Explore Canada’s Apparel Sourcing Patterns

Presenter: Mikayla Dubreuil  (MS 2020, Fashion and Apparel Studies)

Canada is one of the world’s top ten largest apparel consumption markets, with retail sales totaling USD$28.04bn in 2019 (Euromonitor, 2020). Similar to other developed nations, clothing sold in Canada is predominately imported, making Canada a significant market access opportunity for clothing manufacturers, wholesalers, fashion brands, and retailers around the world. Based on the latest market and trade data, this study intends to provide an in-depth analysis of the Canadian apparel sourcing patterns.

Key findings:

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First, the volume of Canada’s apparel imports mirrors its economic growth. As the apparel business is buyer-driven, the performance of Canada’s national economy has a huge impact on its apparel imports. Canada’s GDP growth is an important predictor for its growth in apparel imports.  When Canada’s national economy boomed, its apparel imports also enjoyed a proportional expansion thanks to consumers’ higher income and purchasing power. Such a strong correlation, however, also suggests a likely sharp decline in Canada’s apparel imports in 2020 due to its national economy took a hard hit by the Covid-19 pandemic. [Note: with a 6.2% drop in GDP growth as forecasted by IMF, Canada’s apparel imports in 2020 could decrease by 16.4% from 2019. At the 95% confidence level, the worst case in 2020 will be a 29% decline of apparel imports from a year earlier and the most optimistic case will be a 4% decline.]

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Second, although China remains the top apparel supplier for Canada, Canadian fashion companies are increasingly sourcing from South Asia. Three trends to note: 1) China’s market share in Canada has been declining steadily from its peak in the 2010s. 2) Meanwhile. Canada is moving more sourcing orders to other Asian countries, particularly Vietnam and Bangladesh. 3) Additionally, thanks to the EU-Canada Free Trade Agreement (CETA), which provisionally entered into force in 2017, Canada’s apparel imports from the European Union (EU) has been rising steadily. In 2019, EU members altogether accounted for 6% of Canada’s apparel imports, an increase from 4% in 2010. Around half of Canada’s apparel imports from the EU are made in Italy, whose high-end luxury apparel exports could be among the biggest beneficiaries of the duty-saving opportunities provided by CETA.

Third, near sourcing from the Americas remains an essential component of Canadian fashion companies’ sourcing portfolio; However, sourcing from the NAFTA regions is in decline.  Approximately 9% of Canada’s apparel imports come from North, Central, and South Americas altogether, a pattern that has stayed relatively stable since 2010. As consumers in Canada are seeking “faster fashion”, Canadian fashion companies are attaching even greater importance to leveraging near sourcing from the Americas and improving their speed to market. For example, Lululemon placed around 8% of its sourcing orders with factories in the Americas in 2018, higher than 3%-5% five years ago.

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Canada’s apparel imports from members of the North American Free Trade Agreement (NAFTA), however, has suffered a notable drop from 12.3% back in 2005 to the record low of 5.4% in 2019. As President Trump repeatedly threatened to withdraw the United States from NAFTA since he took office in 2017, the mounting uncertainty had caused Canadian fashion companies to cut sourcing from the region. For years, many Canadian fashion companies have been actively using the tariff preference level (TPL) mechanism to import apparel from the NAFTA region, although only a limited amount of TPL quota is allowed each year. While the TPL utilization rate for Canada’s cotton and man-made fiber apparel imports from the United States always reached 100%, the utilization rate slipped to a record low of 84% in 2019.

The upcoming implementation of the U.S.-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0) on July 1, 2020 could help create a more stable environment for Canadian fashion companies interested in sourcing from the United States and Mexico. However, as USMCA fails to add any significant flexibility to the NAFTA apparel-specific rules of origin, whether the new agreement will improve the attractiveness of sourcing from North America for Canadian fashion companies remains to be seen.

by Mikayla DuBreuil and Sheng Lu

Additional Reading: Mikayla DuBreuil and Sheng Lu (2020). Canada’s clothing market – Top selling and sourcing trendsJust-Style.

Production and Export Strategies of U.S. Textile and Apparel Manufacturers

Presenter: Kendall Keough (MS 2020, Fashion and Apparel Studies)

Textiles and apparel “Made in the USA” are gaining growing attention in recent years amid the escalating U.S.-China trade war, the rising cost of imports, and consumers’ increasing demand for “speed to market.” Statistics show that the value of U.S. textile and apparel (T&A) production totaled $US28.1bn in 2018, which was a record high since 2010. Meanwhile, different from the old days, more and more T&A “Made in the USA” are sold overseas today. According to the Office of Textiles and Apparel (OTEXA) under the U.S. Department of Commerce, the value of U.S. T&A exports reached US$22.9bn in 2019, up nearly 20% from ten years ago.

Despite the strong performance in production and export, however, U.S. T&A manufacturers do not seem to be “visible” enough. Given the information gap, we recently analyzed the 122 U.S. T&A manufacturers included in the OTEXA “Made in the USA” database. Information in the database is self-reported by companies and then verified by OTEXA. Our analysis intends to gain more insights into the state of U.S. T&A mills, including their demographics, production and supply chain strategies, as well as their export behaviors.

Key findings:

First, U.S. T&A manufacturers display a relatively high concentration of geographic locations. Notably, as much as 61% of self-reported yarn manufacturers are from North Carolina (NC), followed by South Carolina (SC), which accounts for another 11%. The concentration of yarn manufacturing in the south, in particular, can be attributed to the abundant cotton supply in that region. Meanwhile, California (CA) has one of the most complete T&A supply chains in the country, with the presence of manufacturers across all T&A sub-sectors.

Second, large-size textile mills are gradually emerging in the United States, whereas U.S. apparel manufacturers are predominantly small and medium-sized. U.S. textile mills, in general, have a high concentration of factories with over 100 employees, particularly those engaged in producing yarns (53%), fabrics (37%), and technical textiles (38%). In the past decade, many relatively small-sized U.S. textile mills had merged into larger ones to take advantage of the economies of scale and reduce production cost. In comparison, over half of the apparel mills in the OTEXA database reported having less than 50 employees. Notably, because of the significant disadvantage in labor cost, U.S. apparel mills are not trying to replace imports, but instead focusing on their “niche market.” For example, designer-based micro-factories are popular these days in U.S. fashion centers such as New York City and California. These factories typically provide customized services, ranging from proto-typing to sample production.

Third, “fabric + apparel” and “fabric + technical textiles” are the two most popular types of vertical integration among U.S. T&A mills. A relatively small proportion of T&A mills included in the OTEXA database had adopted the vertical integration business strategy. Notably, fabric mills seem to be most actively engaged in the vertical integration strategy–around one-third of them reported also making apparel, technical textiles, or home textiles. Additionally, 20% of technical textile manufacturers in the OTEXA database have incorporated an apparel component to their product portfolio. This is a significant trend to watch as more and more sportswear brands are developing technology-driven functional apparel. However, we find few U.S. T&A mills have created a vertical integration model that covers three or more different nature of products.

Fourth, U.S. T&A mills have shifted from only making products to also offering various value-added services. Notably, the majority of companies included in the OTEXA “Made in the USA” database reported having the in-house design capability, including apparel mills (86%), fabric mills (80%), yarn manufacturers (61%), home textiles manufacturers (71%) as well as those making technical textiles (91%). U.S. T&A mills also commonly describe themselves as “innovators” and “solutions providers” on their websites to highlight that the nature of their core business is to serve customers’ needs rather than just “making” physical products.

Fifth, exporting has become an important economic activity of U.S. T&A manufacturers today. Notably, of all the 122 U.S. T&A manufacturers in the OTEXA “Made in the USA” database, as many as 70.5% reported engaged in export, a trend which echoes the rising value of U.S. textile and apparel exports in recent years. Regarding the particular export behaviors of U.S. T&A mills, several patterns are interesting to note:

  • U.S. textile mills (76%) are more actively engaged in export than those that make apparel products only (37%).
  • Larger U.S. T&A mills overall had a higher percentage engaged in export than those manufacturers smaller in size.
  • The Western Hemisphere is the dominant export market for U.S. yarn, fabric, and home textile mills, whereas the export markets for U.S. apparel mills and technical textile producers are relatively more diverse.
  • Except for apparel producers, the export diversification strategy is commonly adopted by U.S. T&A mills. As many as 77% of yarn manufacturers included in the OTEXA database reported exporting to three or more different markets in the world. Likewise, around 40% of the fabric, home textiles, and technical textiles mills did the same.
  • Free trade agreements support U.S. T&A exports. A high percentage of U.S. T&A mills that reported exporting to the Western Hemisphere said they took advantage of NAFTA and CAFTA-DR, two primary U.S. free trade agreements with the region. The utilization of NAFTA and CAFTA-DR is particularly high among U.S. yarn producers (83.3%).

Additional reading: Kendall Keough and Sheng Lu. (2020). ‘Made in the USA’ textiles and apparel – Key production and export trends. Just-Style.

USITC Economic Assessment Report on USMCA—Textile and Apparel Sector Summary

On April 19, 2019, the U.S. International Trade Commission (USITC) released its independent assessment report on the likely economic impact of the U.S.-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0). Below are the key findings of the report:

Impact of USMCA on the U.S. economy

USITC found that because of the size of the U.S. economy relative to the size of the Mexican and Canadian economies and the reduction in tariff and nontariff barriers that has already taken place among the three countries under the North American Free Trade Agreement (NAFTA), the overall impact of USMCA on the U.S. economy is likely to be moderate. For example, USITC’s computable general equilibrium (CGE) model suggests that compared to the base year level in 2017, USMCA could increase the U.S. GDP by 0.35% (or $68.2 billion) and create 0.17 million new jobs when other factors held constant.

Impact of USMCA on the textile and apparel sector

First, USITC found that the 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. For example, USMCA eliminates the NAFTA requirements that visible linings must be sourced from members of the agreement; however, USMCA adds more restrictive new requirements for narrow elastic fabrics, sewing thread, and pocket bag fabric.

Second, USITC found that 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 $4,292.8 million U.S. apparel imports from the NAFTA region in 2018, only $3,756.1 million (or 87.5%) 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.

However, interesting enough, the USITC report says little about the potential impact of USMCA on U.S. textile and apparel manufacturing.

Timeline

On 30 September 2018, the United States reached USMCA with Canada and Mexico. On 30 November 2018, USMCA was officially signed by Presidents of the three countries. According to the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (the picture above), after the release of the USITC economic assessment report on USMCA, the Trump Administration will need to work with U.S. Congress to develop legislation to approve and implement the agreement. However, there remains huge uncertainties over USMCA’s prospect.

Related reading:

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:

Regional Supply Chain Remains an Import Feature of World Textile and Apparel Trade

The full article is available HERE

Key findings:

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.

Recommended citation: Lu,S. (2018). How regional supply chains are shaping world textile and apparel trade. Just-Style. Retrieved from https://www.just-style.com/analysis/how-regional-supply-chains-are-shaping-world-textile-and-apparel-trade_id135021.aspx

Apparel Specific Rules of Origin in NAFTA 2.0 (US-Mexico-Canada Free Trade Agreement)

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The full article is available HERE

Key findings:

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:

  • 1) Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
  • 2) 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.

About USMCA

On 30 September 2018, The United States reached an agreement with Canada, alongside Mexico on the updated North American Free Trade Agreement (NAFTA), now called the United States-Mexico-Canada Agreement (USMCA)

Before taking into effect, USMCA still needs to be ratified by all member countries. In the United States, the earliest that President Trump can sign the agreement will be 11/29/2018 (i.e., 90 days after notifying the Congress). The U.S. International Trade Commission has until 3/14/2019 (i.e., 150 days after President signing the agreement) to release an assessment of the new trade agreement. Afterward, the Trump Administration will need to work with the Congress to develop legislation to approve and implement the agreement.

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

us-mexico-trade-agreement

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.”