China’s Membership in CPTPP Could Threaten the Survival of the US Textile Industry

As one breaking news, on 16 September 2021, China officially presented its application to join the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). While the approval of China’s membership in CPTPP remains a long shot and won’t happen anytime soon, the debate on the potential impact of China’s accession to the trade agreement already starts to heat up.

Like many other sectors, textile and apparel companies are on the alert. Notably, China plus current CPTPP members accounted for nearly half of the world’s textile and apparel exports in 2020. Many non-CPTPP countries are also critical stakeholders of China’s membership in the agreement. In particular, the Western Hemisphere textile and apparel supply chain, which involves the US textile industry, could face unrepresented challenges once China joins CPTPP. 

First, once China joins CPTPP, the tariff cut could provide strong financial incentives for Mexico and Canada to use more Chinese textiles. China is already a leading textile supplier for many CPTPP members. In 2019, as much as 47.7% of CPTPP countries’ textile imports (i.e., yarns, fabrics, and accessories) came from China, far more than the United States (12.1%), the other leading textile exporter in the region. 

Notably, thanks to the Western Hemisphere supply chain and the US-Mexico-Canada Trade Agreement (USMCA, previously NAFTA), the United States remains the largest textile supplier for Mexico (48.2%) and Canada (37.2%). Mexico and Canada also serve as the largest export market for US textile producers, accounting for as many as 46.4% of total US yarn and fabric exports in 2020.

However, US textile exporters face growing competition from China, offering more choices of textile products at a more competitive price (e.g., knitted fabrics and man-made fiber woven fabrics). From 2005 to 2019, US textile suppliers lost nearly 20 percentage points of market shares in Mexico and Canada, equivalent to what China gained in these two markets over the same period.

Further, China’s membership in CPTPP means its textile exports to Mexico and Canada could eventually enjoy duty-free market access. The significant tariff cut (e.g., from 9.8% to zero in Mexico) could make Chinese textiles even more price-competitive and less so for US products. This also means the US textile industry could lose its most critical export market in Mexico and Canada even if the Biden administration stays away from the agreement.

Second, if both China and the US become CPTPP members, the situation would be even worse for the US textile industry. In such a case, even the most restrictive rules of origin would NOT prevent Mexico and Canada from using more textiles from China and then export the finished garments to the US duty-free. Considering its heavy reliance on exporting to Mexico and Canada, this will be a devastating scenario for the US textile industry.

Even worse, the US textile exports to CAFTA-DR members, another critical export market, would drop significantly when China and the US became CPTPP members. Under the so-called Western-Hemisphere textile and apparel supply chain, how much textiles (i.e., yarns and fabrics) US exports to CAFTA-DR countries depends on how much garments CAFTA-DR members can export to the US. In comparison, US apparel imports from Asia mostly use Asian-made textiles. For example, as a developing country, Vietnam relies on imported yarns and fabrics for its apparel production. However, over 97% of Vietnam’s textile imports come from Asian countries, led by China (57.1%), South Korea, Taiwan, and Japan (about 25%), as opposed to less than 1% from the United States.

The US textile industry also deeply worries about Vietnam becoming a more competitive apparel exporter with the help of China under CPTPP. Notably, among the CPTPP members, Vietnam is already the second-largest apparel exporter to the United States, next only to China. Despite the high tariff rate, the value of US apparel imports from Vietnam increased by 131% between 2010 and 2020, much higher than 17% of the world average. Vietnam’s US apparel import market shares quickly increased from only 7.6% in 2010 to 16.6% in 2020 (and reached 19.3% in the first half of 2021). The lowered non-tariff and investment barriers provided by CPTPP could encourage more Chinese investments to come to Vietnam and further strengthen Vietnam’s competitiveness in apparel exports.  

Understandably, when apparel exports from China and Vietnam became more price-competitive thanks to their CPTPP memberships, more sourcing orders could be moved away from CAFTA-DR countries, resulting in their declined demand for US textiles. Notably, a substantial portion of US apparel imports from CAFTA-DR countries focuses on relatively simple products like T-shirts, polo shirts, and trousers, which primarily compete on price. Losing both the USMCA and CAFTA-DR export markets, which currently account for nearly 70% of total US yarns and fabrics exports, could directly threaten the survival of the US textile industry.

by Sheng Lu

Related readings:

Is the Western Hemisphere Textile and Apparel Supply Chain in Trouble?

Within the Western-Hemisphere (WH) textile and apparel supply chain, the United States serves as the leading textile supplier, whereas developing countries in North, Central, and South America (such as Mexico and countries in the Caribbean region) assemble imported textiles from the United States or elsewhere into apparel. The majority of clothing produced in the area is eventually exported to the United States or Canada.

WH countries still form a close supply chain partnership in textile and apparel production. For example, close to 70% of US textile exports went to WH members in 2020, a pattern that has stayed stable over the past decades (OTEXA, 2021). Meanwhile, the United States serves as the single largest export market for most apparel exporting countries in the WH For example, in 2019, close to 89% of apparel exports from CAFTA-DR and USMCA (NAFTA) members went to the US.

However, the WH textile and apparel supply chain is not without significant challenges. For example, CAFTA-DR and Mexico are increasingly using textiles inputs from outside the WH region, which weakens the US role as a dominant textile supplier. Notably, most of the market shares lost by US textile suppliers are fulfilled by Asian countries, including China and other members of the RCEP (Regional Comprehensive Economic Partnership). Theoretically, using cheaper textile inputs from Asia may help apparel producing countries in the WH improve the price competitiveness of their finished garments and diversify their export markets beyond the US.

Meanwhile, despite the apparent popularity of “near-sourcing”, no evidence suggests that US fashion brands and retailers are sourcing more from WH countries, including CAFTA-DR and USMCA (NAFTA) members. Neither the US-China trade war nor COVID-19 seems to have shifted the trends. Instead, close to 75%-80% of US apparel imports still come from Asian countries (OTEXA, 2021). Studies further show that a vast majority of US apparel imports from WH concentrate on a limited category of products, such as tops and bottoms, which is far from sufficient to meet retailers’ sourcing needs.

On the other hand, technical textiles and industrial textiles account for a growing share in the total US textile exports, and Asia is a particularly fast-growing market. However, there is few US free trade agreement with Asian countries, making it a disadvantage to promote “Made in the USA” products in these markets. It is debatable what should be the priority for the US textile and apparel trade policy: to continue to protect the exports of yarn and fabrics to the WH or open new export markets for technical and industrial textiles outside the WH region?

by Sheng Lu

Relate readings:

Regional Comprehensive Economic Partnership (RCEP): What Does it Mean for US Apparel Sourcing from Asia?

This event is part of the 2021 Winter Texworld USA Educational Program

Panelists

  • Dr. Deborah Elms – Founder and Executive Director, Asian Trade Center
  • Beth Hughes – Vice President, Trade & Customs Policy, American Apparel and Footwear Association
  • Dr. Sheng Lu (Moderator), Associate Professor, Department of Fashion & Apparel Studies, University of Delaware

About the session

The Regional Comprehensive Economic Partnership (RCEP), signed in November 2020, is the world’s largest free trade agreement. Nearly half of the world’s textile and apparel exports currently come from the fifteen RCEP members. How will the new “rules of the game” in RCEP shape the future landscape of the textile and apparel supply chain in Asia? Who are the winners and losers of the agreement? Why US fashion brands and retailers also need to care about RCEP? The panel will interpret the key textile and apparel provisions in RCEP and share insights about the agreement’s broad implications on the textile and apparel sector.

CPTPP Tariff Phaseout Schedule for Textiles and Apparel

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),  signed on March 8, 2018, is a new free trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Once the CPTPP enters into force, it will be one of the largest free trade agreements in the world and will provide enhanced market access to key Asian markets. Below is the detailed tariff phaseout schedule for textile and apparel products by CPTPP members:

CPTPP

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by Sheng Lu