How Have the Apparel Trade Flows Reacted to the Section 301 Tariff Action against China?

1

2

3

  • Apparel products are not subject to the Section 301 tariff yet. Neither the $34 billion product list (subject to the 25% additional tariff rate since July 6, 2018) nor the newly proposed $200 billion product list covers wearing apparel (HS Chapters 61 and 62). The current tariff rates will remain unchanged for now.
  • Nevertheless, the Section 301 tariff action has created huge market uncertainties for U.S. fashion brands and apparel retailers. Uncertainty hurts business.
  • Seasonally adjusted data shows that between January-May 2018, the total U.S. apparel imports increased by 1.5 percent in volume and 2.5 percent in value year on year—largely due to the improved U.S. economy which creates more import demand. However, over the same period, the value of U.S. apparel imports from China decreased by 1.2 percent in volume and 2.5 percent in value year on year.

Untitled

  • After all, cost concern does NOT seem to be the most influential factor that drives companies to source less from China. The average unit price of U.S. apparel imports from China dropped from $2.5/SME in 2016, $2.38/SME in 2017 to $2.32/SME in the first five months of 2018.

7.jpg

5

  • In response to the market uncertainty, US importers have already started to accelerate diversifying their sourcing base. Interesting enough, while China’s share in the U.S. apparel import market is declining, there is no single alternative to “Made in China.” Notably, the market shares of Vietnam, Bangladesh, NAFTA and CAFTA only marginally increased in 2018 compared with a year ago. Again, companies’ immediate strategy is to diversify sourcing.
  • In the short run, the volume of US textile and apparel imports from China is likely to go up since US importers are eager to complete their sourcing orders before the tariff hit. If the market uncertainty lasts, the real negative impact will be reflected in the trade data later this year or next year. Usually, companies place sourcing orders several months ahead of the season.
  • Last but not least, the Section 301 action is driven by politics. It is insufficient to just calculate the economic costs and benefits; the political costs should be considered as well.

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

by Sheng Lu

U.S. Textile and Apparel Industry Responds to Trump’s Tariff Announcement against China

FOREIGN201708211521000183597989940

On June 15, 2018, the Trump Administration announced to impose a 25% punitive tariff on a list of Chinese goods based on the results of its Section 301 investigation, which targeted against China’s unfair trade practices related to the forced transfer of American technology and intellectual property. The additional duty will first apply to 818 lines of products on July 6, 2018, which cover approximately $34 billion worth of imports from China. Office of the U.S. Trade Representative (USTR) said it would issue a final determination on the second set of 284 proposed tariff lines, which cover approximately $16 billion worth of imports from China shortly. The total 1,102 tariff lines targeted by USTR generally focuses on products from industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy, which include industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles.

In response to the U.S. action, China’s Ministry of Commerce (MOFCOM) quickly announced its proposed countermeasures, including a 25% punitive tariff on approximately $34 billion worth of U.S. soybean, autos, and fruits effective July 6, 2018. China is also ready to impose the punitive tariff on another list of products, which cover approximately $16 billion worth of medical device, chemicals and energy imports from the United States.

The U.S. textile and apparel industry keeps a close watch on the U.S.-China trade dispute since as much as 36% of U.S. textile and apparel imports come from China. In an announcement released on June 16, 2018, the American Apparel and Footwear Association (AAFA) called a victory that no textile and apparel products are subject to the punitive tariff proposed by USTR. The June 15 USTR list also removes the majority of the textile machinery initially on the retaliation product list back in April 2018. However, U.S. fashion brands and apparel retailers remain deeply concerned about Trump’s tariff action and its potential negative economic impacts on the apparel sector.

In contrast, the U.S. textile industry, represented by the National Council of Textile Organizations (NCTO) praised the Trump administration’s tariff announcement. NCTO also called on the Trump administration to include finished textile and apparel products on any future lists of imports from China to be made subject to Section 301 tariffs.  Not surprisingly, NCTO’s proposal is opposed strongly by AAFA and the U.S. Fashion Industry Association, representing U.S. fashion brands and apparel retailers. As argued by USFIA, the U.S. tariff rates on apparel and fashion products are already the highest among manufactured goods, reaching 32 percent for man-made fiber apparel and 67 percent for footwear. Any additional tariff would constitute a huge, regressive tax increase and have a negative impact on the American jobs.

Appendix: Timeline of U.S. Section 301 Investigation against China

June 15, 2018: The Trump Administration announced to impose a 25% punitive tariff on a list of Chinese goods based on the results of its section 301 investigation

June 4, 2018: Secretary of Commerce Wilbur Ross concluded his two-day trade negotiation with China in Beijing. A White House statement said “the meetings focused on reducing the United States’ trade deficit by facilitating the supply of agricultural and energy products to meet China’s growing consumption needs, which will help support growth and employment in the United States. The United States officials conveyed President Donald J. Trump’s clear goal for achieving a fair trading relationship with China.” While the announcement didn’t mention the next round, it says that the delegation will “receive guidance on the path forward.”

May 29, 2018: President Trump suddenly announced that the United States will impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology, including those related to the “Made in China 2025” program.  The final list of covered imports will be announced by June 15, 2018. The announcement also said that the U.S. Trade Representative Office (USTR) will continue WTO dispute settlement against China originally initiated in March to address China’s discriminatory technology licensing requirements. Additionally, the United States will implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology. The list of restrictions and controls will be announced by June 30, 2018.

May 19, 2018: A joint statement released by the White House said that the United States and China had led to an agreement for China to buy more goods and services, including “meaningful increases in U.S. agriculture and energy exports.” The statement also said that both sides attach importance to intellectual property protections, agreed to encourage two-way investment and to strive to create a fair, level playing field for competition, and agreed to engage at high levels on trade and investment issues. Additionally, the statement said that the United States would send a team to China to work out the details of the agreement. However, the statement did not contain a specific target for reducing the $375 billion trade deficits.

April 5, 2018: President Trump announced that he has instructed the Office of the U.S. Trade Representative (USTR) to consider $100 billion additional retaliatory tariffs on China, in response to China’s own retaliation against the Section 301 tariffs announced in late March. In a statement released the next day, USTR confirms the proposed new measures. USTR also says that any additional tariffs proposed will be subject to a similar public comment process as the proposed tariffs announced on April 3, 2018. No tariffs will go into effect until the respective process is complete. 

April 3, 2018: USTR released the proposed list of Chinese products to be subject to the retaliatory tariff under the Section 301 action. The proposed list covers approximately 1,300 separate tariff lines and will undergo further review in a public notice and comment process, including a hearing (scheduled at around May 15, 2018). The USTR statement says it will make a final decision on whether to implement the proposed tariff action after the whole process. 

March 26, 2018: USTR filed a WTO case against China’s discriminatory technology licensing requirements (DS542). The US claimed that China’s measures appear to be inconsistent with Articles 3, 28.1(a) and (b) and 28.2 of the Trade-Related Intellectual Property Rights Agreement (TRIPS). As of April 8, 2018, the European Union, Japan, Ukraine and Saudi Arabia have requested to join the dispute as third parties. According to the WTO rule, China shall enter into consultation with the US no later than April 26, 2018. If the dispute is not resolved by May 25, 2018 (i.e., 60 days after the request for consultation), the United States may request a WTO panel. As of June 17, 2018, the case is still in consultations.

March 22, 2018: President Trump announced his decisions on the actions the Administration will take in response to China’s unfair trade practices covered in the USTR Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation. U.S. Trade Representative Robert Lighthizer initiated the investigation in August 2017 at the direction of President Trump. In the Memorandum he signed, President Trump directed the US Trade Representative to level tariffs on about $50 billion worth of Chinese imports. 

January 2018: the U.S. Trade Representative Office submitted its annual report on China’s WTO Compliance to U.S. Congress. The report says that “It seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-orientated trade regime.”

August 14, 2017: President Trump issued a memorandum directing the USTR to determine if China’s policies regarding IPR theft and forced technology requirements “may be harming American intellectual property rights, innovation, or technology development,” and thus warrant USTR action under Section 301of the 1974 Trade Act.

Related reading: The Section 301 Investigation against China Divides the U.S. Textile Industry and U.S. Fashion Brands and Retailers

China’s Changing Role in the World Textile and Apparel Supply Chain

1

2

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 35.8 percent in 2016.  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 in value, 47 percent of Bangladesh’s textile imports came from China in 2015, up from only 39 percent in 2005. We can observe similar trends in Cambodia (up from 30 percent to 63 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 68 percent), Malaysia (up from 25 percent to 49 percent), Indonesia (up from 26 percent to 40 percent), Philippines (up from 19 percent to 40 percent) and Sri Lanka (up from 15 percent to 38 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

This slideshow requires JavaScript.

Related readings: 

Trade Issues Facing the U.S. Apparel and Retail Industry

Panel:

  • Steve Lamar, Executive VP at the American and Apparel Footwear Association (AAFA)
  • Jon Gold, VP of Supply Chain and Customs Policy at the National Retail Federation (NRF)
  • Robert Antoshak (Host), Managing Director at Olah Inc.

Topic discussed

  • Renegotiation of the North American Free Trade Agreement (NAFTA)
  • Trump’s trade policy agenda
  • What’s going on in the retail market?
  • Technology and the future of apparel supply chain
  • US labeling requirements and a return of Made-in-USA

USTR Lighthizer Discusses Philosophies behind Trump Administration’s Trade Policy

At an event hosted by the Center for Strategic and International Studies (CSIS) on September 18, U.S. Trade Representative Robert Lighthizer addressed the U.S. trade policy in the Trump Administration, particularly Trump’s beliefs on trade:

Philosophy 1: The reason why some Americans oppose free trade is NOT that they were “ill-informed.” Rather, it is because the U.S. trade policy for decades has failed to create a “level playing field.” The Trump Administration will proactively use all instruments to “make it expensive” for U.S. trading partners to engage in the non-economic behavior, convince U.S. trading partners to treat U.S. workers, farmers, and ranchers fairly and demand “reciprocity” both in the home and international markets.

Philosophy2: Trade deficits matter. Although trade policy is not the only cause for the trade deficit, it can be a major contributor, such as high tariffs that deny the market access for U.S. products, not imposing the border adjustment tax and currency manipulation.

Philosophy 3: China is the top challenge. According to Lighthizer, “the sheer scale of China’s coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.”

Philosophy 4: The Trump Administrations will exam all existing trade agreements to make sure they provide “roughly equivalent” measured by trade deficits. “Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.”

During the Q&A session, Lighthizer further shared his views on some cutting-edge trade issues:

  1. Regarding the NAFTA renegotiation, Lightlizher said that the negotiation is “moving at warp speed, but we don’t know whether we’re going to get to a conclusion, that’s the problem.” The consultation process with U.S. Congress is complicated and time-consuming, but it is unavoidable.
  2. The Trump Administration prefers bilateral trade deal over regional and multilateral ones. Given the size of the U.S. economy, Lighthizer believes that bilateral trade agreement will provide more negotiation leverages and ensure better enforcement.
  3. The Trump Administration will still stay very much engaged in Asia.
  4. The WTO Dispute-Settlement mechanism doesn’t work well—it has both imposed new obligations for the U.S. and reduced a lot of U.S. benefits.
  5. Regarding the outlook for the Trans-Atlantic Trade and Investment Partnership (T-TIP) negotiation, Lighthizer stressed the importance of the US-EU trade relations. He said that the series of elections in EU is a reason why the negotiation of the agreement hasn’t moved forward.
  6. Regarding TISA (Trade in services agreement), the U.S. objective is to open markets and eliminate market access barriers for U.S. companies.

North Korea’s Apparel Exports: Four Things to Know

NK1

First, apparel (defined by HS Chapters 61 & 62) is one of the top categories of North Korea’s merchandise exports. Statistics from the International Trade Center (ITC) show that of North Korea’s total US$2,339.9 million merchandise exports in 2016, US$564.7 million (or 19.4%) were apparel.

NK2

Second, apparel is also one of the fastest-growing categories of North Korea’s exports over the past decade. From 2003 to 2016, the value of North Korea’s apparel exports surged by 416%, compared to only 171% increase of other products over the same period.

NK3

NK4.jpg

Third, over 99.4% of North Korea’s apparel exports went to China in 2016. Notably, back in 2003, China only accounted for 49.7% of North Korea’s apparel exports. However, apparel exports from North Korea to China received two substantial boosts just in the past ten years: one in 2009 (the year when UN resolution 1874 was adopted) and another in 2013 (the year when UN resolution 2087 was adopted).

Fourth, interesting enough, North Korea’s apparel exports predominantly concentrate on men and women’s overcoats (HS 6201 and 6202) as well as suits, jackets, and blazers (HS 6203 and 6204). This is a notable difference from most other developing countries, such as Bangladesh, Vietnam, and Cambodia whose apparel exports usually focus on more basic items like shirts and trousers.  

by Sheng Lu

Extended readings:

Disclaimer: All blog posts on this site are for FASH455 educational purposes only and they are nonpolitical and nonpartisan in nature. No blog post has the intention to favor or oppose any particular public policy, nor shall be interpreted in that way.