Interview with Modaes.es on the Latest Trends of Apparel Sourcing and Trade

The original interview (in Spanish) is available HERE. Below is the translated version.

Question: Is there a reversal in the globalization of fashion?

Sheng Lu: The fashion industry is becoming more global AND regional — the making and selling of a garment “travel” through more and more countries. Just look at the label of a Gap sweatshirt: it is an American clothing brand, but the product is “Made in Vietnam,” and the label includes the size standards in six different countries. The business model of the fashion industry today is “making anywhere in the world and selling anywhere in the world.”

Q .: What do you mean the industry is becoming more “regional”?

Sheng Lu: The trade flows of textiles and apparel today are heavily influenced by regional free trade agreements (FTAs). For example, while China is known as the world’s largest apparel producer and exporter, nearly 50% of the clothing consumed by European consumers are still produced by EU countries themselves. Notably, consumers have different expectations for clothing: many are price-sensitive, but others prefer more trendy items, which requires “near sourcing”—this explains why fashion companies have to adopt a more balanced sourcing portfolio.

Q .: Is the price still the most important factor in fashion companies’ sourcing decisions?

Sheng Lu: Sourcing is far more than just about chasing for the lowest cost. Sourcing decisions today have to consider a mix of factors, ranging from flexibility, speed to market, sustainability, to compliance risks. In fact, few companies “put all eggs in one basket.” My recent studies show that both in the United States and the EU, fashion companies with more than 1,000 employees, typically sourced from more than twenty different countries—sometimes even exceed forty. Behind such a diversified sourcing practice is the necessity to strike a balance between so many different sourcing factors.

Q .: Is apparel sourcing becoming more diversified today than a decade ago?

Sheng Lu: From my observations, fashion companies are souring from more countries and regions than a decade ago, but not in terms of producers. Especially in the last two or three years, I see some large companies are consolidating their supplier base to build a closer relationship with key vendors. The reason is the same as mentioned earlier: a very competitive price is not enough for apparel sourcing today.

Q .: How has the tariff war between the United States and China affected apparel sourcing?

Sheng Lu: The trade war between the United States and China is having big impacts on apparel sourcing that go beyond the two countries. Notably, American fashion brands and retailers are moving sourcing orders from China to other Asian countries such as Vietnam and Bangladesh. However, finding China’s alternatives is anything but easy. Despite the tariff war, China remains a competitive player in apparel sourcing. The unparalleled production capacity that can fulfill orders nearly for any products in any quantity, and the ability to comply with complex sustainability and social responsibility regulations are among China’s unique competitive advantages. Understandably, companies are not giving up sourcing from China, as there are few other “balanced” sourcing destinations in the world. That being said, it is important to recognize that the big landscape of apparel sourcing is evolving. Even in Europe, which is not having a trade war with China, apparel “Made in China” is seeing a notable decline in its market share.

Q .: How is China adapting?

Sheng Lu: The textile and apparel industry in China is undergoing a structural change. Partially caused by the tariff war, apparel producers in China are increasingly moving their factories to nearby Asian countries (especially for big-volume and/or relatively low value-added product categories). Meanwhile, China itself is changing from an apparel producer to become a leading textile supplier for other apparel-exporting countries in Asia. This is NOT a temporary move, but a permanent transition, which has happened in many industrialized economies in history. Somehow, the tariff war has accelerated the adjustment process, however.

Q .: Will Africa be the next hub for apparel sourcing in the near future?

Sheng Lu: As textile and clothing trade is turning more regional-based, Africa is facing significant challenges to become an attractive tier-1 sourcing base for Western fashion brands and apparel retailers.

Q .: Why is that?

Sheng Lu: In general, there are three primary apparel import markets in the world: the United States, the European Union, and Japan—as of 2018, these three regions altogether still accounted for as many as 70% of the world apparel imports. Surely, Asian countries are important apparel suppliers for all these three regions. However, each of these three markets also has its respective regional suppliers—Mexico and Central & South American countries for the United States, China, and a few Southeast Asian countries for Japan and Eastern European countries for the EU market. Other than geographic proximity, often, these regional suppliers also enjoy preferential market access to the US, EU, and Japan provided by regional free trade agreements.

Africa, on the other hand, is not close to any of these three major apparel import markets geographically. Why would fashion companies in the United States, Japan, or the EU have to source from Africa when there are so many other options available?

Q .: For price?

Sheng Lu: Several trade preference programs currently offer apparel exporters in African countries preferential or duty-free market access to the United States, the EU, and Japan (such as the African Growth Opportunity Act and the EU and Japan Generalized System of Preferences programs). However, sourcing from Africa will entail other extra costs—for example, the raw material cost will be higher as yarns and fabrics have to be imported from Asia first, and the transportation bill could be costly due to the poor infrastructure. Further, not like their counterpart in Asia, the apparel industry is not regarded as a development priority in many African countries, which continue to rely heavily on the export of raw materials instead. Manufacturing for the local market is also complicated—apparel producers in Africa are struggling with both the cheap clothing imported from Asia and the mounting used clothing sent from the West.

Q .: It is said that fashion might be the most regulated sector in international trade other than agriculture. How to explain this?

Sheng Lu:  I think we need some changes here. For example, in 2018, textiles and apparel accounted for only 5% of the total U.S. merchandise imports but contributed nearly 40% of the tariff revenue collected. This phenomenon, which makes no sense economically, is the result of the industry lobby—trying to protect domestic manufacturers from import competition.

As another example, around 15%-17% of Mexico’s clothing exports to the United States do not claim the duty-free benefits provided by the North American Free Trade Agreement (NAFTA), as the NAFTA rules of origin strictly require the using of regional yarns and fabrics for qualified apparel items. In the end, companies prefer bigger savings on the raw material cost than claiming the NAFTA duty-saving benefits. We should think about how to modernize these trade rules and make them more supply-chain friendly in the 21st century.

Meanwhile, policymakers are developing new regulations to address some emerging areas in international trade, such as E-commerce, labor standards and environmental protection. Increasingly, trade policy is moving from “measures at the border” to “measures behind the borders.”

Social and Economic Impacts of Clothing Trade—Debate on the Used Clothing Import Ban: Discussion Questions from FASH455

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#1 Why or why not do you think the used clothing import ban truly can help East African countries better develop their local textile and apparel industry? (please provide detailed examples, if possible)

#2 If U.S. citizens donate clothing to local charity organizations and second-hand clothing stores, in hopes to better the community, why are these organizations exporting the clothes overseas?

#3 Used clothing imports were seen as a threat to the EAC but were also viewed as having a positive environmental impact because the clothes were being up-cycled and recycled. Do you think if there was more emphasis put on the benefits of importing used clothes, due to its positive environmental effect, that the EAC would put more thought into their decisions to ban all used apparel imports?

#4 Notably, almost none of the used clothing exported from the United States to EAC countries are actually “Made in the USA”—they were originally imported from Asian countries such as China, Vietnam, and Bangladesh. Also, most U.S. used clothing exports to EAC were “free giveaways” by U.S. consumers. Is it ethical for SMART to oppose the used clothing import ban so that its own can make a profit? What is your evaluation?

#5 Why or why not do you agree with U.S. government’s response to the EAC import ban on used clothing? What could be done differently and why?

#6 Given the debate on used clothing trade and its impact on East African nations, will you continue to donate used clothing? Why or why not?

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

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: Challenges for sub-Saharan Africa as an apparel sourcing hub

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

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A newly released report by the U.S. International Trade Commission (USITC) suggests that the African Growth Opportunity Act (AGOA) and the third-country fabric provision are critical for U.S. Apparel Sourcing from sub-Saharan Africa (SSA). Specifically:

U.S. apparel imports from SSA grew faster than the world average. During 2010–16, U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 4.5 percent (compared with 2.1 percent CAGR of all countries), from $795.2 million in 2010 to over $1.0 billion in 2016. However, SSA overall remained a small apparel supplier to the U.S. market, accounting for only 1.2 percent of the market shares in 2016 (lower than 2.7 percent in 2004, but higher than 1.1 percent in 2010).

U.S. apparel imports from SSA remain uneven across countries. Kenya, Lesotho, Mauritius, and Madagascar accounted for over 90 percent of all apparel imports from SSA in 2016. Ethiopia and Tanzania experienced the fastest growth rates during the period—63.8 percent and 33.3 percent, respectively

The duty-free preferences awarded under AGOA and the liberal rules of origin available for apparel under the “third-country fabric provision”* are the key competitive advantages of SSA serving as apparel sourcing destination for U.S. companies. Due to limited yarn and fabric production in SSA, the third-country fabric provision remained critical for SSA exports of apparel to receive duty-free entrance to the United States. Notably, nearly all (97.3 percent) U.S. imports of apparel from SSA countries entered under AGOA, and of these imports, virtually all (96 percent) used the third-country fabric provision in 2016.

Further, the USITC report used Madagascar as an example to illustrate the significance of AGOA and the third-country fabric provision in particular to SSA countries’ apparel exports to the United States. As noted by USITC:

  • Madagascar were evidenced by the sharp decline in its apparel exports to the U.S. after the country lost its AGOA eligibility in 2009. Without duty-free access to the United States, the average duty rate for U.S. imports of apparel from Madagascar rose to 19.6 percent, and apparel exports to the United States from Madagascar fell from over $211 million in 2009 to only $40 million in 2011.
  • Madagascar’s AGOA benefits were reinstated in 2014, and in 2016, U.S. apparel imports from Madagascar bounced back to one-half of the 2009 level.

The USITC report also argues that the long-term renewal of AGOA and the third-country fabric provision was critical to instilling confidence in U.S. firms deciding to invest in or source from SSA countries. The report says that “because apparel production lead times are generally 6 to 9 months, U.S. apparel companies that source from the region import basic cut-and-sew garments that can be ordered months in advance and have steady U.S. demand, such as five-pocket denim jeans, uniform tops and bottoms, and T-shirts. This long lead time on orders makes long-term AGOA renewal particularly important to the apparel industry.”

Additionally, the USITC report believes that China’s declining competitiveness as an apparel producer (caused by its increasing labor cost) benefited the second- and third-largest suppliers to the United States, Vietnam and Bangladesh, but also helped smaller suppliers in SSA.

Last but not the least, the USITC report suggests that Kenya, Madagascar, and Ethiopia may have the most potential for apparel export growth in the future. However, the report doesn’t think apparel exports from South Africa will grow much because the country does not qualify for third-country fabric provisions under AGOA. Similarly, USITC believes that should SSA countries like Tanzania lose their AGOA benefits, due largely to its recent import ban on used clothing, the United States will likely see significant decreases in apparel imports from these countries too.

*About the African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to US imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen US trade and investment ties with the region.

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. Particularly, 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 use yarns and fabrics produced by non-AGOA countries/regions (such as China, South Korea and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology intensive textile products.

On 29 June 2015, the Obama Administration signed a new bill to extend the AGOA (including the third country fabric provision) for another ten years (until 30 September 2025). The new law simplifies the AGOA rules of origin; gives the president the ability to withdraw, suspend or limit benefits (rather than just terminate eligibility) if designated AGOA countries do not comply with the eligibility criteria; adds notification and reporting requirements; and improves transparency and participation in the AGOA review process.

In 2016, US apparel imports from the AGOA region totaled US$260m, of which US$255m were under the agreement (or 98% utilisation rate).

About the “Third-Country Fabric” provision under AGOA

This is a “Special Rule” for lesser-developed SSA countries (LDCs) under AGOA. According to the rule, these SSA LDCs can enjoy duty-free and quota-free access to the U.S. market for apparel made from fabric originating anywhere in the world. In comparison, the regular AGOA rules of origin more restrictively require that apparel qualify for duty-free treatment must meet one of the following conditions:

  • apparel made of U.S. yarns and fabrics;
  • apparel made of SSA (regional) yarns and fabrics, subject to a cap;
  • apparel made in a designated lesser-developed country of third-country yarns and fabrics (also subject to a cap);
  • apparel made of yarns and fabrics not produced in commercial quantities in the United States;
  • textile or textile articles originating entirely in one or more lesser-developed beneficiary SSA countries;
  • certain cashmere and merino wool sweaters; and
  • hand-loomed/handmade/or folklore articles and ethnic printed fabrics

African Growth and Opportunity Act and Textile & Apparel

(In the video: Gail Strickler, former Assistant US Trade Representative for Textiles, highlights the immense opportunities created by the renewal of AGOA for duty-free access to the massive US market for African textile and apparel producers.)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to U.S. imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen U.S. trade and investment ties with the region. (note: non-reciprocal means SSA countries do not need to offer equivalent benefits to imports from 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.  Like many trade agreements and trade preference programs, AGOA also set unique rules of origin for textile and apparel (T&A):

First, to enjoy the duty-free and quota-free treatment in the US market, eligible T&A products made in qualifying AGOA countries need to be one of the following categories:

  • Apparel made with US yarns and fabrics;
  • Apparel made with Sub-Saharan African (SSA) regional yarns and fabrics, subject to a cap;
  • Apparel made with yarns and fabrics not produced in commercial quantities in the United States;
  • Certain cashmere and merino wool sweaters; and
  • Eligible hand-loomed, handmade or folklore articles and ethnic printed fabrics.

Second, under a special rule called “third-country fabric” provision, AGOA countries with lesser-developed countries (LDBC) status can further enjoy duty-free access in the US market for apparel made from yarns and fabric originating anywhere in the world (such as China, South Korea, and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology-intensive textile products. [Note: Although the US imports of apparel made with third-country fabric are subject to a cap, the cap has never been reached].

According to a 2014 comprehensive study conducted by the USITC, the “third-country fabric” provision has three major benefits to the AGOA members:

1) Increase exports of apparel. This can be evidenced by the fact that most US apparel imports under AGOA came from those countries that are eligible for the “third-country fabric” provision, such as Lesotho, Kenya, Mauritius, and Swaziland. In comparison, because South Africa is not eligible for the “third-country fabric” provision, its apparel exports to the United States had significantly dropped since 2003 and only accounted for 0.6% among AGOA countries in 2013.

2) Encourage foreign investment. From 2003 to 2013, a total 21 T&A FDI projects were made in SSA, among which 18 projects (or 85.7%) were greenfield FDI. The third-country fabric provision is the main driver for these FDI projects. For example, many Chinese and Taiwanese investors had opened apparel factories in Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Namibia, Nigeria and Tanzania as a source of exports to the United States and the EU.

3) Enhance trade diversification. Theoretically, relaxing rules of origin (RoO) such as the third-fabric provision can free up companies’ resources and allow them to expand export product lines. As observed by a few empirical studies, AGOA’s third-country fabric provision helped related countries increase the varieties of apparel exports between 39 and 61 percent.

AGOA receives new authorization in 2015, which will last for 10 years until 2025 (including the 3rd country fabric provision). This ten-year renewal of AGOA is regarded as critical and necessary to encourage more long-term investment in the region. As put by Florizelle Liser, Assistant US Trade Representative for Africa “What we know is that African producers of apparel, like producers of apparel all around the world, need to have the flexibility to source their input from wherever of those can be produced most effectively, cost effectively for the products that they are sewing. So we want through the “third country fabric” provision to give the African producers of apparel that flexibility. We do know in terms of establishing textiles business on the ground producing those inputs right there in Africa and that more of that indeed is going to happen. The reason is that as U.S. buyers of apparel and this is an enormous market for apparel… as U.S. buyers of apparel source more of their apparel from Africa, then investors in textile mills, which are very expensive, will be incentivized and are being incentivized to actually establish those fabric mills right there in Africa, and then be able to save time, in terms of getting those inputs that are needed for the clothing that is being produced. So we see that happening already: it’s happening in Kenya, it’s happening in Ethiopia and around the continent. And that is what we need to have more of as we go forward in this ten-year extension of AGOA.”

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Apparel Sourcing Opportunities in Madagascar and Mauritius


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

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

Does AGOA’s “third country fabric” provision discourage the development of Africa’s local textile industry?

African-textilesThe following Q&A is adapted from the 2015 AGOA Forum Preview (15m:44s)

Question: What is the principal obstacle to the development of a local yarn industry in an apparel exporting country such as Kenya? Does AGOA’s “third country fabric” provision in place for 13 years act as a disincentive to such a development?

Florizelle Liser, Assistant US Trade Representative for Africa: That’s a really good question, but the answer is no. What we know is that African producers of apparel, like producers of apparel all around the world, need to have the flexibility to source their input from wherever of those can be produced most effectively, cost effectively for the products that they are sewing. So we want through the “third country fabric” provision to give the African producers of apparel that flexibility. We do know in terms of establishing textiles business on the ground producing those inputs right there in Africa and that more of that indeed is going to happen. The reason is that as U.S. buyers of apparel and this is an enormous market for apparel… as U.S. buyers of apparel source more of their apparel from Africa, then investors in textile mills, which are very expensive, will be incentivized and are being incentivized to actually establish those fabric mills right there in Africa, and then be able to save time, in terms of getting those inputs that are needed for the clothing that is being produced. So we see that happening already: it’s happening in Kenya, it’s happening in Ethiopia and around the continent. And that is what we need to have more of as we go forward in this ten-year extension of AGOA.

What do you think?