Textile and Apparel Products Covered by the U.S.-China Tariff War Reference List (updated January 2020)

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US China tariff war reference list (Jan 15, 2020)_Page_1

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Appendix: Links for the Product List (updated January 15, 2020)

by Sheng Lu

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.”

How Has the Tariff War Affected the Competitiveness of China’s Textile and Apparel Exports to the U.S.? (December 2019)

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This study intends to explore how has the U.S.-China trade tension since 2017 affected the competitiveness of China’s textile and apparel (T&A) exports to the U.S. market. The findings of the study will shed new light on the mega-trend of T&A sourcing from China in the medium term, and support T&A companies’ sourcing decision making in the current uncertain business environment.

Data for the analysis were collected from the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, including the value of U.S. imports from China between 2016 (i.e., the year before the U.S. launched the section 301 investigation against China) and October 2019 (the latest data available) for a total of 167 categories of T&A products.

Specifically, based on the constant market share (CMS) model, a commonly adopted international trade analysis tool, this study decomposed the value of U.S. T&A imports from China into the following four factors:

  • Market growth effect: changes in China’s T&A exports to the U.S. due to the growth of total U.S. import demand for T&A
  • Commodity structural effect: changes in China’s T&A exports to the U.S. due to the shifting product structure of China’s T&A exports
  • General competitive effect: changes in China’s T&A exports to the U.S. due to the shifting competitiveness of Chinese T&A products in the U.S. market (measured by China’s market shares)
  • Product competitive effect: changes in China’s T&A exports to the U.S. due to the joint effect of the product structure of China’s T&A exports and the shifting competitiveness of Chinese T&A products in the U.S. market (measured by China’s market shares)

Four findings are of note:

First, the U.S.-China trade tension has affected China’s T&A exports to the U.S. negatively. Even though Section 301 tariffs on the majority of apparel products didn’t start until September 2019, China’s T&A exports to the U.S. had suffered a significant drop. This result, however, was at odds with the overall trend of China’s T&A exports to the U.S. in recent years. Notably, except apparel, China’s yarns, fabrics and made-up textile exports to the U.S. all enjoyed a steady and positive growth between 2016 and 2018. The impact of the tariff war is real.

Second, the increased U.S. import demand has partially mitigated the negative impact of trade tension on China’s T&A exports to the U.S. market. Results of the CMS model indicate that expanded total U.S. import demand for T&A driven by the booming U.S. economy had avoided an even worse decline of U.S. T&A imports from China. In other words, without such a market growth, China’s T&A exports to the U.S. would have been $2,065 million less in 2018 (including $528 million for apparel) and $878 million less (including $613 million for apparel) in the first ten months of 2019 than their current level.

Third, China’s export competitiveness is shifting from apparel to textiles. Results of the CMS model show that even before the tariff war, the competitiveness of China’s apparel exports has been weakening steadily, which was the most significant contributing factor to the decline of $530 million U.S. apparel imports from China between 2016 and 2018. In comparison, China is exporting more yarns and fabrics to the U.S. in recent years. Data from OTEXA shows that between 2016 and 2018, China’s yarn and fabric exports to the U.S. enjoyed a 13.1% and 2.6% compound annual growth, respectively, compared with a 0.6% decline of apparel. The CMS model further suggests that China’s improved export competitiveness can explain the majority of these increased exports.

Fourth, China is adjusting its T&A export structure to mitigate the negative impact of the tariff war. As estimated, through targeting those product categories with higher growth in import demand, China was able to achieve an additional $36.7 million apparel export to the U.S. in the first ten months of 2019.  Likewise, the commodity structural effect also favored China’s made-up textile exports to the U.S. market in 2019, resulting in $148.7 million more exports than otherwise.

By Sheng Lu

The Changing Face of Textile and Apparel “Made in Asia”

Video 1: How one Chinese shirt-maker uses automation to safeguard its future

Video 2: Chinese investors move clothing factory to Bangladesh

Video 3: Can Vietnam become the next China?

Discussion questions (for FASH455: Please finish watching ALL the three short videos above before sharing your viewpoints)

  1. How are textile and apparel “Made in Asia” changing its face? What are the driving forces of these changes?
  2. What are the examples of the “flying geese model” from the videos? Overall, why or why not do you think this model is still valid today?
  3. Why or why not do you think the U.S.-China tariff war has fundamentally changed the patterns of textile and apparel production and trade in Asia?

Related readings

U.S. Textile and Apparel Industry and Companies’ Sourcing Strategy—Discussion Questions from FASH455

 

#1 How do you think it would be possible for the United States to successfully re-shore apparel manufacturing when so many other countries have the advantage in speed, efficiency, and cost?

#2 The Berry Amendment is highly favored by NCTO and is seen as being good for the U.S textile industry and American pride. Why or why not do you think Berry Amendment should be applied to other segments of the fashion industry? Will such an initiative gain broad support?

#3 Why do you think NCTO suggests the trump administration impose tariffs on finished apparel items from China, whereas U.S. fashion brands and retailers oppose the tariff action strongly?

#4 Assume you are a sourcing manager for a major US fashion brand, how would you rank the following regarding importance when determining a sourcing destination: Speed to Market, Sourcing Cost, Flexibility and Agility, and Risk of Compliance?  Why would you rank them as such?

#6 Why do you think U.S. fashion brands and apparel retailers are sticking with sourcing from China, when there are less expensive products in other countries, such as Bangladesh and Vietnam?

#7 According to the 2019 US fashion industry benchmarking study, some apparel retailers source from more than 10 or even 20 different countries or regions. What are the benefits of adopting such a diversified sourcing base? Is it necessary?

(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question # in your reply)

Related: Global Apparel Sourcing Practices and Trends

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:

When ‘Made in Vietnam’ Products Are Actually From China

As described in the video, transshipment is one form of illegal import activities and occurs when false country-of-origin information is provided for imported goods in order to evade U.S. customs duties. Transshipment was a major issue in textile and apparel trade back in days when the quota system was still in place.

According to the media, because of the escalating U.S.-China tariff war, customs fraud such as transshipment is thriving again. Some fashion companies are also using tariff engineering to avoid paying the punitive tariffs in a legal way. Indeed, how to label “Made in ___” can be much more complicated, technical and subtle than we realize.

Related reading: