COVID-19 and U.S. Apparel Imports (Updated: August 2020)

The latest statistics from the Office of Textiles and Apparel (OTEXA) show that while the negative impacts of COVID-19 on U.S. apparel imports continued in June 2020, there appeared to be early signs of economic recovery. Specifically:

While the value of U.S. apparel imports decreased by 42.8% in June 2020 from a year ago, the speed of the decline has slowed (was down 60% year over year in May 2020). Nevertheless, between January and June 2020, the value of U.S. apparel imports decreased by 30.4% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

The latest trade statistics support the view that U.S. fashion companies continue to treat China as an essential apparel-sourcing base, despite COVID-19, the trade war, and companies’ sourcing diversification strategy. As the first country hit by COVID-19, China’s apparel exports to the U.S. dropped by as much as 49.0% from January to June 2020 year over year. In February 2020, China’s market shares slipped to only 11%, and both in March and April 2020, U.S. fashion companies imported more apparel from Vietnam than from China. However, China’s apparel exports to the U.S. are experiencing a “V-shape” recovery: as of June 2020, China had quickly regained its position as the top apparel supplier to the U.S., with a 29.1% market share in value and 43.4% share in quantity.

Moreover, U.S. apparel imports from China are also becoming more price-competitive—the unit price slipped from $2.25/Square meters equivalent (SME) in 2019 to $1.88/SME in 2020 (January to June), or down more than 16% (compared with a 4.6% price drop of the world average). As of June 2020, the unit price of U.S. apparel import from China was only 65% of the world average, and around 25—35 percent lower than those imported from other Asian countries. On the other hand, the official Chinese statistics report a 19.4% drop in China’s apparel exports to the world in the first half of 2020.

Despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.3% YTD in 2020 vs. 16.2% in 2019), ASEAN (34.4% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.9% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.5% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.

However, still, no clear evidence suggests that U.S. fashion brands and retailers have been giving more apparel sourcing orders to suppliers from the Western Hemisphere because of COVID-19 and the trade war. In the first six months of 2020, only 8.8% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.2% from NAFTA members (down from 4.5% in 2019).

Notably, U.S. fashion companies source products from Asia (including China) and the Western Hemisphere for different purposes. In general, US companies tend to source either price-sensitive or more sophisticated items from Asia, where factories overall have higher productivity and more advanced production techniques. Meanwhile, the Western Hemisphere is typically used to source products that require faster speed-to-market or more frequent replenishments during the selling season. Some studies further show that there is more divergence in the products imported into the United States from Asian countries and the Western Hemisphere from 2015 to 2019. In contrast, over the same period, China, ASEAN, and Bangladesh appear to be exporting increasingly similar products to the United States.

That being said, as USMCA enters into force on July 1, 2020, a more stable trading environment could encourage more U.S. apparel sourcing from Mexico down the road (assuming garment factories there can gradually resume production and no further COVID-19 related shutdown).

As a reflection of weak demand, the unit price of U.S. apparel imports dropped in the first six months of 2020 (price index =100, meaning the same nominal price as in 2010). The price index was 104.7 in 2019. The imports from Mexico (price index =87.1 YTD in 2020 vs. 112.1 in 2019) and China (price index = 69.9 YTD in 2020 vs. 83.5 in 2019) have seen the most notable price decrease so far.

by Sheng Lu

USTR Factsheet: Textiles and Apparel and the US-Mexico-Canada Free Trade Agreement (USMCA)

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The factsheet is available in PDF

Background

On December 10, 2019, the United States, Mexico and Canada reached an updated U.S.-Mexico-Canada Free Trade Agreement (USMCA). USMCA officially enters into force on 1 July 2020. Compared with the version signed in September 2018, the new USMCA includes even higher labor and environmental standards and stronger enforcement mechanisms for these rules. According to the released protocol of amendment, no change has been made to the Textiles Chapter, however.

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Textiles and Apparel and USMCA

First, in general, USMCA still adopts the so-called “yarn-forward” rules of origin. This means that fibers may be produced anywhere, but each component starting with the yarn used to make the garments must be formed within the free trade area – that is, by USMCA members.

Second, other than the source of yarns and fabrics, USMCA now requires that some specific parts of an apparel item (such as pocket bag fabric) need to use inputs made in the USMCA region so that the finished apparel item can qualify for the import duty-free treatment.

Third, USMCA allows a relatively more generous De minimis than NAFTA 1.0.

Fourth, USMCA seems to be a “balanced deal” that has accommodated the arguments from all sides regarding the tariff preference level (TPL) mechanism:

  • Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
  • Compared with NAFTA, USMCA will expand the TPL level for a few product categories with a high TPL utilization rate.

Fifth, USMCA will make no change to the Commercial availability/short supply list mechanism in NAFTA 1.0.

Sixth, it remains to be seen whether USMCA will boost “Made in the USA” fibers, yarns and fabrics by limiting the use of non-USMCA textile inputs. For example, while the new agreement expands the TPL level for U.S. cotton/man-made fiber apparel exports to Canada (currently with a 100 percent utilization rate), these apparel products are NOT required to use U.S.-made yarns and fabrics. The utilization rate of USMCA will also be important to watch in the future.

(Additional reading: Apparel-specific rules of origin in USMCA)

Economic Impacts of USMCA on the Textile and Apparel Sector

According to an independent assessment by the U.S. International Trade Commission (USITC) released on April 19, 2019:

First, USMCA overall is a balanced deal for the textile and apparel sector, particularly regarding the rules of origin (RoO) debate. As USITC noted, USMCA eases the requirements for duty-free treatment for certain textile and apparel products, but tighten the requirements for other products.

Second, the USMCA changes to the Tariff Preference Level (TPLs) would not have much effect on related trade flows. As USITC noted in its report, where USMCA would cut the TPL level on particular U.S. imports from Canada or Mexico, the quantitative limit for these product categories was not fully utilized in the past.  Meanwhile, the TPL level for product categories typically fully used would remain unchanged under USMCA. The only trade flow that might enjoy a notable increase is the U.S. cotton and man-made fiber (MMF) apparel exports to Canada—the TPL is increased to 20million SME annually under USMCA from 9 million under NAFTA.

Third, USITC suggested that in aggregate, the changes under USMCA for the textile and apparel sector will more or less balance each other out and USMCA would NOT affect the overall utilization of USMCA’s duty-free provisions significantly. Notably, the under-utilization of free trade agreements (FTAs) by U.S. companies in apparel sourcing has been a long-time issue. Data from the Office of Textiles and Apparel (OTEXA) shows that of the total $4,163 million U.S. apparel imports from the NAFTA region in 2019, around $3,742 million (or 89.9%) claimed the preferential duty benefits under the agreement. As noted in the U.S. Fashion Industry Benchmarking Study, some U.S. fashion companies do not claim the duty savings largely because of the restrictive RoO and the onerous documentation requirements.

New CRS Report: Textile and Apparel Sectors Disagree on Certain Provisions of the Proposed U.S.-Mexico-Canada (USMCA) Agreement

The study is available HERE

Key findings:

While U.S. textile manufacturers and the apparel and retail industries have expressed overall support for the newly reached US-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0), textile producers and the apparel sector still hold divergent views on certain provisions:

Textile “Yarn-Forward” Rule of Origin

USMCA vs. NAFTA1.0: The USMCA will continue to adopt the “yarn-forward” rules of origin. The USMCA will also newly require sewing thread, coated fabric, narrow elastic strips, and pocketing fabric used in apparel and other finished products to be made in a USMCA country to qualify for duty-free access to the United States.

U.S. textile industry: U.S. textile manufacturers almost always support a strict “yarn-forward” rules of origin in U.S free trade agreements and they support eliminating exceptions to the “yarn forward” rule as well. The National Council of Textile Organization (NCTO) estimates that a yearly USMCA market for sewing thread and pocketing fabric of more than $300 million.

U.S. apparel and retail industries: The U.S. apparel industry opposes “yarn forward” and argues that apparel should be considered of North American origin under a more flexible regional “cut and sew” standard, which would provide maximum flexibility for sourcing, including the use of foreign-made yarns and fabrics.

Tariff Preference Levels (TPL) for Textiles and Apparel

USMCA vs. NAFTA1.0: With some adjustments, the USMCA would continue a program that allows duty-free access for limited quantities of wool, cotton, and man-made fiber apparel made with yarn or fabric produced or obtained from outside the NAFTA region, including yarns and fabrics from China and other Asian suppliers.

U.S. textile industry: The textile industry contends China is a major beneficiary of the current NAFTA TPL mechanism, and it strongly pushed for its complete elimination in the USMCA.

U.S. apparel and retail industries: U.S. imports of textiles and apparel covered by the tariff preference level mechanism supply 13% of total U.S. textile and apparel imports from Canada and Mexico. Apparel producers assert that these exceptions give regional producers flexibility to use materials not widely produced in North America.

Viewpoints on other Provisions in USMCA

U.S. textile industry: The U.S. textile industry also opposes the USMCA newly allows visible lining fabric for tailored clothing could be sourced from China or other foreign suppliers, and it would permit up to 10% of a garment’s content, by weight, to come from outside the USMCA region (up from 7% in NAFTA1.0). The U.S. textile industry also welcomes that the USMCA would add specific textile verification and customs procedures aimed at preventing fraud and transshipment. Additionally, the U.S. textile industry is also pleased that the USMCA would end the Kissell Amendment. The Kissell Amendment is an exception in NAFTA that allows manufacturers from Canada and Mexico to qualify as “American” sources when Department of Homeland Security (DHS) buys textiles, clothing, and footwear using appropriated funds (about $30 million markets for textiles, clothing, and shoes altogether).

U.S. apparel and retail industries: Apparel importers are of concern that the USMCA continue to incorporate the existing NAFTA short supply procedure, which is extremely difficult to get a new item approved and added to the list, limiting their flexibility to source apparel with inputs from outside North America.

Finally, the report argues that “Regardless of whether the USMCA takes effect, the global competitiveness of U.S. textile producers and U.S.-headquartered apparel firms may depend more on their ability to compete against Asian producers than on the USMCA trade rules.

Related reading:

U.S. and Mexico Reached a Deal to Replace NAFTA

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The Office of U.S. Trade Representative (USTR) announced that the United States and Mexico have “reached a preliminary agreement in principle” to update the 24-year old North American Free Trade Agreement (NAFTA). According to USTR, compared with the existing NAFTA, the new deal will

  • strengthen the labor and environmental protection provisions
  • provide stronger and more effective protection and enforcement of intellectual property right protection
  • reduce various non-tariff barriers facing U.S. agriculture exports
  • include new rules of origin and origin procedures for autos (including requiring 75 percent of auto content be made in the United States and Mexico AND 40-45 percent of auto content be made by workers earning at least $16 per hour.)
  • include new chapters dealing with digital trade and textiles
  • include a 16-year “sunset period” with a review every six years, at which time the parties can renew the deal for another 16 years.

Specifically for the textile and apparel sector, USTR said that “The new provisions on textiles incentivize greater United States and Mexican production in textiles and apparel trade, strengthen customs enforcement, and facilitate broader consultation and cooperation among the Parties on issues related to textiles and apparel trade.” More specifically, the new textile chapter in renegotiated NAFTA will:

1) Promote greater use of Made-in-the-USA fibers, yarns, and fabrics by limiting rules that allow for some use of non-NAFTA inputs in textile and apparel trade; and requiring that sewing thread, pocketing fabric, narrow elastic bands, and coated fabric, when incorporated in apparel and other finished products, be made in the region for those finished products to qualify for trade benefits. “

2) Include textile-specific verification and customs cooperation provisions that provide new tools for strengthening customs enforcement and preventing fraud and circumvention.

Based on USTR’s statement, it is likely, although not confirmed, that the US-Mexico deal will allow more limited tariff preference level (TPL) than the existing NAFTA.

USTR’s statement also said that the new deal would be subject to “finalization and implementation,” and its relationship with NAFTA remain unclear. The statement did not mention anything about Canada, another NAFTA member, either. Interesting enough, when announcing the US-Mexico deal in front of the press, President Trump said I will terminate the existing deal (NAFTA).  When that happens, I can’t quite tell you; it depends on what the timetable is with Congress.  But I’ll be terminating the existing deal and going into this deal.  We’ll start negotiating with Canada relatively soon.”

In a statement released on the same day, the American Apparel and Footwear Association (AAFA) said it welcomed the conclusion of bilateral talks with Mexico on NAFTA and emphasized the need for Canada to be a part of any final agreement: “The conclusion of talks between the U.S. and Mexico is a positive step in the NAFTA negotiations, however, it is essential that the updated agreement remain trilateral. At the same time, we encourage the administration to share the details of the agreement so the business community can inspect the impact on North American supply chains and share feedback with the administration and Congress…Any update to the agreement must continue to support these American jobs, promote trade linkages, and be seamlessly implemented to be considered a success. It is with this in mind that we are deeply concerned to hear any mention of withdrawal or termination of the existing agreement at this late stage.”

According to Inside U.S. Trade, the National Council of Textile Organizations (NCTO) which represents the U.S. textile industry says it is “encouraged by the information released by USTR with respect to strengthening the rules of origin for textiles and apparel in the announced agreement with Mexico. U.S. talks with Canada are still ongoing, however, and NCTO will wait to review the text of any final agreement before issuing a more detailed statement on the negotiation outcome.”

NAFTA Members’ Applied MFN Tariff Rates for Textile and Apparel in 2017

If the North American Free Trade Agreement (NAFTA) is terminated by President Trump, the immediate impact will be an increase in tariff rate for textile and apparel (T&A) products traded between the three NAFTA members from zero to the most-favored-nation (MFN) rates applied for regular trading partners. In 2017, the average applied MFN tariff rates for textile and apparel were 7.9% and 11.6% respectively in the United States, 2.3% and 16.5% in Canada and 9.8% and 21.2% in Mexico (WTO Tariff Profile, 2017).

Below is NAFTA members’ average applied MFN tariff rate in 2017 for chapters 50-63, which cover T&A products:

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US export to mexico

US export to canada

US import from Mexico

US import from Canada

Data source: World Trade Organization (2017); US International Trade Commission (2017)

by Sheng Lu

Related article: What Will Happen to the U.S. Textile and Apparel Industry if NAFTA Is Gone?

Mexico’s Apparel Exports Continue to Rely on the U.S. Market Heavily

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Mexico’s textile and apparel (T&A) exports totaled USD$6,441 million in 2016, fell by 5.1% from 2015. Around 63% of these exports were apparel (or USD$4,061 million), and 37% (or USD$2,379 million) was textiles.

Could be negatively affected by the appreciation of the Mexican Peso against the U.S. dollar, plus the uncertainty associated with the renegotiation of the North American Free Trade Agreement (NAFTA), Mexico’s apparel exports further went down 7.2% in the first half of 2017 compared to 2016.

In 2016, the United States remains Mexico’s top T&A export market with an 87.3% share (up from 87.0% in 2015, 86.7% in 2014 and 84.7% in both 2013 and 2012), followed by Canada with a 1.9% share (up from 1.6% in 2015). Overall, Mexico was the sixth largest T&A supplier for the U.S. market, accounting for 4.3% of the market shares measured by value in 2016.

Nevertheless, Mexico’s T&A exports to the United States fell by 4.7% between 2015 and 2016 (from USD$5,902 million to USD$5,625 million). Product categories that suffered the deepest drop include cotton hosiery (down by 57.3%), men’s and boys’ wool suits (down by 35.9%), manmade fiber underwear (down by 29.0%), and men’s and boys’ cotton woven shirts (down by 27.9%).

Overall, Mexican T&A exporters feel relieved that the United States has decided to withdraw from the Trans-Pacific Partnership (TPP). However, without TPP, the Mexican T&A industry is still expected to face an increased competition from Vietnam and China both in the leading export markets (such as the United States and Canada) and the domestic market. Notably, the Mexican government has decided to lower the Most Favored Nation (MFN) import duty rates on the 73 clothing items and seven made-up textile items effective in January 2019.

References: Textile Outlook International (October 2017)