On 16 September 2019, the Trump administration notified U.S. Congress of its intent to enter into a trade agreement on “tariff barriers” with Japan as well as an “executive agreement” on digital trade. According to the announcement, the Trump administration plans to utilize Section 103(a) of the 2015 Trade Promotion Authority law, which allows the president to modify tariffs WITHOUT congressional approval. While details of the tariff agreement are not yet available, U.S. Trade Representative Robert Lighthizer in August said the deal with Japan would focus on beef, pork, wheat, dairy products, wine, and ethanol, as well as on industrial goods.
The 16 September notification also says the Trump administration will “further negotiations with Japan to achieve a comprehensive trade agreement that results in more fair and reciprocal trade between the United States and Japan.” Such a more comprehensive trade agreement, however, will require congressional approval.
On December 21, 2018, Office of the U.S. Trade Representative (USTR) released negotiating objectives of the proposed U.S.-Japan Free Trade Agreement (USJTA). Overall, USJTA aims to address both tariff and non-tariff barriers to achieve fairer and more balanced trade between the two countries. Regarding the textiles and apparel sector, USTR says it will “secure duty-free access for U.S. textile and apparel products and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities” during the negotiation. USJTA also will “establish origin procedures for the certification and verification of rules of origin that promote strong enforcement, including with respect to textiles.”
Should the newly announced U.S.-Japan trade deal remove the tariffs for textiles and apparel traded between the two countries, the overall economic impact on related trade flows could be modest. Data from the UNComtrade shows that in 2018 U.S. imported $656 million textiles (SITC 26 and 65) and $88 million apparel (SITC 84) from Japan, accounting for 2.1% and 0.1% of total U.S. textile and apparel imports respectively. Meanwhile, in 2018 Japan imported around $353 million textiles and $121 million apparel from the U.S., accounting for 3.7% and 0.4% of Japan’s total textile and apparel imports that year respectively.
In comparison, over 70% of U.S. textile and apparel exports went to the Western-Hemisphere and U.S. imported textiles and apparel mostly from NAFTA & CAFTA-DR members and other Asian countries (such as China and Vietnam). Likewise, Japan also has a much closer trade tie with other Asian countries because of the regional textile and apparel trade patterns (or commonly known as “factory Asia”).
On the other hand, the elimination of tariffs and potentially non-tariff barriers under the U.S.-Japan trade deal could expand the bilateral trade flows for technical textiles. Notably, the top categories of U.S. textile and apparel exports to Japan in 2018 were mostly technical textiles such as specialty and industrial fabrics, filament yarns, and non-woven textiles. Likewise, the top categories of Japan’s textile and apparel exports to the U.S. in 2018 also include special-purpose fabric, non-woven fabric, and synthetic filament fabrics.
Additionally, the textiles and apparel-specific rules of origin (RoO) is likely to remain a heated debate in the US-Japan trade negotiation. To protect the interests of the U.S. textile industry and the Western-Hemisphere regional textile and apparel supply chain, most free trade agreements enacted in the United States adopt the so-called “yarn-forward” RoO. Even though the U.S.-Japan trade agreement may not be a too big deal economically, the U.S. textile industry is unlikely to give up the RoO fight. However, most free trade agreements enacted in Japan adopt more liberal fabric-forward rules of origin (or commonly called “double transformation”). As textile and apparel production in Japan is increasingly integrated with other Asian countries, the strict “yarn-forward” RoO could prevent Japanese textile and apparel exporters from enjoying the preferential duty benefits under the U.S.-Japan trade agreement fully.
October 16, 2018, the Trump
Administration notified U.S. Congress its intention to negotiate the
U.S.-EU Free Trade Agreement. Between
2013 and 2016, the United States and EU were also engaged in the negotiation of
a comprehensive free trade agreement– Trans-Atlantic Trade and Investment Partnership
(T-TIP) with the goal to unlock market access opportunities for
businesses on both sides of the Atlantic through the ambitious elimination of
trade and investment barriers as well as enhanced regulatory coherence. The T-TIP
negotiation was stalled since 2017, although
the Trump Administration has never officially announced to withdraw from the
II. Negotiating Objectives
January 11, 2019, the Office of the U.S. Trade Representative (USTR) released
objectives of the proposed U.S.-EU Free Trade Agreement after
seeking inputs from the public. Overall, the proposed agreement aims to address
both tariff and non-tariff barriers and to “achieve fairer, more balanced trade”
between the two sides.
Regarding textiles and apparel, USTR says it will secure duty-free access for U.S. textile and
apparel products and seek to improve competitive opportunities for exports of
U.S. textile and apparel products while taking into account U.S. import
sensitivities” during the negotiation. The proposed U.S.-EU free trade
agreement also will “establish origin procedures for the certification and
verification of rules of origin that promote strong enforcement, including with respect to textiles.” T-TIP
had adopted similar negotiating objectives for the textile and apparel sector.
III. Industry viewpoints on the agreement
January 2019, leading trade associations
representing the U.S. apparel industry and the EU textile and apparel industries
have expressed support for the proposed U.S.-EU Free Trade Agreement. In general,
these industry associations recommend the agreement to achieve the following
First, eliminate import duties. For example:
Apparel and Footwear Association (AAFA): “We
support the immediate and reciprocal elimination of the high duties that both
countries maintain on textiles, travel goods, footwear, and apparel.”…” We also
support the immediate elimination of any retaliatory duties imposed by the
E.U., as well as any duties imposed by the U.S. (that led to that retaliation).
The duties impose costs on activities, including manufacturing activities in
the U.S., and undermine markets for U.S. exporters in Europe.”
Apparel and Textile Confederation (Euratex):“The
European Textile and Clothing sector faces high tariffs while exporting to the
US market from 11% to up to 32% for some products, namely sewing thread of
man-made filaments, suits, woven fabrics of cotton, trousers and t-shirts. Zero
customs duties while ensuring modern rules of origin will allow EU companies to
boost exports and offer more choice to American consumers and professional
Second, promote regulatory coherence (Harmonization). For example:
AAFA: “The E.U. and the
United States both maintain an extensive array of product safety, chemical management,
and labeling requirements regarding apparel (including legwear), footwear,
textiles, and travel goods.”…” Yet they often contain different requirements,
such as testing or certification, that greatly add compliance costs.”…” We
believe the U.S.‐E.U. trade agreement presents an important opportunity to achieve
harmonization or alignment for these regulations.”
Euratex: “Maintaining high
level of standards while eliminating unnecessary burdens, removing additional
requirements and facilitating customs procedures that impede business are top
priorities. Mutual recognition of the EU and US standards will preserve high
level of consumer protection on both sides of the Atlantic. Convergence on labelling (fibre
names, care symbols and wool labelling),
consumer safety on children products and flammability standards is key for the
T&C sector.” “EURATEX believes the EU and US standardization bodies should
cooperate on setting standards for Smart Textiles taking into account the
industry views for facilitating development and trade of such products of the
Third, adopt flexible/modern rules of origin. For example:
AAFA: “We should also support higher usage of the agreement by making sure the rules of origin reflect the realities of the industry today…”the yarn forward” rules, although theoretically promote usage of trade partner inputs, in practice they operate as significant barriers that restrict the ability of companies to use a trade agreement in many cases”…” We need to incorporate sufficient flexibilities into the rules of origin so that different supply chains –and the U.S. jobs they support – can take advantage of the agreement.”
Euratex: “Zero customs
duties while ensuring modern rules of
origin will allow EU companies to boost exports and offer more choice to
American consumers and professional buyers.”
The National Council of Textile Organizations (NCTO), which represents the U.S. textile industry, hasn’t publically stated its position on the proposed U.S.-EU Free Trade Agreement. However, NCTO had strongly urged U.S. trade negotiators to adopt a yarn-forward rule of origin in T-TIP. NCTO also opposed opening the U.S. government procurement market protected by the Berry Amendment to EU companies.
IV. Patterns of U.S.-EU textile and apparel trade
United States and the EU are mutually important textile and apparel (T&A)
trading partners. For example, the United States is EU’s largest extra-region
export market for textiles, and EU’s fifth largest extra-region supplier of
textiles in 2017 (Euratex, 2018).
the EU is one of the leading export markets for U.S.-made technical textiles as
well as an important source of high-end apparel products for U.S. consumers (OTEXA,
2018). Specifically, in 2017, U.S. T&A exports to the European Union
totaled $2,572 million, of which 73.2% were textile products, such as specialty
& industrial fabrics, felts & other non-woven fabrics and filament
yarns. In comparison, EU’s T&A exports to the United States totaled $4,163
million in 2017, among which textiles and apparel evenly accounted for 48.7%
and 51.3% respectively.
V. Potential economic impact of the agreement
By adopting the Global Trade Analysis Project (GTAP) model, Lu (2017) quantitatively evaluated the potential impact of a free trade agreement between the U.S. and EU on the textile and apparel sector. According to the study:
the trade creation effect of the agreement will expand the EU-U.S.
intra-industry trade for textiles. Meanwhile, the agreement is likely to
significantly expand EU’s apparel exports to the United States.
the trade diversion effect of the U.S.-EU Free Trade Agreement will affect other
T&A exporters negatively, including Asia’s T&A exports to the U.S. market
and EU and Turkey’s T&A exports to the EU market.
Third, the U.S.-EU Textile and Apparel Trade might affect the intra-region T&A trade in the EU region negatively but in a limited way.
Overall, the study suggests that the EU T&A industry will benefit from the additional market access opportunities created by the U.S.-EU Free Trade Agreement.One important factor is that the U.S. and EU T&A industries do not constitute a major competing relationship. For example, the United States is no longer a major apparel producer, and EU’s apparel exports to the United States fulfill U.S. consumers’ demand for high-end luxury products. The U.S.-EU Free Trade Agreement is also likely to create additional export opportunities for EU textile companies in the U.S. market, especially in the technical textiles area, which accounted for approximately 40% of EU’s total textile exports to the United States in 2017 measured in value. Compared with traditional yarns and fabrics for apparel making purposes, technical textiles are with a greater variety in usage, which allows EU companies to be able to differentiate products and find their niche in the U.S. market.
Further, the study suggests that we shall pay more attention to the details of non-tariff barrier removal under the U.S.-EU Free Trade Agreement, which could result in bigger economic impacts than tariff elimination.
The deepening of the regional production and trade network(RPTN) is a critical factor behind the increasing concentration of world textile and apparel exports. RPTN refers to the phenomenon that geographically proximate countries form a regional supply chain.
In general, three primary textile and apparel regional
supply chains are operating in the world today:
Asia: within this regional supply chain, more economically advanced Asian countries (such asJapan, South Korea, and China) supply textile raw material to the less economically developed countries in the region (such as Bangladesh, Cambodia, and Vietnam). Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets around the world.
Europe: within this regional supply chain, developed countries in Southern and Western Europe such as Italy, France, and Germany, serve as the primary textile suppliers. Regarding apparel manufacturing in EU, products for the mass markets are typically produced by developing countries in Southern and Eastern Europe such as Poland and Romania, whereas high-end luxury products are mostly produced by Southern and Western European countries such as Italy and France. Furthermore, a high portion of finished apparel is shipped to developed EU members such as UK, Germany, France, and Italy for consumption.
Western-Hemisphere(WH): within this regional supply chain, the United States serves as the leading textile supplier, whereas developing countries in North, Central andSouth 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 UnitedStates or Canada for consumption.
Associated with these
regional production and trade networks, three particular trade flows are
important to watch:
First, Asian countries are increasingly sourcing textile inputs from within the region. In2017, close to 80 percent of Asian countries’ textile imports came from other Asian countries, up from around 70 percent in the 2000s.
Second, the pattern of EU intra-region trade for textile and apparel stays strong and stable. Intra-region trade refers to trade flows between EU members. In 2017, 55 percent of EU countries’ textile imports and 47 percent of EU countries’ apparel imports came from within the EU region. Over the same period, 68 percent of EU countries’ textile exports and 75 percent of their apparel exports also went to other EU countries.
Third, trade flows under the Western-Hemisphere textile and apparel supply chain are becoming more unbalanced. On the one hand, textile and apparel exporters in the Western-Hemisphere still rely heavily on the region. In 2017, respectively as much as 80 percent of textiles and 89 percent of apparel exports from countries in the Western Hemisphere went to the same region. However, on the other hand, the operation of the Western-Hemisphere supply chain is facing growing competition from Asian suppliers. For example, in 2017, only 24.8 percent of North, South and Central American countries’ textile imports and 15.7 percent of their apparel imports came from within the region, a record low in the past ten years.
Look ahead, it will be interesting to see how will the reaching and implementation of several new free trade agreements, such as CPTPP, RCEP, EU-Vietnam FTA, and the potential US-EU and US-Japan FTAs, affect the regional pattern of world textile and apparel trade.
Business challenges facing U.S. fashion companies: Protectionism is the top challenge for the U.S. fashion industry in 2018. More companies worry about increases in production or sourcing cost, too. For the second year in a row, “protectionist trade policy agenda in the United States” ranks the top challenge for U.S. fashion companies in 2018.
Industry outlook:Despite concerns about trade policy and cost, executives are more confident about the five-year outlook for the U.S. fashion industry in 2018 than they were a year ago, although confidence has not fully recovered to the level seen in 2015 and 2016. In addition, 100 percent of respondents say they plan to hire more employees in the next five years, compared with 80-85 percent in previous studies; market analysts, data scientists, sustainability/compliance related specialists or managers, and supply chain specialists are expected to be the most in-demand.
U.S. fashion companies’ sourcing strategy: When it comes to sourcing, diversification is key for many companies.
Most respondents continue to maintain a diverse sourcing base, with 60.7 percent currently sourcing from 10+ different countries or regions, up from 57.6 percent in 2017.
Larger companies, in general, continue to be more diversified than smaller companies.
Reflecting the U.S. fashion industry’s growing global reach, respondents report sourcing from as many as 51 countries or regions in 2018, the same as in 2017. Asia as a whole continues to take the lead as the dominant sourcing region. Meanwhile, with the growing importance of speed-to-market and flexibility, the Western Hemisphere is becoming an indispensable sourcing base.
Keeping a relatively diverse sourcing base will remain a key element of U.S. fashion companies’ sourcing strategy. Nearly 80 percent of respondents plan to source from the same number of countries, or more countries, in the next two years. However, respondents are equally divided on whether to increase or decrease the number of suppliers they will work with.
“China plus Vietnam plus Many” has become an ever more popular sourcing model among respondents. And this model is evolving as companies further diversify their China production. In particular, China now typically accounts for only 11-30 percent of companies’ total sourcing value or volume, compared with 30-50 percent in the past.
Although China’s position as the top sourcing destination is unshakable, companies are actively seeking alternatives to “Made in China.” This does not seem to be due to concerns about cost, but rather the worries about the escalating U.S.-China trade tensions.
Benefiting from the diversification away from China, Vietnam and Bangladesh are expected to play a bigger role as apparel suppliers for the U.S. market in the near future.
Rules of origin and the utilization of trade agreements for sourcing: Rules of origin, and exceptions to the rules of origin, significantly impact whether companies use free trade agreements (FTAs) and trade preference programs for sourcing.
While FTAs and trade preference programs remain largely underutilized by U.S. fashion companies, more companies are using NAFTA (65 percent), CAFTA-DR (58 percent) and AGOA (50 percent) than in the past two years.
Still, it’s concerning that companies often do not claim the duty-free benefits when sourcing from countries with FTAs or preference programs. Companies say this is primarily due to the strict rules of origin.
Exceptions to the “yarn-forward” rules of origin, including tariff preference levels (TPLs), commercial availability/short supply lists, and cumulation, are priorities for respondents; 48 percent say they currently use these mechanisms for sourcing. These exceptions provide critical flexibilities that make companies more likely to use FTAs and source from FTA regions.
NAFTA: U.S. fashion companies call for a further reduction of trade barriers and urge trade negotiators to “do no harm” to NAFTA, the most-utilized free trade agreement by respondents.
Respondents predominantly support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to restrictive rules of origin in NAFTA and future free trade agreements.
More than half of respondents explicitly say NAFTA is important to their business—and they have grave concerns about the uncertain future of the agreement.
Sourcing in sustainable and socially compliant ways: Overall, U.S. fashion companies are making more commitments to sustainability and social responsibility.
85 percent of respondents plan to allocate more resources for sustainability and social compliance in the next two years, in areas including providing training to suppliers and internal employees, adding more employees, and working more closely with third-party certification programs on sustainability and social compliance. However, the availability of operational budget remains the primary hurdle for companies that want to do more.
100 percent of respondents map their supply chains (i.e., keep records of name, location, and function of suppliers), up from 90 percent in 2017. Over 80 percent of respondents track not only Tier 1 suppliers (i.e., factory where the final product is assembled), but also Tier 2 suppliers (i.e., subcontractors or major component suppliers, such as fabrics). However, it’s less common for companies to map Tier 3 (i.e., yarn spinners, finding and trimming suppliers) and Tier 4 suppliers (i.e., raw materials suppliers, such as cattle/pig hides, rubber, cotton, wool, goose down, minerals/metals and chemicals).
100 percent of respondents audit their suppliers for issues including building safety, fire safety, and treatment of workers. The vast majority of respondents (96 percent) currently use third-party certification programs to audit, with both announced and unannounced audits.
The US Fashion Industry Benchmarking Study from 2014 to 2017 can be downloaded from HERE
Between 1985 and 2011, the United States entered into 14 free trade agreements (FTAs) with 20 countries. Data from the Census shows that U.S. merchandise trade (or trade in goods) with FTA partner countries represents nearly 70% of all U.S. exports in goods and services, and more than 80% of all U.S. imports of goods and services.
In 2016, the United States ran a merchandise trade deficit of -$71.3 billion with the 20 FTA partner countries and a services surplus of $68.9 billion. The share of the U.S. trade deficit with FTA partners, however, has fallen by nearly half over the 2007-2017 period, from 18% to only about 10% of the total -$734.4 billion U.S. merchandise trade deficit.
Regarding the economic impact of FTAs on the United States, a study conducted by the U.S. International Trade Commission suggests that bilateral and regional trade agreements increased U.S. aggregate trade by about 3%, but less than 1% for U.S. employment (or 159,300 full-time equivalent employees). Specifically, the study finds that rising imports, due in part to the Agreement on Textiles and Clothing (ATC), accounted for most of the reduction in U.S. employment in the apparel industry between 1998 and 2014.
Current trade data treat exports and imports as though the full value of an export was produced domestically and the full value of an import was produced abroad. However, the rapid growth of global value chains and intra-industry trade (importing and exporting goods in the same industry) has significantly increased the amount of trade in intermediate goods in ways that can blur the distinction between domestic and foreign firms and goods. For example, foreign value added accounts for about 11% of the content of U.S. exports in 2010. As a result of the growth in value chains, traditional methods of measuring trade may obscure the actual sources of goods and services and the allocation of resources that are used in producing those goods and services.
Trade agreements of the type currently being negotiated by the United States comprise a broad range of issues that could have significant economic effects on trade and commercial relations over the long run between the negotiating parties, particularly for developing and emerging economies. However, the negative effects of international trade and trade agreements, particularly potential job losses and lower wages, often are distributed disproportionately with the effects falling more heavily on some workers and on some firms.
#1 How do rules of origin (RoO) and free trade agreement (FTA) regulations affect speed to market in apparel sourcing? Do countries who are part of an FTA find it to be easier to get to market in a shorter amount of time if they are working with other FTA members? Or could RoO slow down the production process because producers have to be more careful about compliance with the complicated RoO?
#2 Why or why not the “yarn forward” rules of origin remains an effective way to promote textile and apparel production in the Western-Hemisphere? What other options are available to improve the competitiveness of the Western-Hemisphere textile and apparel supply chain?
#3 What would happen to the Western-Hemisphere textile and apparel supply chain should NAFTA no longer exist?
#4 Should NAFTA be responsible for the loss of US apparel manufacturing jobs? Any hard evidence?
#5 If you were U.S. trade negotiators, what would you do with TPL in NAFTA given the competing views from the U.S. textile industry and U.S. fashion brands and retailers?
The Outlook of “Factory-Asia”
#6 From the perspective of the U.S. textile and apparel industry, is it a good idea for the United States to reach free trade agreement (FTA) with Asian countries? If so, what countries should be included in the new FTA? If not, why?
#7 How can U.S. companies get involved in the Asia-based textile and apparel supply chain?
#8 Why or why not is the “Flying geese model” unique to Asia? Can the model be replicated in America too?
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