced by non-AGOA members, such as China, South Korea, and Taiwan. This special rule is deemed as critical as most SSA countries still have no capacity in producing capital and technology-intensive textile products.

That being said, to play a bigger role as an apparel sourcing base, SSA is not without significant challenges:

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Challenge 1: limited industry upgrading and local textile production capacity

Theoretically, as a country’s economy advances, it should gradually be producing and exporting more capital and technology-intensive textiles versus labor-intensive apparel products. This is the notable trends in many Asian countries (such as China and Vietnam), where the textile/apparel export ratio has been rising steadily between 2005 and 2017. However, as a reflection of the stagnant industry upgrading, the textile/apparel export ratio remains fairly low in SSA, including in Lesotho, Kenya, and Mauritius, the top three largest apparel exporters in the SSA region.

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Challenge 2: Slow and no progress in export diversification

Ideally, as the economy becomes more sophisticated, textiles and apparel (T&A) should account for a declining share in a country’s total merchandise exports. Countries such as China, Vietnam, and ASEAN demonstrate perfect examples. However, in some SSA countries (e.g., Lesotho), T&A has stably accounted for over 80% of their total merchandise exports over the past 17 years, a sign of slow or no progress in export diversification. In other SSA countries, T&A accounted for less than 10% of their total merchandise exports, suggesting the sector is not a priority to the local economy.

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Challenge 3: Intense competition both in key export markets and domestic market

As of 2017, over 96% of SSA countries’ T&A exports went to three markets: the United States, the EU, and other SSA members. However, because of the intense competition, except for the regional SSA market, SSA countries account for merely 1.4% and 0.2% of total U.S. and EU textile and apparel imports in 2017 respectively.

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Even more concerning, the T&A industry in SSA countries is facing growing competition in the domestic market with cheap imports, mostly from Asia. Notably, SSA countries import MORE apparel than they export, a phenomenon rarely seen among developing countries in a similar stage of economic development.

Challenge 4: U.S. companies remain low interest in investing in the region directly

According to several recent studies, leading U.S. fashion brands and retailers remain low interest in investing in the SSA region directly, even though companies admit more investments in areas such as infrastructure are critical to the success of SSA countries serving as competitive apparel sourcing bases. Some argue that the “temporary” nature of AGOA make companies hesitant to build factories in SSA. However, should AGOA become a permanent free trade agreement, which follows the principle of reciprocity, SSA countries would have to lower their trade barriers to U.S. products, including eliminating the tariffs and non-tariff barriers, in exchange for the reciprocal market access benefits from the United States. It doesn’t seem most AGOA members are ready for that stage yet.

by Sheng Lu

Further reading: USITC Report: AGOA and the Third-country Fabric Provisions Critical for U.S. Apparel Sourcing from sub-Saharan Africa

U.S. Apparel Retailers’ Shifting Sourcing Strategy for “Made in China” under the Shadow of the Tariff War

The full article is available HERE

Key findings:

First, U.S. fashion brands and retailers are sourcing less from China, particularly in quantity. Notably, the number of “Made in China” apparel newly launched to the market had significantly dropped from 26,758 SKUs in the first quarter of 2018 to only 8,352 SKUs in the first quarter of 2019 . Nevertheless, consistent with the macro-level trade statistics, China remains the single largest apparel supplier to the U.S. retail market.

Second, apparel “Made in China” are becoming more expensive in the U.S. retail market, yet remain price-competitive overall. Notably, apparel “Made in Vietnam” is becoming more expensive in the U.S. retail market too—an indication that as more production is moving from China to Vietnam, apparel producers and exporters in Vietnam are facing growing cost pressures.

Third, U.S. fashion retailers are shifting what apparel products they source from China. U.S. apparel retailers have been sourcing less lower value-added basic fashion items (such as tops, and underwear), but more sophisticated and higher value-added apparel categories (such as dresses and outerwear) from China since 2018. The shifting product structure could also be a factor that contributed to the rising average retail price of “Made in China” in the U.S. market.

On the other hand, U.S. retailers adopt a very different product assortment strategy for apparel sourced from China versus other regions of the world. There seems to be much fewer alternative sourcing destinations for more sophisticated product categories, such as accessories and outerwear. Somehow ironically, moving to source more sophisticated and higher value-added products from China could make U.S. fashion brands and retailers even MORE vulnerable to the tariff war because of fewer alternative sourcing destinations.

In conclusion, the results imply that China will remain a critical sourcing destination for U.S. fashion brands and retailers in the near future, regardless of the scenario of the U.S.-China tariff war. Meanwhile, we should expect U.S. fashion companies continue to adjust their sourcing strategy for apparel “Made in China” in response to the escalation of the tariff war.

Related reading: Trade war to hit high-end US fashion brands dependent on specialized Chinese manufacturing

USITC Economic Assessment Report on USMCA—Textile and Apparel Sector Summary

On April 19, 2019, the U.S. International Trade Commission (USITC) released its independent assessment report on the likely economic impact of the U.S.-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0). Below are the key findings of the report:

Impact of USMCA on the U.S. economy

USITC found that because of the size of the U.S. economy relative to the size of the Mexican and Canadian economies and the reduction in tariff and nontariff barriers that has already taken place among the three countries under the North American Free Trade Agreement (NAFTA), the overall impact of USMCA on the U.S. economy is likely to be moderate. For example, USITC’s computable general equilibrium (CGE) model suggests that compared to the base year level in 2017, USMCA could increase the U.S. GDP by 0.35% (or $68.2 billion) and create 0.17 million new jobs when other factors held constant.

Impact of USMCA on the textile and apparel sector

First, USITC found that the 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. For example, USMCA eliminates the NAFTA requirements that visible linings must be sourced from members of the agreement; however, USMCA adds more restrictive new requirements for narrow elastic fabrics, sewing thread, and pocket bag fabric.

Second, USITC found that 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 $4,292.8 million U.S. apparel imports from the NAFTA region in 2018, only $3,756.1 million (or 87.5%) 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.

However, interesting enough, the USITC report says little about the potential impact of USMCA on U.S. textile and apparel manufacturing.

Timeline

On 30 September 2018, the United States reached USMCA with Canada and Mexico. On 30 November 2018, USMCA was officially signed by Presidents of the three countries. According to the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (the picture above), after the release of the USITC economic assessment report on USMCA, the Trump Administration will need to work with U.S. Congress to develop legislation to approve and implement the agreement. However, there remains huge uncertainties over USMCA’s prospect.

Related reading: