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

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

The Evolving Sourcing Strategies of U.S. Fashion Apparel Companies: Discussion Questions from FASH455

#1 Do you think it is a good move for companies to embrace the “China plus Vietnam plus Many” sourcing strategy, especially after learning about the working conditions in developing countries such as Bangladesh? Do you think this could backfire on companies?

#2 Why or why not do you think sourcing from Asia will become less attractive relative to sourcing from the Western Hemisphere due to the increasing importance of “speed to market” in U.S. fashion apparel companies’ sourcing decisions?

#3 As sustainability becomes more prevalent throughout the fashion industry, will there be a way to lower costs, while still creating garments that are better for the environment, and have transparency with consumers about factory conditions? Why?

#4 According to the article, “more and more well paid and high quality jobs in the US fashion industry will depend on international trade and the global value chain.” How do you feel about the quality of the US fashion industry depending so heavily on factors outside of the US? Do you see this changing in the future, and if so explain how.

#5 Most U.S. apparel companies have already shifted their businesses to non-manufacturing activities such as design, branding, sourcing and retailing. Is it still meaningful to give so much attention to apparel manufacturing in the U.S.?

#6 When purchasing your garments from either online stores or brick-and-mortar stores, do you look to see what country your goods are produced in and on a scale from 1 to 10 with 1 being the least important 10 being the most important, how significant is it to you to know where your goods are coming from and how much of a factor does that play into your buying decision?

#7 If it is predicted that more US fashion companies’ sourcing could be from nearshore due to automation technology, what would happen if they technology was implemented in a place where there were lower labor costs (for the people operating the machines)? Would the US continue to use nearby manufacturers or would they resort to wherever is cheaper?

#8 Do you think “made in the USA” apparel is truly telling the whole story of the supply chain? Do you think that it is truly more ethical? Or do you think it is just a way for retailers to charge more for apparel? If producing products in the U.S. is much more expensive than importing products from other countries, how are companies such as Walmart able to sell products with labels that say “Made in U.S.A”?

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

U.S.-China Tariff War: Discussion Questions from FASH455

#1 President Trump has been proposing many tariffs on imports from foreign countries such as China. Do you think that these high tariffs will actually drive more production into North American manufacturers and promote the US economy, or will it hurt the U.S. and inflate the costs of U.S. production? Why?

#2 In class we discussed that trade creates winners and losers. So will President Trump’s high tariffs create winners and losers too? Who are they? Also, why should or should not government use trade policy to pick up winners and losers in international trade?

#3 What are some possible solutions to the trade deficit between the United States and China other than high tariffs? Why or why not trade deficit is a problem to worry about?

#4 If Trump is able to impose more tariffs and even the playing field with China, will a new “China” arise from a rivaling country, which can continue to pressure US manufacturers? Why?

#5 Why does Columbia refuse to bring production to the US, as Trump would like?

#6 Columbia has been designing products to specifically get around the tariffs set by President Trump which creates trade loopholes for their company. Do you think that it is ethical for them to do this? Why or why not?

#7 If President Trump keeps raising tariffs and wants goods to be made domestically, how will other countries respond to this with all of their excess goods?

#8 Why would President Trump continue to advocate and push for this tariff even if an overwhelming amount if businesses are hurt by it, finding ways around it, or getting excused from its implications? Do the pros outweigh the cons?

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

Outlook 2019: Apparel Industry Issues in the Year Ahead

In January 2019, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2019–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. Any comments and suggestions are more than welcome!

1: What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2019, and why?

In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2019, ranging from a more volatile global economy, the unpredictable outlook of the U.S.-China trade talks to the various possible scenarios of Brexit. While uncertainty creates exciting new research opportunities for scholars like me, it could be a big headache for companies seeking a foreseeable market environment to guide their future business plan and investments. 

Meanwhile, the increasing digitalization of the apparel supply chain based on big-data tools and artificial intelligence (AI) technologies means a huge opportunity for fashion companies. Indeed, the apparel industry is quickly changing in nature—becoming ever more globalized, supply-chain based, technology-intensive and data-driven. Take talent recruitment as an example. In the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), as much as 68 percent of surveyed leading U.S. fashion brands and apparel retailers say they plan to increase hiring of data scientists in the next five years. Googling “apparel industry” together with terms such as “big data” and “data science” also returns much more results than in the past. It is hopeful that the advancement of digital technologies and the smarter use of data will enable apparel companies to overcome market uncertainties better and improve many aspects of their businesses such as speed to market, operational efficiency and even sustainability.

2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2019, and what can apparel firms and their suppliers do to stay ahead?

Based on my research, I have three observations regarding apparel companies’ sourcing trends and the overall sourcing landscape in 2019:

First, apparel companies overall will continue to maintain a diverse sourcing base. For example, in a recent study, we examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Notably, on average these companies sourced from over 20 different countries or regions using more than 200 vendors in 2017. Similarly, in the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), we also found companies with more than 1,000 employees typically source from more than ten different countries and regions. Since no sourcing destination is perfect, maintaining a relatively diverse sourcing base allows apparel companies to strike a balance among various sourcing factors ranging from cost, speed, flexibility, to risk management.

Second, while apparel companies are actively seeking new sourcing bases, many of them are reducing either the number of countries they source from or the number of vendors they work with. According to our study, some apparel companies have been strategically reducing the number of sourcing facilities with the purpose of ensuring closer collaborations with their suppliers on social and environmental compliance issues. Some other companies are consolidating their sourcing base within certain regions to improve efficiency and maximize productivity in the supply chain. Related to this trend, it is interesting to note that approximately half of the 50 largest U.S. apparel companies report allocating more sourcing orders to their largest vendor in 2017 than three years ago.

Third, nearshoring or onshoring will become more visible. Take “Made in the USA” apparel for example. According to the 2018 U.S. Fashion Industry Benchmarking Study, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume. In a recent study, we find that 94 out of the total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S. market between December 2017 and November 2018. These “Made in the USA” apparel items, in general, focus on fashion-oriented women’s wear, particularly in the categories of bottoms (such as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and dungarees), swimwear and suits-sets. The advantage of proximity to the market, which makes speedy replenishment for in-season items possible, also allows retailers to price “Made in the USA” apparel substantially higher than imported ones and avoid offering deep discounts. Looking ahead, thanks to automation technology and consumers’ increasing demand for speed to market, I think nearshoring or onshoring, including ”Made in the USA” apparel, will continue to have its unique role to play in fashion brands and retailers’ merchandising and sourcing strategies.

3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?

2019 will be a year to test apparel companies’ resources, particularly in the sourcing area. For example, winners will be those companies that have built a sophisticated but nimble global sourcing network that can handle market uncertainties effectively. Likewise, companies that understand and leverage the evolving “rules of the game”, such as the apparel-specific rules of origin and tariff phase-out schedules of existing or newly-reached free trade agreements, will be able to control sourcing cost better and achieve higher profit margins. Given the heavy involvement of trade policy in apparel sourcing this year, companies with solid government relations should also enjoy unique competitive advantages. 

On the other hand, as apparel business is changing in nature, to stay competitive, apparel companies need to start investing the future. This includes but not limited to exploring new sourcing destinations, studying the changing consumer demographics, recruiting new talents with expertise in emerging areas, and adopting new technologies fitting for the digital age. 

4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2019 to be better than 2018, and why?

Two things are at the top of my watchlist:

First, what is the future of China as an apparel sourcing base? While external factors such as the U.S.-China tariff war have attracted most of the public attention, the genuine evolution of China’s textile and apparel industry is something even more critical to watch in the long run. From my observation, China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. Similar trends are seen in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame. A key question in my mind is how quickly China’s textile and apparel industry will continue to evolve and upgrade by following the paths of most other advanced economies in history.

Second, how will the implementation of several newly-reached free trade agreements (FTAs) affect the big landscape of apparel sourcing and the existing regional apparel supply chains? For example:

  • The newly-reached U.S.-Mexico-Canada Free Trade Agreement (USMCA or commonly called NAFTA2.0) includes several interesting changes to the textile and apparel specific rules of origin provisions, such as the adjustment of the tariff-preference level (TPL) mechanism. Whether these changes will boost textile and apparel production in the Western-Hemisphere and attract more sourcing from the region will be something interesting to watch.
  • The implementation of the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA) will allow Vietnam to get access to nearly 40% of the world apparel import market (i.e., EU + Japan) duty-free. However, restrained by the country’s relatively small population, the apparel industry is increasingly facing the challenge of competing for labor with other export-oriented sectors in Vietnam. Realistically, what is the growth potential of apparel “Made in Vietnam” after the implementation of CPTPP and EVFTA?
  • In 2017, close to 80% of Asian countries’ textile imports came from other Asian countries, up from around 70% in the 2000s. Similarly, in 2017, 85.6% of Asian countries’ apparel imports also came from within the region. The negotiation of the Regional Comprehensive and Economic Partnership (RCEP) is likely to conclude in 2019, whose membership includes member states of the Association of Southeast Asian Nations (ASEAN) and other six economies in the Asia-Pacific region (Australia, China, India, Japan, South Korea and New Zealand). Will RCEP result in an ever more integrated Asia-based textile and apparel supply chain and make the Asia region even more competitive as an apparel sourcing destination?  

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How Has the Apparel Trade Flow Reacted to the Section 301 Tariff Action against China? (updated November 2018)

While apparel products are not subject to the Section 301 tariff yet, the trade action nevertheless has created huge market uncertainties for U.S. fashion brands and apparel retailers. Here is how the monthly trade flow of U.S. apparel imports has reflected the impacts of the U.S.-China tariff war:

First, U.S. companies did NOT stop importing from China. Seasonally adjusted data shows that between January and September 2018, the value of U.S. apparel imports from China decreased by 0.6 percent in volume and 0.05 percent in value year on year. Despite the decline, China remained the No.1 apparel supplier for the U.S. market in the first nine months of 2018, accounting for 32.3 percent market share in value and 41.3 percent shares in quantity, only marginally dropped by 1 and 0.7 percentage points from a year earlier respectively .

Second, apparel “Made in China” are becoming even cheaper. Notably, the average unit price of U.S. apparel imports from China dropped from $2.5/SME in 2016,$2.38/SME in 2017 to $2.36/SME in the first nine months of 2018. On the one hand, this result suggests that cost concern is not the most influential factor that drives U.S. companies to source less from China. However, it is also likely that Chinese exporters are intentionally reducing their price to keep their orders and overcome the challenges caused by the Section 301.

Third, there is no perfect replacement for “Made in China”. In response to the market uncertainty created by the Section 301 trade action, U.S. apparel importers are diversifying their sourcing base. That being said, it is difficult to identify a single largest beneficiary–notably, the market shares of apparel exports from Vietnam, Bangladesh, NAFTA, and CAFTA regions only marginally increased in the first nine months of 2018 compared with a year ago.

Additionally, it remains unclear whether the section 301 trade action has benefited U.S. textile and apparel manufacturing. Data shows that in the first ten months of 2018, the production index (2012=100) of textile manufacturing in the United States slightly increased from 92.8 in 2017to 94.3. However, over the same period, the index of apparel manufacturing decreased from 73.6 to 72.4.

Looking ahead, the volume of US textile and apparel imports from China is likely to increase in the short run since U.S. importers are eager to complete their sourcing orders before the new tariff hit.  Usually, companies place sourcing orders several months ahead of the selling season. However, it will be interesting to see if the trade data in the first half of 2019 will reveal the negative impact of the Section 301 action on China’s apparel exports to the U.S. market.

Data source: Office of Textiles and Apparel (OTEXA), US Department of Commerce

by Sheng Lu

China’s Changing Role in the World Textile and Apparel Supply Chain (updated October 2018)

china market share

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Following the steps of many countries in history, China is gradually shifting its role in the world textile and apparel supply chain. While China unshakably remains the world’s largest apparel exporter, its market shares measured by value fell from 38.6 percent in 2015 to 33.7 percent in 2017.  China’s market shares in the world’s top three largest apparel import markets, namely the United States, EU, and Japan, also indicate a clear downward trend in the past five years. This result is consistent with several recent survey studies, which find that fashion brands and retailers are actively seeking alternative apparel sourcing bases to China. Indeed, no country, including China, can forever keep its comparative advantage in making labor-intensive garments when its economy becomes more industrialized and advanced.

However, it is also important to recognize that China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. We observe similar trends in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame. 

So maybe the right question to ask in the future is: how much value of “Made in China” actually contains in Asian countries’ apparel exports to the world?

China’s Textile and Apparel Factories Today

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