Regional Textile and Apparel Supply Chains–Questions from FASH455

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NAFTA and Textile and Apparel Rules of Origin

#1 How do rules of origin (RoO) and free trade agreement (FTA) regulations affect speed to market in apparel sourcing? Do countries who are part of an FTA find it to be easier to get to market in a shorter amount of time if they are working with other FTA members? Or could RoO slow down the production process because producers have to be more careful about compliance with the complicated RoO?

#2 Why or why not the “yarn forward” rules of origin remains an effective way to promote textile and apparel production in the Western-Hemisphere?  What other options are available to improve the competitiveness of the Western-Hemisphere textile and apparel supply chain?

#3 What would happen to the Western-Hemisphere textile and apparel supply chain should NAFTA no longer exist?

#4 Should NAFTA be responsible for the loss of US apparel manufacturing jobs? Any hard evidence?

#5 If you were U.S. trade negotiators, what would you do with TPL in NAFTA given the competing views from the U.S. textile industry and U.S. fashion brands and retailers?

The Outlook of “Factory-Asia”

#6 From the perspective of the U.S. textile and apparel industry, is it a good idea for the United States to reach free trade agreement (FTA) with Asian countries? If so, what countries should be included in the new FTA? If not, why?

#7 How can U.S. companies get involved in the Asia-based textile and apparel supply chain?

#8 Why or why not is the “Flying geese model” unique to Asia? Can the model be replicated in America too?

(Welcome to join our online discussion. Please mention the question number in your reply)

Regional Supply Chain Remains an Important Feature of Global Textile and Apparel Trade (Updated: November 2017)

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

There are three primary textile and apparel (T&A) regional supply chains in the world today:1

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Asia: within this regional T&A supply chain, more economically advanced Asian countries (such as Japan, South Korea, and China) supply textile raw material to the less economically developed countries in the region (such as Myanmar, Cambodia, and Vietnam). Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets around the world.

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Europe: within this regional T&A supply chain, developed countries in Southern and Western Europe such as Italy and Germany serve as the primary textile suppliers. Regarding apparel manufacturing in the European Union,  products for the mass markets are typically produced by developing countries in Southern and Eastern Europe such as Poland and Romania, whereas high-end luxury products are mostly produced by Southern and Western European countries such as Italy and France. Furthermore, a high portion of finished apparel is shipped to developed EU members such as UK, Germany, France, and Italy for consumption.

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America: within the region, the United States serves as the leading textile supplier, whereas developing countries in North, Central and South America (such as Mexico and countries in the Caribbean region) assemble imported textiles from the United States or elsewhere into apparel. The majority of clothing produced in the area is eventually exported to the United States for consumption.

Data from the World Trade Organization (WTO) shows that regional supply chain remains an essential feature of today’s global textile and apparel trade.  Notably, three trade flows are worth watching:

First, Asian countries are increasingly importing more textiles from within the region. In 2016, around 91.2% of Asian countries’ textile imports came from other Asian countries, up from 86.8% in 2006. This change reflects the formation of a more integrated T&A supply-chain in Asia. The more efficient regional supply chain also helps improve the price competitiveness of apparel made by “factory Asia” in the world marketplace. Particularly in the past few years, T&A exports from Asia is posting substantial pressures on the operation of the T&A regional supply chains in the Western Hemisphere.

Second, the intra-region T&A trade in EU remains stable. In 2016, 64.1% of EU countries’ textile imports and 55.6% of EU countries’ apparel imports came from within the EU region. Over the same period, 73.3% of EU countries’ textile exports and 81.6 % of their apparel exports also went to other EU countries.

Third, the Western-Hemisphere T&A supply chain, which involves countries in North, South and Central America, is facing substantial challenges from the increasing competition from Asian T&A exporters. In 2016, only 29.0% of North, South and Central American countries’ textile imports and 18.6% of their apparel imports came from within the region, a record low in the past ten years. Meanwhile, in 2016 Asian countries supplied 60.1% of textiles and 73.7% of clothing imported by countries in the Western Hemisphere, a record high in history. Understandably, if regional free trade agreements, such as NAFTA and CAFTA-DR, no longer exist, it would be even more difficult for the Western-Hemisphere T&A supply chain to survive. The potential losers of the collapse of the Western-Hemisphere T&A supply chain will include not only US textile exporters but also apparel exporters in North, South and Central America. Notably, in 2016, 89.3% of apparel exported by countries in the Western Hemisphere were destined for the region.  

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Data Source: World Trade Organization (2017)

by Sheng Lu

The Future of the Asia-Pacific Region as a Textile and Apparel Sourcing Destination: Discussion Questions Proposed by FASH455

asia-pacific-economy-v7

#1 How have US importers/retailers/fashion brands which source from China reacted to China’s rising labor cost in recent years? Any specific examples of companies’ practices and strategies?

#2 It is widely reported that China’s labor cost has been rising quickly in recent years (around 14% annually between 2010 and 2014). But trade data didn’t show a significant drop of China’s textile and apparel exports to the US. Why is that?

#3 Why do you think people have a conception of China being a “highly reliable” sourcing destination for textile and apparel? What is China’s unique competitiveness?

#4 Many domestic and foreign firms have started investing in textile/fiber factories in Vietnam because of the yarn forward rules of origin in TPP. Would it be in the United States’ best interest to become one of these investors? Why or why not?

#5 In the class we discussed the “flying geese model” and the phenomenon of “Factory Asia”. Particularly, Asian countries are forming an ever more integrated textile and apparel supply chain—for example, apparel manufacturers in Asia are gradually using more textile inputs made in Asia rather than made outside the region. Does it mean that the United States has no role to play in Asia-based textile and apparel supply chain? Will the TPP make a difference?

#6 Should US allow China to join the TPP? Why or why not? If China joins the TPP, what will be the implications for the pattern of textile and apparel trade in the Asia-Pacific region?

 #7 What is the relationship between the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP)? Alternatives? Competitors? Friends? Foes? Why are there so many different free trade agreements (FTA) in the same region?

Please feel free to share your thoughts and recommend any additional articles/readings/resources relevant to the discussion. Please mention the question # in your reply.

 

The Future of Asia-Pacific and Implications for the U.S. Textile and Apparel Industry

Asia Pacific

The following discussion questions are proposed by students enrolled in FASH455 (Global Apparel & Textile Trade and Sourcing) Fall 2015 after learning the unit on textile and apparel industry & market in the Asia-Pacific region. Please feel free to leave your comment and engage in our online discussion.

  1. We’ve heard so much about China’s superior involvement in the textile & apparel sectors globally, but how are these industries contributing to the local economy?
  2. As rules on working conditions and minimum wage have been enforced in Mainland China many business people have moved their operations to Southeast Asia, do you think the Southeast Asia will eventually become like mainland China forcing businessmen to seek low wages elsewhere?
  3. Will Vietnam shift its sourcing of yarns and fabrics from China to US after TPP? What are some setbacks associated with this? What are some potential opportunities?
  4. While Vietnam is currently one of the primary exporters of apparel to the United States, what should be the actions taken by the United States if they continue to “refuse” to cut out Chinese Textiles? Or, should the United States continue their trading patterns with Vietnam despite their reliance on Chinese Textiles?
  5. The Asia pacific region is made up of a variety of countries with different strengths and political infrastructure. How does the variety of policies and governments affect how we do business abroad, and is there a way to set standards that are not individualized to each country?
  6. China and the US can be seen as a threat to one another. However the president of China said the “Pacific Ocean has enough space for the two large countries”. Do you think they are threats to each other, or are they ultimately helping each other’s economies grow?
  7. What will happen as more and more countries that used to produce apparel move into producing more capital intensive production?
  8. What are the advantages or disadvantages of excluding China from international trade agreements such as TPP?
  9. If the T&A industry in China is envisioned by policymakers as beginning to focus more on technical textiles, how will the textile industry in China compete with the industry in the United States?
  10. Why has East Asia become one of the most economically interconnected regions in the world?
  11. What are some of the reasons that China still remains one of most price competitive export markets in the World? Also, does China face challenges in losing their top spot as leader in price competitiveness? If so, what are some of the reasons they are in danger of competition?
  12. How is the discussion about yarn forward rules of origin different in regards to TPP countries than the same discussion between the NAFTA/CAFTA-DR countries?

 [Discussion for this post is closed].

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

Screenshot 2015-10-06 08.13.16

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

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

Trade Statistics

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

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

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

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

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

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

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

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

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

2015 US Fashion Industry Benchmarking Study

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

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

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

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

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

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

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

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

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

size of apparel market

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

34On the other hand, despite its overall market size, as a developing country, dollar spending on apparel per capita will remain much lower in China than many developed economies around the world. In 2014, each Chinese consumer on average spent $240 on apparel versus $815 in the United States, even though apparel spending accounted for a larger share in household income in China (around 10%) compared with the United States (less than 3%).

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Several personal thoughts based on the data:

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

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

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

Data source: Euromonitor Passport(2015)