Tag: China

Chinese Manufacturer to Open $20 Million Garment Factory in the US

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We all know that China is the single largest supplier of textile and apparel to the U.S. market. But on Oct 20, 2016, Arkansas Gov. Asa Hutchinson announced Tianyuan Garments Company, a Chinese sport apparel manufacturer based in Suzhou, China will invest $20 million to build a new garment factory in the Little Rock area of Arkansas.

Tianyuan, founded in 1998, is a garment maker specializing in the production of casual and sport apparel, including garment for Adidas, Reebok and Armani. With five facilities in China, Tianyuan was named one of the top 100 garment companies in China in 2015. Tianyuan’s annual production rate is nearly 10 million articles and clothing. The company currently supplies 90% of the garments marketed by Adidas, which is the second-largest global sports and apparel maker behind Nike. Tianyuan was also one of several suppliers for the 2014 World Cup and for the Italian Olympic Team in 2016.  

According to the Memorandum of understanding (MOU) signed by Hutchinson and Tianyuan executives, the Chinese apparel giant will hire 400 full-time workers primarily from Arkansas within four years of starting operations in central Arkansas. It is said that these workers will be paid around $14/hour.

As part of the deal, Arkansas offers an incentive package that will include five-year, 3.9% annual tax rebate worth nearly $1.6 million annually. Other incentives include a $1 million infrastructure assistance grant for building improvements and equipment purchases, as well as a $500,000 stipend for worker training.

Arkansas will also help provide assistance in helping Tianyuan get 20 work visas for company executives who will live in Arkansas or travel between the U.S. and China on business related to the Little Rock manufacturing plant. Furthermore, the Chinese garment maker will receive abatement of up to 65% of property taxes from the city of Little Rock and Pulaski County.

Tianyuan is not the only Chinese textile and apparel company that invests in the US in recent years. Back in 2013, Keer Group, a Chinese textile company founded in 1995 and based in Zhejiang, China opened a new facility in Lancaster County, South Carolina as the base of operations for Keer Group’s expansion into the North American market. With $218 million total investment in 5 years, Keer America plans to open one plant with manufacturing capacity of 30,000 metric tons of yarn per year and another plant with 75,000 spindles to make 50 metric tons of yarns daily.

Please feel free to share your thoughts on the following discussion questions:

  1. Why do you think Tianyuan and Keer group decide to open factories in the US? Based on your research, do you think Tianyuan and Keer’s investments reflect a growing trend in the industry or are they just two individual cases?
  2. In your view, are investments made by Tianyuan and Keer group good or bad for the US economy? Why?
  3. What is the business outlook for Tianyuan’s garment factory in the US and Keer America? What are their opportunities and challenges?
  4. Any other thoughts or questions for the case?

[Discussion for this post is closed]

China’s 13th Five-Year Plan for Its Textile and Apparel Industry: Key Numbers

chinas-13th-five-year-planBy Sheng Lu

How is China’s Garment Industry Dealing with Rising Labor Costs?

Please feel free to share your views on the following discussion questions based on the video:

China is no longer one of the cheapest places to produce garments. The minimum monthly wages in China have far exceeded those in Bangladesh, India and Cambodia:

  • How are Chinese garment factories coping with the challenges of rising labor cost?
  • Is adopting Taylor’s “scientific management”, i.e. asking skilled workers to do less skilled jobs in a more specialized production line, a smart idea?
  • What is your view on the growing difficulty of hiring and retaining young skilled workers for the garment industry in China?
  • Any other thoughts on the video?

Appendix: State of China’s Apparel Exports in 2015

According to the UNComtrade, China remains the world’s largest apparel exporter in 2015 (37.4% world share for knitted apparel, HS61 and 34.9% for woven apparel, HS62).

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62From 2011 to 2015, “Made in China” continues to acquire more market shares in some key apparel import markets in the world, including the United States and UK (i.e. China’s apparel exports to these markets grew at a faster rate than these countries’ apparel import growth from the world—bubbles in blue in the figures below). Nevertheless, in some other markets (bubbles in yellow in the figures below), notably Japan and Germany, China is losing market shares to other garment exporters such as Vietnam and Bangladesh.

61 market

62 growth

2016 U.S. Fashion Industry Benchmarking Study Released

The 2018 U.S. Fashion Industry Benchmarking Study is now available. 
usfia 2016 cover_Page_1

The report can be downloaded from HERE

Key Findings of the study:

I. Business environment and outlook in the U.S. Fashion Industry

  • Overall, respondents remain optimistic about the five-year outlook for the U.S. fashion industry. “Market competition in the United States” is ranked the top business challenge this year, which, for the first time since 2014, exceeds the concerns about “increasing production or sourcing cost.”

II. Sourcing practices in the U.S. fashion industry

  • U.S. fashion companies are more actively seeking alternatives to “Made in China” in 2016, but China’s position as the No.1 sourcing destination seems unlikely to change anytime soon. Meanwhile, sourcing from Vietnam and Bangladesh may continue to grow over the next two years, but at a slower pace.
  • U.S. fashion companies continue to expand their global reach and maintain truly global supply chains. Respondents’ sourcing bases continue to expand, and more countries are considered potential sourcing destinations. However, some companies plan to consolidate their sourcing bases in the next two years to strengthen key supplier relationships and improve efficiency.
  • Today, ethical sourcing and sustainability are given more weight in U.S. fashion companies’ sourcing decisions. Respondents also see unmet compliance (factory, social and/or environmental) standards as the top supply chain risk.

III. Trade policy and the U.S. fashion industry

  • Overall, U.S. fashion companies are very excited about the conclusion of the Trans-Pacific Partnership (TPP) negotiations and they look forward to exploring the benefits after TPP’s implementation.
  • Thanks to the 10-year extension of the African Growth and Opportunity Act (AGOA), U.S. fashion companies have shown more interest in sourcing from the region. In particular, most respondents see the “third-country fabric” provision a critical necessity for their company to source in the AGOA region.
  • Free trade agreements (FTAs) and trade preference programs remain underutilized in 2016 and several FTAs, including NAFTA and CAFTA-DR, are utilized even less than in previous years. U.S. fashion companies also call for further removal of trade barriers, including restrictive rules of origin and remaining high tariffs.

The benchmarking study was conducted between March 2016 and April 2016 based on a survey of 30 executives from leading U.S. fashion and apparel brands, retailers, importers, and wholesalers. In terms of business size, 92 percent of respondents report having more than 500 employees in their companies, while 84 percent of respondents report having more than 1,000 employees, suggesting that the findings well reflect the views of the most influential players in the U.S. fashion industry.

For the benchmarking studies in 2014 and 2015, please visit: https://www.usfashionindustry.com/resources/industry-benchmarking-study

China’s Position as the No.1 Textile and Apparel Sourcing Destination Remains Unshakable

china

China as the top textile and apparel sourcing destination for U.S. companies remains “unshakable”, according to product level data from the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce.  Specifically, based on the import value in 2015:

  • Of the total 11 categories of yarns, China was the top supplier for 3 categories (27.3%)
  • Of the total 34 categories of fabrics, China was the top supplier for 23 categories (67.6%)
  • Of the total 106 categories of apparel, China was the top supplier for 95 categories (89.6%)
  • Of the total 16 categories of made-up textiles, China was the top supplier for 12 categories (75.0%)

In comparison, Vietnam, the second largest textile and apparel supplier to the United States, was the top supplier for only four categories of apparel (3.8% of the total 106 categories).

china market share

For many textile and apparel products, China not only is the largest supplier, but also holds a lion’s market share. Specifically, for those textile and apparel product categories that China was the top supplier in 2015 (by value):

  • China’s average market share reached 20.7% for yarns, 2.3 percentage points higher than the 2nd top supplier
  • China’s average market share reached 42.0% for fabrics, 25 percentage points higher than the 2nd top supplier
  • China’s average market share reached 52.7% for apparel, 37.2 percentage points higher than the 2nd top supplier
  • China’s average market share reached 56.8% for made-up textiles, 42.7 percentage points higher than the 2nd top supplier

by Sheng Lu

State of China’s Textile and Apparel (T&A) Industry (Updated in January 2016)

Textile-factory-in-China-007

How to deal with China as a sourcing destination remains a tough and controversial issue facing U.S. apparel retailers and fashion brands in 2016. Although companies are of grave concerns about China’s continuous rising production cost (especially labor cost), few other lower-wage countries can beat China in terms of industry integration, supply chain efficiency, and reliability.This blog post intends to add to the discussion by taking a look at the supply side, i.e. what is happening in the China textile and apparel (T&A) industry.

First, China’s production capacity remains unparalleled in the world. In 2014, the latest statistics available, textile fiber production in China exceeded 50 million tons, accounting for 54.36 percent of world share. By 2013, as much as 64.2 percent of the world’s chemical fibers, 64.1 percent of synthetic fibers and 26.2 percent of cotton were produced in China (see the table blew). On the other hand, apparel production in China reached 29.9 billion units in 2014, up 10.4 percent from 2013. Given China’s vast production capacity, very likely it will remain the top apparel sourcing destination for most EU and US fashion apparel companies for many years to come. For example, Vietnam’s apparel production in 2015 totaled 2.85 billion units, which was only around 10 percentage of China’s production scale in 2014.

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Second, China’s T&A industry is growing slower. Specifically, output of China’s T&A industry (measured by value added) grew only 7.0 percent between 2013-2014, a significant drop from 10.3 percent between 2009-2010. Other major economic indicators in the industry, from sales revenue, net profit to investment, followed a similar pattern (see the figure below). Additionally, for the first time since the 2008 financial crisis, China’s T&A exports suffered a 3.9 percent decline in 2015 (-1.3% for textiles and -5.4% for apparel). Given the downward pressure on China’s economy and uncertainties in the world marketplace, such a slow-growth pattern is likely to continue in the years ahead.

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investment

Third, China’s T&A industry is undergoing important structural adjustment. Within the total industry output, the ratio of apparel, home textiles and industrial textiles has turned from 51:29:20 in 2010 to 46.8: 28.6: 24.6 in 2014, reflecting China’s efforts to move towards making more value-added and technology-intensive textile products. This ratio is expected to become 40:27:33 by the end of 2020 (i.e. the end of China’s 13th five-year plan). In order to overcome the pressure of rising labor and production cost, China’s T&A manufacturing base is gradually moving from the east coast to the western and central part of the country (accounting for 22.5 percent of China’s T&A production in 2014, up from 16.8 percent in 2010; this share may further increase to 28 percent by 2020). Additionally, T&A companies in China are encouraged to increase spending on research and development (R&D), which on average had accounted for 0.47 percent of T&A companies’ sales revenue in 2013, up from 0.43 percent in 2011.

Fourth, T&A companies in China are actively seeking business opportunities in the domestic retail market. Apparel retail sales in China reached 893.6 billion yuan in 2014 (around $137.5 billion), among which 30.77 percent were sold online (up from 14.54 percent in 2011). Apparel retail price on average rose 2.6 percent between 2013-2014, compared with 2.0 percent increase of China’s overall CPI over that period. However, it shall be noted that apparel retail sales in China’s tier 1 and tier 2 cities achieved almost zero growth in 2014, partially reflecting the negative impact of retail price increase on consumers’ demand. In comparison, apparel retail sales in China’s tier 3 & 4 cities as well as rural areas remain robust and strong. Additionally, financial performance of T&A companies in China is becoming more polarized. Companies that follow the traditional business model of manufacturing and exporting are facing their most difficult time since the 2008 financial crisis. However, there are also many success stories of apparel companies that focus on function upgrading, i.e. moving from simply “manufacturing” products to “serving” the market needs.

Sheng Lu

Recommended reading: China’s 13th five-year plan for its textile and apparel industry: Key numbers

Top 10 Most Read FASH455 Blog Posts in 2015

top 10

 

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

2. 2014 World Textile Industry Labor Cost Comparison

3. Global Trade of Used Clothing (Updated: October 2015)

4. Market Size of the Global Textile and Apparel Industry: 2014 to 2018

5. When Will TPP Take Effect? Let’s look at the History

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

7. Are US Textile and Apparel Imports Using Free Trade Agreements?

8. 2015 US Fashion Industry Benchmarking Study Released

9. Exclusive Interview with Erin Ennis, Vice President, US-China Business Council

10. US Tariff Phaseout Schedule for Textile and Apparel in TPP by OTEXA Code

The Future of “Made in China”: Robots are taking over China’s Factory Floors


The video echoes one recent Wall Street Journal article about Levi Strauss using automation technologies to revamp their apparel production in China:

“In an apparel factory in Zhongshan, a gritty city of three million stuffed with industrial parks across the Pearl River from Hong Kong, lasers are replacing dozens of workers who scrub Levi’s blue jeans with sandpaper to give them the worn look that American consumers find stylish. Automated sewing machines have cut the number of seamstresses needed to stitch arc designs into back pockets. Digital printers make intricate patterns on jeans that workers used to do with a mesh screen.”

One important factor that gives a push to adopting robots in China’s factory floor is the end of very cheap labor in China. China’s wage level has been rising in double-digit percentages for the past decades. And as a consequence of its “one-child policy”, by 2050, the working-age population in China could decline by 212 million according to estimation from the United Nations.

But Levi executives say they have largely abandoned a strategy of relocating production to one impoverished country after another, known as “chasing the needle,” in favor of other forms of cost-cutting.” “Labor is getting more expensive and technology is getting cheaper,” says Andrew Lo, chief executive of Crystal Group, one of Levi’s major suppliers in China.

“Levi is adapting its laser technology so it can etch different patterns to make one type of denim look like another, reducing costs by buying less fabric. For a new line of women’s wear, Levi said it needed only 12 fabrics, rather than 18. In the past three years, Levi said, it cut the number of its suppliers by 40% and the number of fabrics by 50%.”

“The changes also give Levi greater flexibility, said Ms. O’Neill, the 44-year-old executive who helps oversee the company’s supply chain. If a pair of jeans using a particular fabric is selling well, she says, Levi can use lasers to produce more of the desired look, and pare back designs that are losers. “The idea is to delay decision-making for as long as possible,” said Ms. O’Neill.”

And this is only the beginning! Some technologists think that inventions such as 3-D printing—essentially printers that replicate solid objects like copiers reproduce printed pages—will have a big impact by 2050. In such a world, printers could spew out clothing, food, electronics and other goods ordered online from a nearly limitless selection, with far fewer workers involved in production.

“In 2050, you could potentially have a 3-D printer at home that could produce all the fabrics you want,” said Roger Lee, the chief executive of Hong Kong’s TAL Group, which makes 1 of every 6 dress shirts sold in the U.S. for brands from Banana Republic to Brooks Brothers. “That would make us obsolete.”

Ironically but not surprisingly, automation also keeps wages down. Levi said it expects China production to rise only “modestly” next year; new orders are up for grabs. Apparel InternationaI’s president, Oscar Gonzalez, says the company now boasts an advantage over China—a large pool of apparel workers who were laid off in past downsizings. Excess labor has helped him keep wage increases to 2% or 3% a year he says. “Every Monday when we recruit,” he adds, “there are long lines of applicants.”

Welcome for any comments and discussion questions.

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].

The People’s Republic of Capitalism Part IV

Koppel_China_05_web08

Discussion questions

  • Is China still a “communist country”? Why or why not?
  • What is your view on China’s overall strategy to develop its economy first and leave problems such as income gap, corruption, human right and pollution to be solved at a later time?
  • How different is the business environment in China versus in the United States?
  • Given the problem such as human rights, pollution and corruption in China, should the U.S. government support and encourage U.S. business connections with China? Why or why not?
  • Anything in the documentary that is particuarlly interesting to you?

Please feel free to share your thoughts & comments. 

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)

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

Potential impact of the Trans-Pacific Partnership (TPP) remains a hot topic among the U.S. textile and apparel industry. A recent news report suggests that implementation of the agreement will negatively affect clothing manufacturers in LA, where most remaining U.S. apparel manufacturing capacity is located.

According to the news report, “small, independent apparel manufacturers (in LA) did not see big gains from TPP because they did not want to outsource their work, but it put them at a competitive disadvantage.” One local industry estimation quoted in the report claims that “Southern California’s apparel manufacturing will shrink an additional 20 percent if the TPP goes into effect.”

The report further says that “A key question for the apparel industry is whether the agreement includes a yarn-forward provision, which requires material to come from a TPP country in order to be duty-free.” However, the report does not explain why the “yarn-forward” rule could potentially benefit apparel manufacturing in the United States.

The followings are my personal preliminary estimation* of the potential impact of TPP on U.S. T&A manufacturing. Results show that, compared to the base year level in 2011:

  1. 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.

 US T&A manfuacturing

US Textile exports

vietnam import source

vietnam import source

US apparel import source

*Note:1. The estimation is conducted based on the latest Global Trade Analysis Project (GTAP) 9.0 database which includes complete bilateral trade information, transport and protection linkages of 140 countries and 57 sectors. Four scenarios are estimated:

  • Scenario 1 (Tariff reduction only): assumes tariff rate for textile and apparel traded between the twelve TPP members are eliminated, whereas tariff rate for other textile and apparel trade flows remain unchanged.
  • Scenario 2 (Tariff reduction + yarn forward): assumes that in addition to tariff reduction among TPP members for T&A, Vietnam substantially increases tariff rate by 100 percent for textile imports from its leading suppliers that are non-TPP members (i.e. China, South Korea and Taiwan). This policy shock provides strong financial incentives for Vietnam to import less textile from non-TPP suppliers and instead import more from other TPP members—an equivalent effect as the yarn forward rule.
  • Scenario 3(Tariff reduction + Vietnam develops local textile industry): assumes that in addition to tariff reduction among TPP members for T&A, productivity of Vietnam’s textile industry increases by 10 percent whereas productivity of other sectors remain unchanged.
  • Scenario 4 (Tariff reduction + yarn forward + Vietnam develops local textile industry): this scenario combines all policy shocks mentioned in scenario 1-3, i.e. tariff rate for textile and apparel traded between the twelve TPP members are eliminated, Vietnam substantially increases its tariff rate by 100 percent for textile imports from its leading suppliers that are non-TPP members (i.e. China, South Korea and Taiwan) and productivity of Vietnam’s textile industry increases by 10 percent.

 2. TPP1 includes Australia, New Zealand, Malaysia, Singapore, Burnie, Chile and Peru; NAFTA1 includes Canada and Mexico; CAFTA1 includes all other CAFTA members except the United States.

Sheng Lu

2015 US Fashion Industry Benchmarking Study Released

[Note: The 2016 U.S. Fashion Industry Benchmarking Study has been released]

UntitledThe U.S. Fashion Industry Association (USFIA) released its 2015 benchmarking study today. The report examines the industry’s business environment and outlook, sourcing practices as well as U.S. fashion companies’ viewpoints on critical trade policy agendas. Among the key findings:

  • Overall, respondents remain optimistic about the five-year outlook for the U.S. fashion industry. Like last year, they are most concerned about increasing production or sourcing costs, but they expect increases to be more modest this year.
  • Consistent with our 2014 findings, U.S. fashion companies are NOT moving away from China, and Bangladesh remains a popular sourcing destination with high growth potential, though not quite as high as last year.
  • Companies continue to diversify their sourcing, though free trade agreements (FTAs) and preference programs remain underutilized.
  • The U.S. fashion industry is a critical Trans-Pacific Partnership (TPP) stakeholder, as close to 80 percent of respondents expect implementation will impact their business practices. However, the restrictive rules in the agreement limit the potential.
  • U.S. fashion companies continue to express interest in expanding sourcing in the United States in the next two years as they further diversify their sourcing. However, there is no evidence that companies are shifting their business models back to manufacturing.

This benchmarking study was based on a survey of 30 executives at the leading U.S. fashion companies from March 2015 to April 2015. The findings well reflect the views of the most influential players in the U.S. fashion industry, with 90 percent of respondents having more than 100 employees (including 60 percent with more than 1,000 employees).

The full report can be downloaded from HERE.

The Changing Business Model of Fashion Companies

From watching the video (the first 18 minutes):

  • What are the key challenges faced by fashion companies nowadays?
  • How has the business model of fashion companies evolved?
  • What’s your outlook for the U.S. fashion industry?

Foreign Direct Investment in the U.S. Textile and Apparel Industry (Updated in May 2015)

Foreign direct investment (FDI) is a major format of cross-border capital flow. It occurs when a company based in one country invests in physical productive assets in another country and obtains a controlling interest in the operation (Brookings, 2014).

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Statistics show that in 2013 the total stock of global FDI exceeded $25 trillion, among which around 18.8% ($4.7 trillion) were made by U.S.-based companies. In the meanwhile, the United States is also a major FDI recipient, with the stock of FDI totaled $2.8 trillion by the end of 2013 (CRS, 2015). Europe is both the top destination of US FDI abroad (55.5%) and the largest source of FDI in the U.S. (70.1%).

Although historically developed countries have been the primary source of global FDI, in recent years, developing countries (especially emerging economies such as China) have played an increasing role in global investment. For example, according to a recent study released by the National Committee on US-China Relations, from 2000 to 2014, Chinese firms spent nearly $46 billion on new establishments and acquisitions in the U.S.. This includes Keer Group, a Chinese textile company, which invested $218 million in South Carolina to produce industrial cotton yarn products specifically for the China market.

It should be noted that in the 21st century FDI is considered to be a major driver of international trade. Particularly, a substantial share of international trade today is between parent firms and their foreign affiliates. For example, Statistics show that in 2012 the affiliates of foreign firms in the U.S. exported $334 billion or 21% of total U.S. exports and imported $671 billion or 29% of total U.S. imports. At the same time, U.S. parent companies (i.e. those companies made FDI overseas) exported $738 billion or 47% of total U.S. exports and imported $949 billion.

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3

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The U.S. textile and apparel industry (T&A) has been actively engaged in FDI as well. Data from the Bureau of Economic Analysis (BEA) show that in 2013 U.S. FDI abroad in the T&A industry reached $16.5 billion and FDI inflow reached $13.7 billion. The apparel retail sector (NAICS 448) in particular accounted for 85% of FDI inflow and 51% FDI outflow in the U.S. T&A industry. Interesting enough, data also show that FDI abroad made by the U.S. apparel manufacturers have substantially increased by 85.4% from 2009 to 2013, implying that U.S. apparel manufacturers may accelerate moving factories overseas rather than adding manufacturing capacity in the United States.

From Trade Protection to Going global: the Changing Nature of the U.S. Textile Industry

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Last week, Milliken & Company, one of the largest U.S. textile manufacturers founded in 1865, was featured in a Wall Street Journal article on the changing position of the U.S. textile industry on international trade. As you may remember in our case study, it was Roger Milliken, the chairman of the Milliken & Company, that founded the Crafted with Pride in the U.S.A. campaign in the 1980s. The campaign not only encouraged U.S. consumers to purchase more “Made in USA” products, but also intended to raise the public awareness of “import threat”. However, titled “free trade gains a convert”, the WSJ article argues that Milliken & Company today has “dropped protectionist stance as business went global”.

The article is a great reminder of the changing nature of the U.S. textile industry in the 21st century. One of them is going global. According to the Hoover’s Academics (2015). Milliken & Company today operates about 40 manufacturing plants in the US, Belgium, China, France, and the UK, as well as sales and services offices worldwide. In particular, as mentioned in the WSJ article, China nowadays is seen as Milliken & Company’s future. The company opened an industrial-carpet factory near Shanghai in 2007 and also moved its Asia headquarters from Tokyo to Shanghai in 2012. And rather than using Chinese labor to make goods for export back to the United States, most Milliken & Company’s products made in China target the local market. As estimated by GlobalData, urbanization and an increase in house ownership in developing countries like China, India, Vietnam, Thailand and Indonesia have led to an annual 7.9% growth of carpets and rug sales in the region.

It is also important to recognize that Milliken & Company’s business model is no longer based on manufacturing basic yarn or fabrics used for apparel. Instead, the company mostly produces highly tech-driven and capital intensive industrial textiles as well as chemicals and colorants that offer more than 100 applications including infusing washable markers and liquid laundry detergent, killing bacteria, melting ice, and blocking UV rays. In many industry sources, Milliken & Comopany is even counted as a chemical company that directly competes with industry giants such as DuPont, Dow Chemical and Shaw industries. Overall, it is product and business innovation that drive this hundred-old company moving forward.

Additionally, we shall not misread title of the WSJ article—i.e. the U.S. textile industry 100% supports free trade with no condition. As a matter of fact, the rules regulating global textile and apparel trade are still very complicated and restrictive in nature. For example, the U.S. textile industry still insists strict yarn-forward rules of origin to be adopted in the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (T-TIP). However, many U.S. apparel companies and fashion brands see the restrictive yarn-forward rule of origin outdated and incompatible with the 21st century global apparel supply chain.

No matter how, it is a noticeable change that the U.S. textile companies like Milliken start to shift their position on international trade, even just in a subtle way. Globalization has demonstrated its impact on shaping the new landscape of the U.S. textile industry and will continue to do so in the years to come.

What Does “Factory Asia” Mean for the U.S. Textile and Apparel Industry?

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Slide38As 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.

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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.

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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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Pattern of U.S. Textile and Apparel Imports (Updated: February 2015)

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Total U.S. textile and apparel imports enjoy steady growth from 2000 to 2014. From 2013 to 2014, value of apparel imports increased 2.5 percent and imports of fabric increased 5.4 percent. However, value of fiber imports declined 1.9 percent over the same period. Almost all fastest growing import categories from 2004 to 2014 are basic apparel.

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Because the United States is no longer a major apparel manufacturer but one of the largest apparel consumption markets in the world, apparel products accounted for 76.1 percent of total U.S. textile and apparel imports in 2014. Fabrics and yarns accounted for 5.8 percent and 1.3 percent respectively.

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While developing countries dominated apparel supply to the United States in 2014, developed countries remain important suppliers of textiles. For certain industrial textile products such as non-woven textiles, nearly 50 percent of imports still came from European Union (28), Canada and Japan. This pattern reflects different product nature of apparel (labor intensive) and textiles (capital intensive) as well as the respective comparative advantage of developing and developed economies.

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Overall, pattern of apparel imports is in parallel with apparel retail sales in the U.S. market. This reflects the fact that demand for imports is largely shaped by macro-economic conditions. It should also be noted that despite the heated discussion on “reshoring” apparel manufacturing in the U.S., apparel imports is NOT declining.

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By value, China accounted for 38.9 percent of total U.S. textile and apparel imports in 2014, which was slightly lower than the level of 39.8 percent in 2013. It should be noted that China’s market shares significantly varies by category. Within the total 167 number of textile and apparel product categories complied by the Office of Textiles and Apparel (OTEXA), China enjoyed market share increase for 119 categories and suffered market share losses for 49 categories from 2004 to 2014 (many are sewing thread products).

Exclusive Interview with Erin Ennis, Vice President, US-China Business Council

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Erin Ennis has been Vice President of the US-China Business Council (USCBC) since May 2005. In that position, she directs the Council’s government affairs and advocacy work for member companies and oversees the Council’s Business Advisory Services. She also leads a coalition of other trade associations on issues of interest to companies doing business with China. Founded in 1973, the US-China Business Council provides extensive China-focused information, advisory, and advocacy services, along with comprehensive events, to nearly 250 US corporations operating within the United States and throughout Asia.

Prior to joining the Council, Ms. Ennis worked at Kissinger McLarty Associates, the international consulting firm headed by former Secretary of State Henry Kissinger and former White House Chief of Staff Thomas “Mack” McLarty. At Kissinger McLarty, Ms. Ennis was responsible for implementing strategies for international business clients on proprietary trade matters, primarily in Vietnam and Japan.

Before entering the private sector, Ms. Ennis held several positions in the US Government. From 1992 to 1996, Ms. Ennis was a legislative aide to former U.S. Senator John Breaux, working on international trade and commerce. She also worked on health care issues during the Senate’s consideration of President Bill Clinton’s health care reform, an issue on which Senator Breaux actively worked to broker a compromise.

At the Office of the US Trade Representative from 1996 to 2000, Ms. Ennis first worked in Congressional Affairs on Asia issues, including annual approvals of China’s most favored nation status and the ill-fated 1997 push to renew presidential “fast track” negotiating authority. Beginning in 1998, she was assistant to Deputy US Trade Representative Richard Fisher, who led US trade negotiations and enforcement with Asia, the Americas, and on intellectual property rights.

Interview Part

Sheng Lu: Our students wonder whether increased trade with China is good or bad for the U.S. economy. Many of them consider the U.S. trade deficit with China to be a serious problem and they are worried about the loss of U.S. jobs to China. What’s your view and insights?

Erin Ennis: We should be realistic about what trade balance data shows and what it doesn’t. There is almost no correlation between a high US trade deficit and a strong US economy. In fact, we tend to have the lowest trade deficits when our economy is doing the worst – take a look at the data from the recent global recession between 2009 and 2010 for example versus what the trade deficit looked like in the 1990s when our economy was booming. We also don’t save much of our earnings, which also factors into the data.

Focusing on a single country as the source of our concerns leads to an inaccurate view that what other countries do has more of an effect on our economy than our own domestic policies. We should indeed be concerned about job creation in the US, but to do that, we should be implementing policies that ensure that we have as competitive an economy as possible. That will require a combination of education, energy, tax and other domestic policies. It also requires our economy to be as open as possible and pursuing market openings globally so that US goods and services have opportunities for sales overseas.

Sheng Lu: The USCBC 2014 China Business Environment Survey describes China as “an extremely difficult business environment along with a vital, growing market for foreign businesses”. We all know that China is an emerging market, but what are the top challenges faced by U.S. companies doing business in China?

Erin Ennis: Our survey goes into detail about the various challenges that companies experience in China. Competition with Chinese companies was the top issue in 2014, an issue that was not only cited independently, but also factors into several other issues that were cited such as foreign investment restrictions, uneven enforcement of laws, licensing disparities, and discrimination in the market. IPR enforcement is also a top concern for companies. Beyond those, there are also issues that both Chinese and foreign companies are grappling with in the market: a very tight labor market and significant increases in the cost of doing business.

Sheng Lu: Related to the previous question, two numbers in the USCBC survey seem to be very interesting: Although 90 percent of respondents consider rising costs in China a concern, only 14 percent of respondents say they actually reduced or stopped planned investment in China in the past year. How to explain this phenomenon?

Erin Ennis: The simple answer is that companies don’t make decisions on where to do business solely on cost. Most companies report that they are doing business in China to access Chinese customers. While costs may have increased, their opportunities for increased sales have increased too. China’s market grew at about 7% in 2014 – still a rapid rate of growth, even though it is slower than in previous years. Companies are likely to stay in the market, even as costs increase, to continue to access those opportunities.

Sheng Lu: While it is under heated discussion whether China should join the Trans-Pacific Partnership (TPP) or not, USCBC suggests that a successful conclusion of the Bilateral Investment Treaty (BIT) negotiations should be the top priority in the US-China economic relationship. What is BIT and why does it matter for U.S. companies?

Erin Ennis: The short answer is that a BIT matters because it will require China to provide the same treatment to foreign companies that it provides to domestic ones and it will require China to open many sectors of its economy to foreign investment that remain closed. More detailed explanations of what the BIT is and why it matters can be found on USCBC’s website here: https://www.uschina.org/advocacy/bilateral-investment-treaty.

Sheng Lu: December 2015 will mark the 15th anniversary of China’s accession to the World Trade Organization (WTO). In your view, what are the most important changes in US-China economic relations since China joins the WTO?

Erin Ennis: China’s WTO access required it to open significant parts of its economy to foreign companies. In general China has done a good job of implementing those commitments. As a consequence, China has grown to be the United States’ third largest trading partners after Canada and Mexico, with whom we have a free trade agreement. More needs to be done, however, to open China’s market. The US-China BIT negotiations will be a useful tool in achieving that goal.

Sheng Lu: China’s recent sweeping anti-graft campaign has attracted the world attention. How does the US business community look at this campaign? Will this campaign have any long-term impact on China’s business environment?

Erin Ennis: In general, the anticorruption campaign is viewed very positively by foreign companies because it is an additional way to ensure that all companies are treated equally in China – bribes and other illegal activities should never be tolerated. To date, the only impact that foreign companies have reported is that it takes longer to get some projects or licenses approved because Chinese officials are being overly cautious in ensuring that there is no appearance of impropriety. Those kinds of delays are ones that companies are willing to deal with.

Sheng Lu: Our students wonder if China presents as a career opportunity for them as well. What’s your observation and do you have any suggestions for our students interested in working/interning in China?

Erin Ennis: If you are serious about working in China, then learning Chinese should be at the top of your to do list – but the same could be said about going to work in any foreign country: learn their language. Beyond that, go to China and experience it. There are plenty of ways to do both of those, but language and on the ground experience will establish your credibility as someone who is serious about the specific opportunities in China, rather than someone who just wants a chance to live in a different country. Final suggestions: read as much as you can and question what you read. China is not a monolith and, as anywhere, there are always multiple sides to every story – that’s especially true in business and politics. Having an informed view of those dynamics will serve you well.

–The End–

2014 World Textile Industry Labor Cost Comparison

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According to the latest Werner International Labor Cost Comparison Report, labor cost gaps remained huge among textile industries worldwide in 2014. Within the 40 countries covered by the report, labor cost in Switzerland ($51.36/hour), the highest, was 82 times higher than in Bangladesh and Pakistan ($0.62/hour), the lowest, in 2014. Overall, labor cost in Western European countries (such as Italy, France and Germany)+Japan remained the highest in the world, followed by (from high to low):

  • the United States
  • advanced economies in East Asia (South Korea and Taiwan)
  • Eastern European countries (such as Poland)
  • South American countries (such as Brazil and Peru) 
  • developing countries in East and Southeast Asia (such as Bangladesh and Pakistan).

[Note: The report does not cover African countries].

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On the other hand, consistent with statistics from other sources, Werner’s report also suggests remarkable labor cost increase in China, which is rapidly approaching the $3 per operator hour (up from $2.1 in 2011 and up from only 0.69 US$ in the year 2000). From 2000 to 2014, labor cost in the U.S. textile industry went up about 25 percent. However, in terms of absolute difference, China’s labor cost was still only 15 percent of the level in the United States in 2014. As noted by the publisher, the labor cost comparison report covers all primary textile industry sectors, consisting of spinning, weaving and dyeing & finishing. Cut & sewing operations are not part of these comparisons. Labor cost in the clothing industry is not covered by the report however.

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Latest Trends in the US Apparel Industry (update: January 2015)

Latest statistics released by the American Apparel and Footwear Association (AAFA) indicate several trends in the U.S. apparel industry:

  • First, the retail market is gradually recovering. According to AAFA, on average, every American spent $907 on clothing (or purchased 64 garments) in 2013. Although this figure is still less than the one before the 2008 financial crisis, it is the highest level since 2012.
  • Second, “Made in USA” is growing but US consumers still rely on imports. Data from AAFA shows that US apparel production increased 6.2 percent from 2012 to 2013, accounting for 2.55% share of U.S. apparel market. However, nearly 98% of apparel consumed in the US were still imports in 2013.
  • Third, China remains the top apparel supplier to the United States. Despite the concerns about the rising production cost in China, latest data from OTEXA shows that, in 2014 (January to November) China still accounted for 42.5% of US apparel imports in terms of quantity and 39.1% in terms of value–almost the highest level in history. These two numbers were 41.7% and 39.9% a year earlier. On the other hand, Vietnam’s market share has reached 9.3% (by value) and 10.7% (by quantity) in 2014 (January to November), about ¼ of China’s exports to the United States.
  • Fourth, job market reflects continuous shift of the apparel industry. According to AAFA, among the total 2.8 million workers directly employed by the US apparel industry in 2013, only 5% were in the manufacturing sector, 5% were in the wholesaling sector and as many as 90% were working for retailers. However, within the apparel retail sector, total employment by the department stores is quickly shrinking—dropped 7.6 percent from 2012 to 2013 and cumulatively 21.3 percent from 1998 to 2013. At the same time, specialty clothing stores and sporting goods stores are hiring more people: 13.8% and 64.5% increase of employment from 1998 to 2013 respectively. The contrasting employment trend reflects the changing nature of the U.S. apparel retail market and the channels through which U.S. consumers purchase clothing.
  • Fifth, US consumers are paying higher taxes on imported clothing. Calculated by AAFA, while the overall U.S. imports were only charged by a 1.4% tariff rate, the effective duty rate on all apparel imports rose to 13.6% in 2013. The higher effective duty rate may be caused by the fact that less apparel were imported utilizing free trade agreement or trade preference programs.

Appendix: Facts on the US Apparel Market in 2012

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Data Source: http://www.statista.com/

China Apparel Retail Market (updated in December 2014)

According to Fung Group’s latest China apparel market report:

1. China’s apparel retail market remains strong despite slower growth. China’s apparel retail sales reached 1,141billion RMB (or $187 billion USD) in 2013, rose by 11.6 percent from 2012. On average, each urban household in China spent 1,902 RMB (or $306USD) on clothing in 2013, accounting for 10.6 percent of their total annual expenditure. [note: in the US, clothing accounts for around 3 percent of household annual expenditure]. It is estimated that China will replace the United States and become the world’s largest apparel retail market in 2017.

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2. Women’s wear is the largest contributor to China’s total apparel sales. A survey of 100 major retailers in China shows that women’s wear accounted for 32.7 percent of their clothing sales from 2012 to 2013. However, women’s wear is a highly fragmented and competitive market in China. For example, the top ten brands altogether only accounted for 21.43 percent of market share in 2013.

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3. Children’s wear and sportswear are the two growing areas in China’s apparel market. Specifically, retail sales of children’s wear in China reached 6.3 billion RMB (or $1 billion USD) in 2013, registered growth of 12.7 percent. Because Chinese government has relaxed its “one-child policy”, China is estimated to add 1-2 million extra kids over the next few years, suggesting further market expansion possibility. Thanks to Chinese consumers’ increasing interest in sports and outdoor activities, sales of sportswear enjoyed 35 percent growth from 2012 to 2013. Functional products with fashionable designs are the key to win the market. While international brands (such as Nike and Adidas) are mainly concentrated in tier 1 and tier 2 cities, domestic brands are still dominating the lower-tier cities where more growth potential is involved.

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4. Department stores and specialty stores remained the main channels for apparel distribution in China, accounting for 36.3 percent and 29.7 percent of market share respectively in 2013. Specifically, department store remains the main channel for mid to high-end apparel sales in China, although specialty stores are increasingly preferred by apparel brand owners. As a common business practice in China, apparel brand owners manage their self-operated specialty stores in key cities while leaving other locations to franchisees as distributors. On the other hand, hypermarkets and supermarkets are popular retailing channels for lower-priced apparel, many of which are with poor brand recognition or unbranded.

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5. Online retailing is the fastest growing retail channel in China for apparel. According to one source, the total online apparel transaction value in China reached 434.9 billion RMB (or $36.2 billion USD) in 2013, increased by 42.6 percent from 2012. Similar as the emerging of “omni-channel retailing” in the US, apparel companies operating in China are making more efforts to explore“O2O” (online and offline integration). It shall be noted that more and more overseas apparel brands see e-commerce as a strategic means to reach Chinese consumers. For example, even luxury brands such as Burberry and Hugo Boss have opened online store through a B2C platform (like Tmall) in China.

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6Some additional personal thoughts:

  1. Western apparel brands and retailers shall realize that China is a highly fragmented market with diverse market characteristics from region to region (for example, tier 1 v.s. tier 3 &4; urban v.s. rural; north v.s. south).
  2. Chinese consumers are getting more and more sophisticated, yet price is still a key factor to win this market.
  3. Given the size and sophistication of China’s apparel market, western apparel brands and retailers may consider building an independent China operation system (from design to distribution). Also, successful business models at home market may not work in China at all.

U.S. Textile and Apparel Exports in 2013 (Updated in November 2014)

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U.S. textile and apparel (T&A) exports increased by $543 million (3 percent) to $19.8 billion in 2013. However, because import increased by $3.2 billion (3 percent) to $97.5 billion, U.S. trade deficit in T&A increased rose to $97.5 billion in 2013. Imports supplied about 98 percent of U.S. consumer demand for T&A in 2013.

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Textiles account for 83 percent of all U.S. T&A exports in 2013. Exports of these textiles products (particularly fabrics and yarns) are used primarily as intermediate inputs for finished products manufactured abroad, which are then imported back into the United States (USITC, 2014). In terms of value, specialty & industrial fabrics, spun yarns & thread, felts & other non-woven textiles and other made-up textile articles altogether account for nearly half of U.S. T&A exports in 2013. Statistics further show that U.S. apparel exports also grow fast in recent years. However, it shall be noted that a good proportion of them might be used clothing.

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Mexico and Canada remain the top two largest export markets for U.S. T&A in 2013. 66 percent of U.S. T&A exports in 2013 went to the Western Hemisphere (i.e. North America, Central America, South America, and the Caribbean countries). However, this share has declined from 77.6 percent in 2000. Other leading export markets for U.S. T&A include Honduras, China and Japan.

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Reference:

USITC (2014). Shifts in U.S. Merchandise Trade. http://www.usitc.gov/press_room/news_release/2014/er1112ll232.htm 

OTEXA (2014). U.S. Imports and Exports of Textiles and Apparel. http://otexa.trade.gov/msrpoint.htm

Discussion: The People’s Republic of Capitalism

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  • What does the documentary impress you most or surprise you most?
  • How do you compare your life with any characters in the documentary? (the Missourian lady, her boss who moved factories to China, the Mexicans who worked on US cotton farms, the Chinese girl working on the production line, the Chinese high school student who comes from a poor rural area and her mother….)
  • How do you see the dilemma of globalization and international trade from the documentary?
  • What arguments in the video do you disagree or have different viewpoints?
  • Do you have any discussion questions to ask your classmates about the documentary?

Please feel free to share your thoughtful comments and I look forward to exciting discussions with you all.

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World Textile and Apparel Trade (Update: August 2014)

The following analysis is conducted based on the statistics released by the World Trade Organization on August 5, 2014.

1. Asia continues to dominate the world textile and apparel exports from 2012 to 2013.

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2. Despite concerns about its rising labor cost, China continues to gain more market shares in world textile and apparel exports from 2012 to 2013.

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3. World market for textiles remains relatively stable from 2000 to 2013; world market for apparel is gradually shifting and diversifying. Although Europe and North America still account for lion’s shares in world apparel imports (due to their higher GDP per capita), Asia is the fast growing market.

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4. Intra-region trade remains a distinct pattern in world T&A trade, particularly in Asia, Europe and America. However, the pattern has become substantially weakened in Europe and America from 2000 to 2013, which could be the results of increasing number of FTAs in these regions.

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5. US textile and apparel exports increased 3.3% and 4.4% respectively from 2012 to 2013. North America remains the single largest T&A export market for the United States.

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by Sheng Lu

Why Textile and Apparel Majors Need to Know about Trade Policy

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This past week, our class moved to the topic of trade policy, which as usual turned out to be one of the most challenging and “least exciting” chapters for our students. A common question in students’ mind is (and probably for some professors in the textile and apparel field as well): as a fashion major, why do I need to care about trade policy?

The answer is straightforward: textile market is shaped by rules—trade policy. Trade policy affects the availability of T&A products in the market in terms of quantity, price and speed. Trade policy also affects T&A companies’ access to the market, both domestic and foreign. Simply look at the clothing and shoes we wear daily: if they are imported, very likely the price we pay includes 10-30% additional tax (tariff). Even the clothing is “made in USA”, we should realize that the survival of US domestic apparel manufacturing could be the result of protection by the exact same trade policy which makes imported competing products 10—30% more expensive than otherwise in the US market.

Yet, trade policy does not happen naturally. Trade policies are deliberately made by policymakers and strongly influenced by industry players. Two things I hope our students can realize: first, the T&A industry cannot afford ignoring trade policy. Think about this case: if the US yarn manufacturers did not actively advocate “yarn-forward” rules of origin to be adopted in NAFTA and CAFTA, what will happen to their fate right now? Vice versa, how will the commercial interests of apparel retailers/importers be affected if they stop voicing themselves and simply leave the trade protectionism forces to influence trade policymakers? As the saying goes: if you are not at the table, you are on the menu. To certain extent, there is no good or bad trade policy, but winners and losers.

Second, understanding trade policy making is about understanding the real world. Trade policymaking is a painful balancing process like trying to “breathe and suck at the same time”.Not only different interests groups may have conflicting views on a specific trade policy, but also different policymakers may have their respective philosophies and priorities. As we mentioned in the class, agencies in the executive branch such as the US Trade Representative Office and the Commerce Department put national interests and international obligations of the United States at its heart whereas the Congress often times gives preferences to regional, sectoral and party interests.  A full understanding of T&A trade policy thus requires familiarity with what’s going on in this unique industry sector, knowledge about its key players as well as having a big picture vision in mind. For example, without recognizing the value of becoming a WTO member for China, it will be difficult to appreciate why it was willing to allow US to restrict its apparel exports from 2003 to 2008 on a discriminatory basis (T-shirt book, part III).

Our FASH students shall be encouraged to jump out of the narrowly-defined fashion world, because no industry operates as an island. Instead, the T&A industry is part of the world economy and shaped by the “rest” of the world economy.

 Sheng Lu

Trade with EU and Japan is good for the US and Trade with China is bad?

Yesterday in class, we’ve discussed how differently people see the impact of international trade. Here is one more example showing the controversy of the topic: according to a survey conducted by PewResearch in late 2010, 58% of sampled Americans said more trade with European nations would be good for the United States, 60% said increased trade with Japan would be good for the U.S. but only 45% favored increased trade with China. However, statistical data shows that US exports to China outpaced nearly all of the top ten export markets (including Japan and EU) from 2003 to 2012(source: USCBC).  

Why would the general public favor a particular trading partner but disfavor another? Should they? By which standard the general public may assume more trade with a particular trading partner would be good or bad for the United States? In your view, is trade beneficial for the US overall? Can we use any trade theories learnt from the class to explain the above phenomenon? Look forward to hearing your thoughts!

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China as an Apparel Importer: A Big Picture View

China is well-known as the single largest apparel exporter in the world. However, with the critical changes of the world economy as well as the evolution of the global textile & apparel sector over the past decade, it is the time to seriously study China as a fast-growing apparel import market.

First and foremost, it is a wrong perception that Chinese consumers only consume clothing “made in China”.  On the contrary, as put it by a 2011 ITC consulting report on the Chinese market for Clothing:  “in Zara’s stores in Shanghai, over 90% of stock-keeping units (SKUs) are imported, with Bangladesh, Egypt, Morocco, Portugal, Spain, Turkey, and Viet Nam and being the main import sources. Bangladesh, Cambodia, India and Indonesia are also important procurement target countries. Shoes made in Viet Nam and Spain account for a high proportion in Zara. New H&M stores in Shanghai attracted thousands of consumers when they opened in April 2007 Of H&M’s SKUs, 75% are imported, with Bangladesh, Cambodia, India, Indonesia and Turkey being the main source countries.”

However, like any other countries in the world, the apparel import market in China also has its unique features & patterns. For example, woven men’s wear accounted for almost 1/3 of China’s total apparel imports. Actually, the aggregate import demand for men’s wear was 17%-20% larger than the import demand for women’s wear in China from 2008 to 2012. As another important feature: in 2012, 83% and 13% of China’s apparel imports came from Asia and Europe respectively, leaving only 4% market share for the rest of the world. This pattern implies that China’s apparel import demand could be rather polarized: either extremely price competitive products (even cheaper than “made in China”) or very high-end luxury goods (such as those made in Germany, Italy, UK and France).

Additionally, it should be highly noted that  “China is not a single unified market but a collection of local markets, each with different market demands, consumer behaviors, competition levels, and market access conditions.” (More reading: Understand China’s retail market)  This feature is particularly important for those Western-based apparel retailers interested in entering China’s retail market. In general, Eastern coastline cities are the wealthiest part of China, where a high concentration of apparel stores can be found. Many famous international brands set up mainly in first-tier cities and then establish their presence in affluent second-tier cities. Currently, the tendency is for famous brands to penetrate into more second-tier cities. Among the first-tier cities, Shanghai plays a significant role in setting fashion trends on the mainland. Therefore, many foreign and domestic apparel suppliers choose to first establish a foothold in Shanghai before seeking further expansion.

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When Apparel “Made in China” Become More Expensive, Will U.S. Consumers Have to Pay More?

(This study was presented at the 2013 International Textile and Apparel Association Annual Conference)

By

Sheng Lu (University of Rhode Island) and Jessica Ridgeway (University of Missouri)

China’s soaring labor cost in recent years has triggered heated discussions on the future of “made in China” and its implication for U.S. consumers who rely heavily on “made in China” products (Rein, 2012). This is particularly the case in the U.S. apparel retail market, where over 98% of consumptions are supplied by imports and nearly 40% of them come from China in value (AAFA, 2012). Although numerous studies have been conducted to evaluate the relationship between imports and the U.S. domestic apparel production or employment (Martin, 2007), the direct linkage between the price of imports and the U.S. apparel retail price has seldom been explored. Because such a price linkage is the key to understand the implication of a more expensive “Made in China” for U.S. consumers, this study tries to fulfill the research gap and specifically investigate to which extent the U.S. apparel retail price is influenced by the price of U.S. apparel imports from China.

Through investigating the impact of the average unit price of U.S. apparel imports from China, the average unit price of U.S. apparel imports from sources other than China and the annual U.S. apparel retail sales on the annual U.S. consumer price index from 2001 to 2011 based on a revised Armington model, this study finds that:

First, for menswear, more expensive “made in China” will result in a higher retail price in the U.S. market. Specifically, the U.S. retail price is suggested to change by 0.137% in the same direction given a 1% change of the price of U.S. imports from China. Second, for womenswear, there is no evidence showing that the price of U.S. imports from China has statistically significant impact on the U.S. retail price Third, the U.S. apparel imports from China and from rest of the world are suggested to constitute higher degree of price elasticity of substitution for womenswear than for menswear.

Findings of this study contribute to the understanding of the direct price linkage between the U.S. apparel import market and the U.S. apparel retail market and have several important implications:

First, the results imply that when “made in China” becomes more expensive, U.S. consumers may not have to pay more, largely because of increased substitution supply from other apparel exporters. Second, the results suggest that the U.S. apparel market is highly competitive and suppliers may not own much market power in price determination despite their large market shares.Third, the results imply that although “made in China” may lose market share in the U.S. market when it becomes more expensive, the magnitude could vary by product categories.

References:

  1. American Apparel and Footwear Association, AAFA (2012).Apparelstats 2012. Retrieved from https://www.wewear.org/industry-resources/publications-and-statistics/
  2. Armington, P.S. (1969). A theory of demand for products distinguished by place of production. International Monetary Fund Staff Papers,16(1), 159-178.
  3. Martin, M. (2007). U.S. clothing and textile trade with China and the world: Trends since the end of quotas. Congressional Research Services, RL 34106, Washington, D.C..
  4. Office of Textiles and Apparel, OTEXA (2013). U.S. imports and exports of textiles and apparel. Retrieved from http://www.otexa.ita.doc.gov/msrpoint.htm
  5. Rodrigo, P. (2012). Re-shoring US apparel making tough but not impossible. Just Style. Retrieve from http://www.just-style.com/analysis/re-shoring-us-apparel-making-tough-but-not-impossible_id115455.aspx
  6. Rein, S. (2012). The end of cheap China: Economic and cultural trends that will disrupt the world: Wiley.
  7. U.S. Bureau of Labor Statistics, BLS. (2013). Consumer Price Index.  Retrieved from http://www.bls.gov/cpi/
  8. U.S. Census Bureau, Census. (2013). Monthly and annual retail trade. Retrieved from http://www.census.gov/retail/

Travels of a T-shirt with Pietra Rivoli (2013)