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.
- 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?
- 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?
- 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?
- 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?
- 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?
- 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?
- What will happen as more and more countries that used to produce apparel move into producing more capital intensive production?
- What are the advantages or disadvantages of excluding China from international trade agreements such as TPP?
- 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?
- Why has East Asia become one of the most economically interconnected regions in the world?
- 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?
- 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?
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(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):
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).
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.
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.
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.
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.
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.
However, 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.
On 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%).
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)
EU and Vietnam announced on August 4th that they have agreed in principle on a comprehensive and ambitious trade and investment agreement (EVFTA).
According to the released memo, EVFTA will eliminate nearly all tariffs (over 99%) between EU and Vietnam. However, textile and apparel (T&A) is among a few exceptions what will not be able to enjoy duty free treatment on day one. Specifically:
- The EU will eliminate duties with longer staging periods (up to 7 years) for some sensitive products in the textile apparel and footwear sectors. The elimination of duties, however, will not be an open door for Chinese products to flood the EU market: to benefit from the preferential access, the strict rules of origin for garments will require the use of fabrics produced in Vietnam, with the only exception being of fabrics produced in South Korea, another FTA partner of the EU.
- The totality of EU textile fabric exports will be liberalized at entry into force.
Statistics shows that Vietnam was EU’s sixth largest extra-region apparel supplier in 2014 (after China, Bangladesh, Turkey, India and Morocco), accounting for 3.1% in value (or €22.3 billion) and 2.6% in volume. On the other hand, EU’s textile exports to Vietnam totaled €169 million.
EVFTA may further encourage investment in Vietnam’s textile industry, because together with TPP, it will make Vietnam become one of the very few regions in the world that can enjoy duty free market access treatment (even not immediately) both in the US and EU, which altogether account for nearly 50% of the global apparel import. The other region that currently enjoys such a benefit is Sub Saharan Africa (based on AGOA and GSP+ programs).
Note: the followings updates are compiled based on the 2015 Bangladesh Development Conference held from June 5th to 6th at the Harvard University. The conference attracted over 100 attendants and speakers from various aspects of the apparel industry, government agencies, international organizations, non-government organizations and academia.
1. Overall, the industry side argues that tremendous efforts have been made to improve work safety in the Bangladesh apparel industry and things are gradually improving. However, representatives from some labor unions say that changes are not happening fast enough as they should.
2. Indeed, as one of the most noticeable changes after the Rana Plaza tragedy, the Bangladesh apparel factories are now facing more frequent safety inspection and audit from various parties:
- In addition to the regular inspection conducted by individual fashion brand or retailer, the Accord on Fire and Building Safety in Bangladesh (the Accord) and Alliance for Bangladesh Worker Safety (the Alliance) were established in 2013 respectively (mostly funded by western apparel brands sourcing from Bangladesh) to maintain minimum safety standards in the Bangladesh apparel industry.
- The Accord has a total five-year budget of $50 million to be used on factory safety inspection and improvement. However, it is far from being clear what will happen after the Accord agreement expires in 2018 and whether the inspection achievements can be maintained afterwards.
- The International Labor Organization and International Finance Corporation launched the “Better Work” program in collaboration with Bangladesh government, apparel factory owners, workers, fashion buyers and other relevant stakeholders. The program intends to provide assessments of factory compliance with national law and core international labor standards, paired with transparent public reporting on findings.
- Nevertheless, some people argue that audit itself is not the answer to the problem, just like “a pig will not gain weight simply by weighting it; instead, we have to feed it.” Reflecting on the limitation of inspection and audit, they refer to compliance as just a piece of paper whereas ethics is something that keeps people awake in bed.
3. Some foreign governments also have responded to the Rana Plaza tragedy, although in different ways:
- Stick: the U.S. government decided to suspend Bangladesh’s Generalized System of Preferences (GSP) status in 2013 as a response to the Rana Plaza tragedy. Because textile and apparel are excluded from GSP, this measure has no direct impact on Bangladesh’s apparel exports to the United States. But the movement is symbolic and significantly increases the publicity of corporate social responsibility (CRS) issue in the Bangladesh apparel industry.
- Carrot: in comparison, the European Union chooses to continue providing Bangladesh its GSP benefits. As a GSP beneficiary, Bangladesh’s apparel exports to EU can enjoy duty free treatment when competing with other Asian suppliers such as China and India. According to EU, from 2008 to 2012 EU28 imports from Bangladesh increased from €5,464 million to €9,212 million (+69%), which is more than half of Bangladesh’s total exports. While granting Bangladesh the benefit, EU also launches the GSP Action Plan and the Sustainability Compact to encourage responsible businesses in Bangladesh.
4. Training has been provided for Bangladesh officials to help them better understand building safety requirements.
5. More apparel factories in Bangladesh now have their own labor unions. According to the local law, 30 percent of the labor force in a factory can form its own labor union, meaning theoretically one factory can have up to three different unions. There has been more open discussions on “worker/women empowerment”, “social dialogue” and “stakeholder engagement” in the Bangladeshi society as well.
6. Some creative financial incentive mechanisms are suggested to improve the situation, such as offering factories with better compliance record with more attractive interest rate for bank loans; and adding building safety clauses in factory insurance contract.
7. Academia is actively engaged in finding a solution for improving the CRS practices in the Bangladesh apparel industry as well:
- Based on analyzing the factory inspection data, some scholars start to evaluate the effectiveness of the current inspection system (eg: does who pay for the inspection matter for the result? Does violation go down overtime in inspection? What is the role of on-going people to people relationship in inspection?).
- Some projects intend to develop an estimate of the true size of the Bangladesh apparel industry, given the fact that the worst work condition may exist in those undocumented factories. As a matter of fact, even the Bangladesh government doesn’t know how many garment factories they have in the country.
- Some scholars propose the idea of linking a company’s social compliance data with its business financial data to evaluate the business implication of CRS practices.
- Some studies compare the labor practices between Bangladesh and other developing countries in South Asia such as Cambodia and Sri Lanka.
- Some people suggest using case studies to develop hypotheses for a policy change.
- More and more studies are now conducted based on field trip and interview in Bangladesh.
8. Criminal charges recently are filed against a dozen individuals and companies identified responsible for the Rana Plaza tragedy.
9. Response to the Rana Plaza tragedy has further led to a discussion on the broader economic, social and political reform in Bangladesh.
As we discussed in class, following the “flying geese pattern”, countries in Asia form a dynamic division of labor in textile and apparel (T&A) manufacturing. Although China may gradually lose its comparative advantage in labor-intensive apparel manufacturing, it will continue playing a critical role in “Factory Asia” （i.e. Asia-based T&A supply chain). As results, Asia will remain a giant player in T&A production and export in the years to come.
Another important feature of “Factory Asia” is regional integration–Asian countries tend to use more and more T&A inputs from within Asia rather than from outside the region. This may improve the internal efficiency of “Factory Asia”, but also may make it harder for T&A companies outside Asia to get access to the Asian market.
So, what is your view on “Factory Asia”? What are the implications of “Factory Asia” for the U.S. T&A industry? Can the Trans-Pacific Partnership potentially shape new T&A supply chain in the Asia-Pacific region? What market opportunities does the Asia-Pacific region present to the US T&A industry? Please feel free to share your view and any other questions in your mind about the Asia-Pacific region.
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