2021 USFIA Fashion Industry Benchmarking Study Released

The full report is available HERE

Key findings of this year’s report:

#1 COVID-19 continues to substantially affect U.S. fashion companies’ sourcing and business operations in 2021

  • Recovery is happening: Most respondents expect their business to grow in 2021. Around 76 percent foresee their sourcing value or volume to increase from 2020. Around 60 percent of respondents expect a full recovery of their sourcing value or volume to the pre-COVID level by 2022.
  • Uncertainties remain: Still, 27 percent find it hard to tell when a full recovery will happen. About 20 percent of respondents still expect 2021 to be a very challenging year financially.
  • U.S. fashion companies’ worries about COVID still concentrate on the supply side, including driving up production and sourcing costs and causing shipping delays and supply chain disruptions. U.S. fashion companies’ COVID response strategies include strengthening relationships with key vendors, emphasizing sourcing agility and flexibility, and leveraging digital technologies. In comparison, few respondents canceled sourcing orders this year.

#2 The surging sourcing costs are a significant concern to U.S. fashion companies in 2021.

  • As many as 97 percent of respondents anticipate the sourcing cost to increase further this year, including 37 percent expect a “substantial increase” from 2020.
  • Respondents say almost EVERYTHING becomes more expensive in 2021. Notably, more than 70 percent of respondents expect the “shipping and logistics cost,” “cost of textile raw material (e.g., yarns and fabrics),” “cost of sourcing as a result of currency value and exchange rate changes,” and “labor cost” to go up.

#3 U.S. fashion companies’ sourcing strategies continue to envovle in response to the shifting business environment.

  • Asia’s position as the dominant apparel sourcing base for U.S. fashion companies remains unshakeable.
  • China plus Vietnam plus Many” remains the most popular sourcing model among respondents. However, the two countries combined now typically account for 20-40 percent of a U.S. fashion company’s total sourcing value or volume, down from 40-60 percent in the past few years.
  • Asia is U.S. fashion companies’ dominant sourcing base for textile intermediaries. “China plus at least 1-2 additional Asian countries” is the most popular textile raw material sourcing practice among respondents.
  • As U.S. fashion companies prioritize strengthening their relationship with key vendors during the pandemic, respondents report an overall less diversified sourcing base than in the past few years.

#4 U.S. fashion companies continue to reduce their China exposure. However, the debate on China’s future as a textile and apparel sourcing base heats up.

  • Most U.S. fashion companies still plan to source from China in short to medium terms. While 63 percent of respondents plan to decrease sourcing from China further over the next two years, it is a notable decrease from 70 percent in 2020 and 83 percent in 2019.
  • Most respondents still see China as a competitive and balanced sourcing base from a business perspective. Few other sourcing countries can match China’s flexibility and agility, production capacity, speed to market, and sourcing cost. As China’s role in the textile and apparel supply chain goes far beyond garment production and continues to expand, it becomes ever more challenging to find China’s alternatives.
  • Non-economic factors, particularly the allegations of forced labor in China’s Xinjiang Uygur Autonomous Region (XUAR), significantly hurt China’s long-term prospect as a preferred sourcing base by U.S. fashion companies. China also suffered the most significant drop in its labor and compliance rating this year.

#5 With an improved industry look and the continued interest in reducing “China exposure,” U.S. fashion companies actively explore new sourcing opportunities.

  • Vietnam remains a hot sourcing destination. However, respondents turn more conservative this year about Vietnam’s growth potential due to rising cost concerns and trade uncertainties caused by the Section 301 investigation.
  • U.S. fashion companies are interested in sourcing more from Bangladesh over the next two years. Respondents say apparel “Made in Bangladesh” enjoys a prominent price advantage over many other Asian suppliers. However, the competition among Bangladeshi suppliers could intensify as U.S. fashion companies plan to “work with fewer vendors in the country.”
  • Respondents are also interested in sourcing more from Sub-Saharan Africa by leveraging the African Growth and Opportunity Act (AGOA). Respondents also demonstrate a growing interest in investing more in AGOA members directly. “Replace AGOA with a permanent free trade agreement that requires reciprocal tariff cuts and continues to allow the “third-country fabric provision” is respondents’ most preferred policy option after AGOA expires in 2025.

#6 Sourcing from the Western Hemisphere is gaining new momentum

  • Overall, U.S. fashion companies’ growing interest in the Western Hemisphere is more about diversifying sourcing away from China and Asia than moving the production back to the region (i.e., reshoring or near-shoring).
  • Respondents say CAFTA-DR’s “short supply” and “cumulation” mechanisms provide critical flexibility that allow U.S. fashion companies to continue to source from its members. However, despite the “yarn-forward” rules of origin, only 15 percent of respondents sourcing apparel from CAFTA-DR members say they “purposefully use U.S.-made fabrics” to enjoy the agreement’s duty-free benefits.
  • Respondents suggest that encouraging more apparel sourcing from the Western Hemisphere requires three significant improvements: 1) make the products more price competitive; 2) strengthen the region’s fabric and textile raw material production capacity; 3) make rules of origin less restrictive in relevant U.S. trade agreements.

This year’s benchmarking study was based on a survey of executives at 31 leading U.S. fashion companies from April to June 2021. The study incorporates a balanced mix of respondents representing various types of businesses in the U.S. fashion industry. Approximately 54 percent of respondents are self-identified retailers, 46 percent self-identified brands, 69 percent self-identified importers/wholesalers. Around 65 percent of respondents report having more than 1,000 employees. Another 27 percent of respondents represent medium-sized companies with 101-999 employees.

Primark’s Global Sourcing for Apparel

About Primark

Primark is one of the largest fashion retailers in Europe, offering something for everyone with a wide selection of products available across womenswear, menswear, kidswear, home, health & beauty, and gifting. It has 384 stores and employs over 70,000 people in the Republic of Ireland, the UK, Spain, Portugal, Germany, the Netherlands, Belgium, Austria, France, Italy, Slovenia, Poland, and the US.

As of May 2021, Primark sources from 28 countries working with around 928 contracted factories. Of these factories, 86 percent are Asia-based. Another 10 percent and 4 percent are located in Eastern EU and Western EU countries, respectively. Primark does not own any of these factories, however.

Measured by the number of workers, Primark’s Asian factories are larger than their counterparts in other parts of the world. For example, while Primark’s factories in Pakistan and Bangladesh typically have more than 2,500+ workers, its factories in Western EU countries like the UK, Germany, Italy, and France, on average, only have 64-200 workers. This pattern suggests that Primark mainly uses Asian factories to fulfill volume sourcing orders and its EU factories mostly produce replenishment or more time-sensitive fashionable items. 

Further, reflecting the unique role of the garment industry in creating economic opportunities for women, females account for more than half of the workforce in most garment factories that make products for Primark. The percentage is exceptionally high in developing countries like Myanmar (89%), Sri Lanka (78%), Vietnam (77%), and Cambodia (75%).

Regarding Primark’s China sourcing strategy, on the one hand, Primark sources from as many as 475 suppliers located in China, far more than any other Asian country. However, most of Primark’s China factories are small and medium-sized, and fewer than 1% report having 1,000+ workers. In comparison, more than 75% of Primark’s factories in Bangladesh, Pakistan, and Myanmar have 1,000+ workers. This pattern suggests that China plays a more sophisticated role in Primark’s textile and apparel supply chain and is often used to balancing flexibility and agility.

Primark’s Ethical Trade and Environmental Sustainability team comprises over 120 specialists based in key sourcing countries. The team visits and reviews every supplier factory at least once a year to ensure the factories’ standards align with Primark’s products Code of Conduct.

Every factory that manufactures products for Primark has to meet internationally recognized standards before the first order is placed and throughout the time they work with Primark.

Further reading:

Apparel Sourcing and Trade: Washington Trade Policy Perspectives

Speaker: Julia Hughes, President, United States Fashion Industry Association (USFIA)

Topics covered:

  • US fashion companies’ latest sourcing trends and sourcing strategies during COVID-19
  • 2021 US textile and apparel trade policy (e.g., China section 301 and product exclusion extensions, and WROs against forced labor)
  • Biden administration’s trade policy agenda (e.g., worker-centered trade policy, climate change, retaliation against DST, GSP, MTB and TPA renewal, potential trade sanctions against Myanmar, promote domestic PPE production, and new FTA negotiation)   

The event is part of the Apparel and Textile Sourcing 2021 S/S virtual seminar series

COVID-19 and U.S. Apparel Imports: Key Trends (Updated: June 2021)

First, thanks to consumers’ resumed demand and a more optimistic outlook for the U.S. economy, U.S. apparel imports continue to rebound. However, uncertainties remain. On the one hand, mirroring retail sales patterns, the value of U.S. apparel imports in April 2021 went up by 66% from a year ago, a new record high since the pandemic. The absolute value of U.S. apparel imports so far in 2021 (January –April) also recovered to around 88% of the pre-Covid level (i.e., January to April 2019). However, the value of U.S. apparel imports in April 2021 was 11.2% lower than in March 2021 (seasonally adjusted), suggesting that the market environment is far from stable yet as the COVID situation in the U.S. and other parts of the world continue to evolve.

Second, data indicates that Asia as a whole remains the single largest sourcing base for U.S. fashion companies, stably accounting for around 72-75% of the import value. Studies show that two factors, in particular, contribute to Asia’s competitiveness as a preferred apparel sourcing base—price and flexibility & agility.  Asia’s highly integrated regional supply chains and its vast production capacity shape its competitiveness in these two aspects.

However, the recent surge of COVID cases in India and its neighboring Southeast Asian countries has raised new worries about the potential sourcing risks and supply chain disruptions for U.S. fashion companies currently sourcing from there.  

Third, as the direction of the US-China relations becomes ever more concerning, U.S. fashion companies seem to accelerate diversifying sourcing from China. Even China remains the top apparel supplier for the U.S. market, from January to April 2021, China’s market shares fell to 32.1% in quantity (was 36.6% in 2020) and 20.2% in value (was 23.7% in 2020).  Also, the HHI index and market concentration ratios (CR3 and CR5) suggest that US fashion companies are increasingly moving their apparel sourcing orders from China to other Asian countries. For example, according to a leading U.S. fashion corporation in its latest annual report, “in response to the recent tariffs imposed by the current US administration, the Company has reduced the amount of goods being produced in China.”

Further, the latest data suggests that the concerns about the alleged forced labor in Xinjiang hurt China’s prospect as an apparel sourcing destination, BOTH for cotton and non-cotton items. Measured by value, only 11.9% of U.S. cotton apparel came from China in April 2021, a new record low since implementing the CBP WROs, which impose a regional ban on any cotton and cotton apparel made in the Xinjiang region. The latest data also suggests that China is quickly losing market shares for non-cotton textile and apparel items.

Fourth, U.S. apparel sourcing from CAFTA-DR members gains new momentum, reflecting the strong interest in sourcing more from the region from the business community and policymakers. For example, 17.5% of U.S. apparel imports came from the Western Hemisphere in 2021 (Jan-Apr), higher than 16.1% in 2020 and 17.1% before the pandemic. Notably, CAFTA-DR members’ market shares increased to 10.8% in 2021 (Jan-Apr) from 9.6% in 2020. The value of U.S. apparel imports from CAFTA-DR also enjoyed a 25.8% growth in 2021 (Jan-Apr) from a year ago, one of the highest among all sourcing destinations. The imports from El Salvador (up 29.2%), Honduras (up 28.0%), and Guatemala (27.0%) had grown particularly fast in 2021.

Meanwhile, U.S. apparel imports from USMCA members stayed stable overall. CAFTA-DR and USMCA members currently account for around 60% and 25% of U.S. apparel imports from the Western Hemisphere. They are also the single largest export market for U.S. textile products (around 70%). The Biden administration has signaled its strong interest in strengthening the western hemisphere textile and apparel supply chain by leveraging CAFTA-DR along with other trade policy tools.

by Sheng Lu

How COVID-19 has shifted US apparel companies’ sourcing strategies?

The article is available HERE (need Just-Style subscription)

Key findings

First, more US apparel companies prioritize consolidating their existing sourcing base than diversification during the pandemic. Nearly half of the top 30 US apparel companies we examined explicitly say they either sourced from fewer countries or worked with fewer vendors in 2020 than 2017-2019 before the pandemic. In comparison, only about one-third of respondents say they were sourcing from more countries in 2020 than two years.

Second, the desire to form a closer relationship with key vendors and ensure social and environmental compliance are the two primary factors behind US apparel companies’ consolidation strategy. In a time of uncertainty like the pandemic, apparel companies are leaning more heavily on suppliers that have proven reliable, capable, and flexible. Working closely with the suppliers and building an efficient and trust-based supply chain also play a central role in US fashion companies’ COVID-mitigation strategies. Meanwhile, with social and environmental compliance becoming increasingly crucial in apparel sourcing today, companies are cutting ties with vendors that are not adhering to government mandates and proprietary codes of conduct. Notably, US apparel companies’ higher expectations for sustainability as well as social and environmental compliance may have resulted in a smaller pool of qualified suppliers.

Third, the desire to steer away from China and reduce sourcing risks are the two main drivers behind US fashion companies’ recent sourcing diversification strategy. US apparel companies mostly moved their sourcing orders from China to China’s competitors in Asia instead of expanding “near-sourcing. On the other hand, it is not uncommon to see US apparel companies keep a relatively diverse sourcing base to control various sourcing risks in the current business setting.

Fourth, the content analysis further reveals that US fashion brands and retailers commit to sourcing and supply chain innovation in response to COVID-19 and the new business environment. Some specific sourcing strategies are noteworthy:

  • Work with “super vendors,” i.e., vertically integrated suppliers that can execute multiple steps in the supply chain or those with production facilities in numerous countries.
  • Optimize supply chain process to improve speed to market.
  • Adjust fabric and textile raw material sourcing base, although the specific strategies vary from company to company.

By Emma Davis and Dr. Sheng Lu

The State of Apparel Supply Chain Transparency: A Case Study on VF Corporation

With the public’s increasing demand, fashion companies are making more significant efforts to improve their apparel supply chains’ transparency, i.e., mapping where the product is made and knowing suppliers’ compliance with social and environmental regulations.

Recently, VF Corporation, one of the most historical and largest US apparel corporations, released the entire supply chain of its 20 popular apparel items, such as Authentic Chino Stretch, Men’s Merino Long Sleeve Crewe, and Women’s Down Sierra Parka. VF Corporation used more than 300 factories worldwide to make these apparel items and related textile raw materials.

We conducted a statistical analysis (Multivariate analysis of variance, MANOVA) of these factories, aiming to evaluate the state of VF Corporation’s apparel supply chain transparency, including its strengths and areas that can be improved further. The findings of this study will fulfill a critical research gap and significantly enhance our understanding of the nature of today’s apparel supply chain and the opportunities and challenges to improve its transparency.

The results show that VF Corporation’s suppliers in different segments of the apparel supply chain had different transparency performances overall:

  • While more than 92% of tier 1 & 2 suppliers shared their environmental or social compliance information with VF Corporation, less than 60% of VF Corporation’s tier 3 & 4 suppliers did so (note: statistically significant).
  • A higher percentage of VF Corporation’s tier 2 & 3 suppliers (i.e., mills making fabrics, yarns, or accessories) received environmental compliance-related certification than tier 1 suppliers (i.e., garment factories) (note: statistically significant).
  • Meanwhile, VF Corporation’s tier 1 suppliers were more active in pursuing social compliance-related certification than suppliers in other levels (note: statistically significant)
  • However, no evidence suggests that whether from a developed or developing country will statistically affect a vendor’s transparency performance.

The study’s findings have several important implications:

  • First, more work can be done to strengthen fashion companies’ transparency of tier 3 & 4 suppliers (i.e., textile mills making yarns and fibers). Despite the significant efforts to know their garment factories (i.e., tier 1 suppliers), fashion companies like VF Corporation still have limited knowledge about vendors upper in the supply chain. Notably, even VF Corporation doesn’t have much leverage to request environmental and social compliance-related information from these vendors. According to VF Corporation, often “Supplier was unresponsive to VF’s request for information.”
  • Second, the results suggest that vendors at different supply chain levels have their respective transparency priorities. However, it is debatable whether tier 1 & 2 suppliers also need to care about environmental and sustainability-related compliance, and if tier 3 & 4 suppliers should be more transparent about their social compliance record. The growing concerns about forced labor involved in cotton production (i.e., tier 4 suppliers) make the debate even more relevant.
  • Additionally, different from the public perception and previous studies, the findings call for equal treatment of suppliers from developed and developing countries when vetting their environmental and social compliance-related transparency.

Because this case study looked at VF Corporation only, future research can continue to investigate other fashion companies’ supply chain transparency based on data availability. It will also be meaningful to hear directly from tier 3 & 4 suppliers to understand their perception about improving the apparel supply chain’s transparency and related opportunities and challenges.

by Sheng Lu and Lora Merryman

Note: The study will be presented at the 2021 International Textile and Apparel Association (ITAA) Annual Conference in November.

What Do You Take Away from FASH455?

I encourage everyone to watch the two short videos above, which provide an excellent wrap-up for FASH455 and remind us of the meaning and significance of our course. BTW, the names of several experts featured in the video should sound familiar to you, such as David Spooner (former U.S. Chief Textile Negotiator and Assistant Secretary of Commerce), Julia Hughes (president of the US Fashion Industry Association, USFIA) and Auggie Tantillo (former president of the National Council of Textile Organizations, NCTO).

First of all, I hope students can take away essential knowledge about textile and apparel (T&A) trade & sourcing from FASH455. As you may recall from the video, in FASH455, we’ve examined the phenomenon of globalization and its profound social, economic and political implications. We also discussed various trade theories and the general evolution pattern of a country’s T&A industry and its close relationship with that country’s overall industrialization process. We further explored three primary T&A supply chains in the world (namely the Western-Hemisphere supply chain, the flying geese model in Asia, and the phenomenon of intra-region T&A trade in Europe). Last but not least, we looked at unique and critical trade policies that matter significantly to the T&A sector (e.g., U.S.-China tariff war and the yarn-forward rules of origin) as well as the complicated factors behind the making of these trade policies. Whether your dream job is to be a fashion designer, buyer, merchandiser, sourcing specialist, or marketing analyst, understanding how trade and sourcing work will be highly relevant and beneficial to your future career given the global nature of today’s fashion industry.

Second, I hope FASH455 helps students shape a big-picture vision of the T&A industry in the 21st-century world economy and provides students a fresh new way of looking at the world. Throughout the semester, we’ve examined many critical, timely, and pressing global agendas that are highly relevant to the T&A industry, from the impact of COVID-19 on apparel sourcing and trade, apparel companies’ social responsibility practices, the debate on the textile and apparel provisions in the U.S.-Mexico-Canada Trade Agreement (USMCA or NAFTA2.0)  to the controversy of used clothing trade. It is critical to keep in mind that we wear more than clothes: We also wear the global economy, international business, public policy, and trade politics that make affordable, fashionable, and safe clothes possible and available for hardworking families. This is also the message from many of our distinguished guest speakers this semester, and I do hope you find these special learning events enlightening and inspiring.

Likewise, I hope FASH455 can put students into thinking about why “fashion” matters. A popular misconception is that “fashion and apparel” is just about “sewing,” “fashion magazine,” “shopping” and “Project Runway.” In fact, as one of the largest and most economically influential sectors in the world today, T&A industry plays a critical and unique role in creating jobs, promoting economic development, enhancing human development and reducing poverty. As we mentioned in the class, over 120 million people remain directly employed in the T&A industry globally, and a good proportion of them are females living in poor rural areas. For most developing countries, T&A typically accounts for 70%–90% of their total merchandise exports and provides one of the very few opportunities for these countries to participate in globalization. The spread of COVID-19, in particular, reveals the enormous social and economic impacts of the apparel sector and many problems that need our continuous efforts to make an improvement. 

Last but not least, I hope from taking FASH455, students will take away meaningful questions that can inspire their future study and even life’s pursuit. For example:

  • How has COVID-19 fundamentally and permanently changed the pattern of apparel sourcing and trade?
  • How to make the growth of the global textile and apparel trade more inclusive and equal?
  • How to make sure tragedies like the Rana Plaza building collapse will never happen again?
  • How will automation, AI and digital technologies change the future landscape of apparel sourcing, trade, and job opportunities?
  • How to use trade policy as a tool to solve tough global issues such as labor practices and climate change?
  • Is inequality a problem caused by global trade? If global trade is the problem, what can be the alternative?

These questions have no good answers yet. However, they are waiting for you, the young professional and the new generation of leaders, to write the history, based on your knowledge, wisdom, responsibility, courage, and creativity!

So what do you take away from FASH455? Please feel free to share your thoughts and comments.

Dr. Sheng Lu

ModCloth Sourcing and Supply Chain Strategies during the Pandemic

Credit: Apparel and Textile Sourcing Tradeshow

Speaker: Linda Ollmann, Director – Sourcing Operations, ModCloth

Event summary

ModCloth is a womenswear company that strives to empower women along every step of their manufacturing process. The customer loves the clothing and the pieces can be utilized in many different ways throughout many different seasons.

As of right now, ModCloth does most of their sourcing partnerships with vendors in China, largely because vendors in China were able to give ModCloth the most efficient price point at the shortest lead time. However, ModCloth did start to look for vendors outside of China in countries such as Vietnam, Sri Lanka, and India, but they found that the lead times were still the shortest when they sourced with vendors in China.

While ModCloth wants to continue having short lead times to satisfy their customer, they have some new sourcing strategies that they are going to be implementing in the near future. One thing they are going to do is find the best suppliers possible to get their fabric from so that their customers are happy and can even possibly love the company even more than they already do. In addition to this, ModCloth is dedicated to pursuing sustainable practices and this includes within the factories that they partner with. They also want to find a way to continue having a shorter lead time from the time customers order a garment to the time it gets delivered at their doorstep, all while having a low carbon footprint and being as environmentally conscious as possible.

Just like every other company in the world, ModCloth was impacted by COVID-19. However, since ModCloth started out as an entirely ecommerce brand they were able to adapt to the new virtual norm very well. They decided that with the pandemic slowing everything down, it was important that they focus on improving the company from the inside out. This helped them become more stable internally so they could inevitably build the brand up again on the outside. People have been primarily shopping online due to the closure of brick and mortar stores, so ModCloth did not see too much of a dip in their sales.

ModCloth is very interested in what their customers want and need. Their customers have expressed a need for more sustainable clothing and fabrics and this is exactly what ModCloth wants to give to them. It was mentioned in the webinar that it is easy to put information about the sustainability of a garment in the product description on their website which helps the customer really understand where the piece of clothing they are about to purchase is coming from. This will help customers remain faithful in the brand as well as help the customer feel connected to the brand

Summarized by Lexi Dembo (FASH455 spring 2021)

The Future of Asia as a Textile and Apparel Sourcing Base—Discussion Questions from Students in FASH455

Garment factories in Vietnam adopt RFID; Video credit: Li &Fung

#1: How to explain the phenomenon that US fashion companies are diversifying apparel sourcing from China, but not so much from the Asia region? For example, as of 2020, still, around 75% of US apparel imports came from Asian countries.

#2: From the readings and your observation, to which extent will automation challenge the conclusions of the “flying geese model” and the evolution pattern of Asian countries’ textile and apparel industry over the past decades?

#3: It could be a crazy idea, but given the current business environment, what would the textile and apparel supply chain in Asia look like without “Made in China”? What would be the implications for US fashion companies sourcing strategies?

#4: RCEP members are with a diverse competitiveness in textile and apparel production and exports. Several leading Asian apparel-exporting countries are not RCEP members (such as Bangladesh). Is it unavoidable that RCEP will create BOTH winners and losers for textile and apparel trade? How so?

#5: Is the growth model and development path of Asian countries’ textile and apparel industry an exception—meaning it is challenging to apply it to the rest of the world, such as the Western Hemisphere and Africa? What is your view?

#6: What is your outlook of Asia as a textile and apparel-sourcing base in the post-Covid world? Why?

(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question number (#) in your reply)

How Has COVID-19 Affected Apparel Exports from China, Vietnam, and Bangladesh?

Key findings:

compiled by Victoria Langro and Sheng Lu (2021)

During the pandemic, three factors are most relevant to a country’s apparel export performance: government lockdown measures, textile raw material access, and comprehensive export competitiveness. Against these three factors, apparel producers and exporters in China, Vietnam, and Bangladesh face common but differentiated business challenges and opportunities during the pandemic (see the table above).

China, Vietnam, and Bangladesh all suffered an unprecedented (nearly 30% year over year) drop in their apparel exports to the world in 2020 (Q1-Q3) due to COVID-19. This result mirrored the reduced import demand in the world’s major apparel consumer markets, where the local economies were also hit hard by the pandemic, including the US (down 2.3%), the EU (down 4.3%), and Japan (down 4.8%).

However, the three countries’ export performance is most different in the US market—China’s apparel exports dropped by 31.6%, much steeper than Vietnam (down 6.9%) and Bangladesh (down 12.6%). It seems that even though COVID-19 may favor China as an apparel sourcing base from an economic perspective, US fashion companies have given more weight to non-economic factors, such as the outlook of the trade war, in their sourcing decisions involving China.

COVID-19 had disrupted apparel exporters’ regular production and export schedule in 2020. The lockdown measures in these three countries seem to affect their export seasonal pattern most significantly. For example, as the first country hit by COVID-19, China’s apparel exports were at the bottom from February to April 2020; however, China’s apparel exports recovered quickly since May 2020 when factories resumed production. In comparison, apparel exports from Vietnam and Bangladesh were at their lowest level from April to May and May to June 2020, respectively, when their factories had to close.

Additionally, Bangladesh’s apparel export seasonality had experienced a more dramatic change in 2020 than in China and Vietnam. A possible reason behind the phenomenon is the export product structure. Notably, China and Vietnam export a more diverse range of products, whereas apparel exports from Bangladesh concentrate on basic fashion items.

Industry sources also indicate that between February 2020 and February 2021, US apparel imports from China and Vietnam see a significant structural change—they include more COVID-popular items such as sweaters, smock dresses, and sweatpants, and fewer dresses, shirts, and suits. However, over the same period, the product structure of US apparel imports from Bangladesh barely changed, and they also included few COVID-popular categories mentioned above. In other words, despite order cancellations, garment factories in China and Vietnam seem more likely to receive new sourcing orders than their counterparts in Bangladesh because of advantages in production flexibility and agility.

Further, China, Vietnam, and Bangladesh all turned less diversified in their apparel export market during the pandemic. Notably, the US, EU, and Japan have become more critical export markets ever. Compared with fashion companies’ efforts in sourcing diversification, it could be more challenging for garment-producing countries to diversify their export market during the pandemic.

Further reading: Victoria Langro and Sheng Lu (2021). Sourcing’s new order – Covid’s impact on world’s top three apparel exporters. Just-Style.

FASH455 Interview Series—QVC Global Sourcing Internship (Guest: Lora Merryman)

About Lora Merryman

Lora Merryman is a Master of Science student in Fashion and Apparel Studies at the University of Delaware (class of 2021). She also graduated from the UD with a Bachelor’s Science in Fashion Merchandising in 2020. She currently works for QVC as a global sourcing intern.  

Lora was selected as a 2020 University of Delaware summer scholar. She also served as a graduate teaching assistant for FASH455 in Fall 2020 and Winter 2021. Lora is the author of a recent research publication on data science education for fashion majors, featured by Just-Style and several other industry news outlets.  

US-China Tariff War During COVID-19—Discussion Questions from Students in FASH455

Steve Lamar, President & CEO, American Apparel and Footwear Association

#1 Studies show that the Section 301 punitive tariff on imports from China hurts both US fashion retailers and ordinary consumers. But why doesn’t President Biden announce to remove the tariffs and stop the trade war?

#2 It doesn’t seem the tariff war with China has brought more apparel manufacturing back to the US. Is this result expected or surprising? How does the outcome of the trade war support or challenge the trade theories we learned in the class (e.g., mercantilism, absolute advantage, comparative advantage, and factor proportion theories)?

#3 The U.S.-China tariff war continues during the pandemic, resulting in higher sourcing costs for US fashion brands and retailers, which have been struggling hard financially. In such a case, if you were the CEO of a leading US fashion brand, why or why not would you pass the tariff burden to consumers, i.e., ask consumers to pay a higher price?

#4 Why or why not do you think the tariff war with China has fundamentally shifted US fashion companies’ sourcing strategy?

#5 What’s your take on “tariff engineering” adopted by fashion companies? A smart idea? Loophole? Controversial? Need to be encouraged/discouraged? And Why?

#6 Any reflections on the video discussion (above) regarding the US apparel industry’s view on the impact of the tariff war during the pandemic?

(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question number (#) in your reply)

Globalization and Its Implications for the Fashion Industry—Discussion Questions from Students in FASH455

Sourcing map: North Face–Men’s Thermoball Eco Hoodie

#1 Why or why not do you think VF Corporation should de-globalize its supply chain—for example, bringing more sourcing and production back to the United States?

#2 Given such a globalized operation, should we still call VF Corporation an American company? Also, does the label “Made in ___” still matter today?

#3 Is the sole benefit of globalization helping us get cheaper products? How to convince US garment workers who lost their jobs because of increased import competition that they benefit from globalization also?

#4 How has COVID-19 changed your understanding of the benefits, costs, and debates on globalization? Do we still need globalization in a post-COVID world? Why?

#5 Throughout history, globalization has been viewed as a two-sided debate with social groups weighing its benefits and negative costs.  With the emergence of COVID-19, how do you think certain social groups’ opinions towards globalization will change?

(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question number (#) in your reply)

US Apparel Sourcing Trends to Watch in 2021

Key points:

  • Key themes in 2021: COVID-19+ trade policy
  • U.S. apparel imports continue to rebound, but uncertainty remains
  • Asia will remain the dominant apparel sourcing base
  • U.S. fashion companies are NOT giving up China as one of their essential apparel-sourcing bases, although companies continue to reduce their “China exposure” overall. Meanwhile, do NOT underestimate the impact of non-economic factors on sourcing.
  • No clear evidence suggests near sourcing from the Western Hemisphere is happening in a large scale
  • Watch Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These two mega-free trade agreements could shape new textile and apparel supply chains in the Asia-Pacific region.

A Snapshot of Myanmar’s Apparel Industry and Export

First, the textile and apparel industry plays a significant role in Myanmar’s economy, particularly the export sector. Data from the UNComtrade shows that textile and apparel accounted for nearly 30% of Myanmar’s total merchandise exports in 2019, followed by footwear and luggage. Industry data also indicates that the textile, apparel, and footwear industry employed more than 1.1 million workers in Myanmar in 2018, up from only 0.3 million in 2016.

On the other hand, as a developing country, Myanmar highly depends on the imported textile raw material. As of 2019, nearly 83% of Myanmar’s textile imports came from China.

Second, since the United States lifted the import ban on Myanmar and the EU reinstated the Everything But Arms (EBA) trade preferences for the country in 2013, Myanmar has been one of the most popular emerging apparel sourcing bases among fashion companies.  From 2015 to 2019, Myanmar’s apparel exports to the world enjoyed an impressive 57% annual growth. Myanmar’s apparel exports to the EU (97% annual growth) and the United States (78% annual growth) have been growing particularly fast.

From 2019 to 2020, some of the top fashion brands that carry apparel items “Made in Myanmar” include United Colors of Benetton, Next, Only, Guess, Jack & Jones, and Mango.

Second, the reasons why fashion companies source apparel from Myanmar are multiple:

  • Thanks to foreign investment (e.g., nearly half of Myanmar’s garment factories are foreign-owned), Myanmar specializes in making relatively higher-quality functional/technical clothing (i.e., outwear like jackets and coats). This is different from many other apparel exporting countries like Bangladesh, Vietnam, and Cambodia, mostly exporting low-cost tops and bottoms.
  • Myanmar’s apparel exports were able to enjoy duty-free market access in the EU, Japan, and South Korea. Myanmar was also a beneficiary of the US Generalized System of Preferences (GSP) program. This explains why Myanmar’s apparel exports mostly go to the EU (56%), Japan and South Korea (30%), and the US (5.5%).
  • Relatively low production cost—garment workers earn around $85/month in 2019.

However, Myanmar still accounts for a tiny share in fashion companies’ total sourcing portfolio because of the size effect. For example, as of 2019, less than 0.1% of US and EU countries’ apparel imports came from Myanmar.

Third, western fashion brands could reevaluate their sourcing strategy from Myanmar because of its recent coup. Notably, in a new study, we find that apparel sourcing is not merely about “competing on price.” Instead, fashion companies give substantial weight to the factors of “political stability” and “financial stability” in their sourcing decisions—reputation risk matters. The country’s latest political instability will hurt Myanmar’s attractiveness as an apparel sourcing base, given many other alternatives out there.

Further, the international community, including the US and the EU, is considering new sanctions against Myanmar. Should Myanmar lose its EU’s EBA eligibility or no longer enjoy duty-free access to its key apparel export markets, the country’s apparel exports could be among the biggest losers. Notably, it could be challenging for Myanmar to find an alternative apparel export market during the pandemic. (for example, only 1.3% of Myanmar’s apparel exports went to China in 2019).

By Sheng Lu

Further reading:

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.

Outlook 2021– Key Issues to Shape Apparel Sourcing

In January 2021, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2021–Key Issues to Shape Apparel Sourcing Management Briefing. Below is my contribution to the report. All comments and suggestions are more than welcome!

What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2021?

I see COVID-19 and market uncertainties caused by the contentious US-China relations as the two most significant challenges facing the apparel industry in 2021.

The difficulties imposed by COVID-19 on fashion businesses are twofold. First, with the resurgence of COVID cases worldwide, when and how quickly apparel consumption can rebound to the pre-COVID level remain hard to tell, particularly in leading consumption markets, including the United States and Europe. As the apparel business is buyer-driven, the industry’s full recovery is impossible without a strong return of consumers’ demand. Numerous studies also show that switching to making and selling PPE won’t be sufficient to make up for losses from regular businesses for most fashion companies.

Second, COVID-19 will also continue to post tremendous pressures on the supply side. In the 2020 Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), the surveyed sourcing executives reported severe supply chain disruption during the pandemic. These disruptions come from multiple aspects, ranging from a labor shortage, a lack of textile raw materials, and a substantial cost increase in shipping and logistics. Even more concerning, many small and medium-sized (SME) vendors, particularly in the developing countries, are near the tipping point of bankruptcy after months of struggle with the order cancellation, mandatory lockdown measures, and a lack of financial support.  The post-covid recovery of the apparel business relies on a capable, stable, and efficient textile and apparel supply chain, in which these SME vendors play a critical role.

In 2021, fashion companies also have to continue to deal with the ramifications of contentious US-China relations. On the one hand, the chance is slim that the punitive tariffs imposed on Chinese products, which affect most textiles and apparel, will soon go away. On the other hand, we cannot rule out the possibility that the US-China commercial relationship will deteriorate further in 2021, as more sensitive, complicated, and structural issues began to get involved, such as national security, forced labor, and human rights. Compared with President Trump’s unilateral trade actions, the new Biden administration may adopt a multilateral approach to pressure China. However, it also means more countries could be “dragged into” the US-China trade tensions, making it even more challenging for fashion companies to mitigate the trade war’s supply chain impacts.

Meanwhile, I see digitalization as a big opportunity for the apparel industry, not only in 2021 but also in the years to come. Fashion brands and retailers will increasingly find digitalization ubiquitous to their businesses—like air and electricity. In 2021, I expect fashion companies will make more efforts to creatively use digital technologies to interact with consumers, make transactions, develop products, and improve consumers’ online shopping experiences. Thanks to the adoption of digital tools, apparel companies may also find new opportunities to improve sustainability, better understand their customers through leveraging data science, and develop a more agile and nimble supply chain. 

What’s happening with supply chains? How is the sourcing landscape likely to shift in 2021, and what can apparel firms and their suppliers do to stay ahead, remain competitive and build resilience for the future?

Apparel companies’ sourcing and supply chain strategies will continue to evolve in response to consumers’ shifting demand, COVID-19, and the new policy environment. Several trends are worth watching in 2021:

First, fashion companies’ sourcing bases at the country level will stay relatively stable in 2021 overall. For example, although it sounds a little contradictory, fashion companies will continue to treat China as an essential sourcing base and reduce their “China exposure” further, a process that has started years before the tariff war. Most apparel sourcing orders left China will go to China’s competitors in Asia, such as Vietnam, Bangladesh, and Cambodia. This also means that Asia, as a whole, will remain the single largest source of apparel imports, particularly for US and Asia-based fashion companies. In comparison, still, “near-sourcing” is NOT likely to happen on a large scale, mainly because “near-sourcing” requires enormous new investments to rebuild the supply chain, and most fashion companies do not have the resources to do so during the pandemic. 

Second, sourcing diversification is slowing down at the firm level, and more apparel companies are switching to consolidate their existing sourcing base. For example, as the 2020 USFIA benchmarking study found, close to half of the respondents say they plan to “source from the same number of countries, but work with fewer vendors” through 2022. Another 20 percent of respondents say they would “source from fewer countries and work with fewer vendors.” The results are understandable– competition in the apparel industry is becoming supply chain-based. Building a strategic partnership with high-quality vendors will play an ever more critical role in supporting fashion brands and retailers’ efforts to achieve speed to market, flexibility and agility, sourcing cost control, and low compliance risk. Thus, apparel companies find it more urgent and rewarding to consolidate the existing sourcing base and resources and strengthen their key vendors’ relations.

Third, apparel sourcing executives still need to keep a close watch on trade policy in 2021. However, we may see fewer news headlines about trade and more “behind the door” advocacy and diplomacy. Specifically:

  • US Section 301 actions: While the punitive tariffs on Chinese goods may not go away anytime soon, there could be a fight over whether the new Biden administration should continue granting certain companies exclusions from those tariffs. Further, in October 2020, the Trump Administration launched two new Section 301 investigations on Vietnam regarding its import and use of timber and reported “undervaluation currency.” The case is pending, but the stakes are high for fashion companies —Vietnam is often treated as the best alternative to sourcing from China and already accounting for nearly 20% of total US apparel imports.
  • The US-China relationship: We all know the relationship is at its low-point, but the fact is many US fashion companies still treat China as one of their most promising markets to explore. China continues to expand its role in the Asia-based textile and apparel supply chain also. In a nutshell, more than ever, apparel executives need to care about what is going on in geopolitics. Hopefully, “tough times can breed positive outcomes.”
  • CPTPP and RCEP: With the reaching of the Regional Comprehensive Economic Partnership (RCEP) in November 2020, there are growing calls for the new Biden administration to consider rejoining the Trans-Pacific Partnership (TPP) in some format to showcase the US presence in the Asia-Pacific region. To make the situation even more complicated, China has openly expressed its interest in joining the Comprehensive Progressive Agreement of the Trans-Pacific Partnership (CPTPP), commonly known as “the TPP without the US.” 2021 will be a critical time window for all stakeholders, including the apparel sector, to debate various trade policy options that could shape the future trade architecture in the Asia-Pacific region.
  • Brexit: Brexit will enter a new phase in 2021 as the transition period ends on 31 December 2020. On the positive side, we have a playbook to follow—the UK has announced its new tariff schedules for various scenarios, which provide critical market predictability. We might also see the reaching of a new US-UK free trade agreement in the first half of the year, which will be exciting news for the apparel sector, particularly those in the luxury segment. However, as the US Trade Promotion Authority (TPA) is set to expire in July 2021, when and how soon such an agreement will enter into force will be another story. By no means trade policy in 2021 will go boring.

by Sheng Lu

COVID-19 and U.S. Apparel Imports: Key Trends (Updated: January 2021)

First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. However, the speed of recovery slowed. Specifically, The value of U.S. apparel imports in November 2020 marginally went down by 0.3% from October 2020 (seasonally adjusted), compared with an 8.8% growth from Aug to September and a 4.6% growth from September to October (seasonally adjusted).

As of November 2020, the volume of U.S. apparel imports has recovered to around 85-90% of the pre-coronavirus level.  This result echoes the trend of U.S. apparel retail sales (NAICS 4481), which also indicates a “V-shape” rebound since May 2020.

Data further shows that compared with the 2008 world financial crisis, Covid-19 has caused a more significant drop in the value of U.S. apparel imports. However, it seems the post-Covid recovery process has been more robust than the 2009 financial crisis. The Auto Regressive Integrated Moving Average (ARIMA) model forecasts that at the current speed of recovery, the value of U.S. apparel imports (seasonally adjusted) could start to enjoy a positive year over year (YoY) growth by February 2021 (or around 11 months after the outbreak of Covid-19 in March 2020). In comparison, when recovering from the 2008 world financial crisis, it took almost 15 months to turn the YoY growth rate from negative to positive).

With the new lockdown measures taken in response to the resurgence of the Covid cases, the outlook of US apparel imports remains uncertain. It should also be noted that the period from December to April usually is the light season for apparel imports.

Second, supporting the findings of some recent studies, data suggests that U.S. fashion brands and retailers continue to reduce their “China exposure” in 2020. For example, both the HHI index and market concentration ratios (CR3 and CR5) suggest that apparel sourcing orders are gradually moving from China to other Asian countries.  Related, since August 2020, China’s market shares in total U.S. apparel imports have been sliding both in quantity and in value.

We should NOT ignore the impact of non-economic factors on China’s prospect as an apparel sourcing destination. For example, the reported forced labor issue related to Xinjiang, China, and a series of actions taken by the U.S. government (such as the CBP withhold release orders) have significantly affected U.S. cotton apparel imports from China. Measured by value, from January to November 2020, only 15.4% of U.S. cotton apparel came from China, compared with 22.2% in 2019 and 28% back in 2017. While China’s total textile and apparel exports to the US dropped by 32% in 2020 (Jan to Nov), China’s cotton textiles and cotton apparel exports to the US went down more sharply by 41.1% and 47.2%, respectively.

Third, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (19.8% YTD in 2020 vs. 16.2% in 2019), ASEAN (32.6% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.2% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.4% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 (Jan to Nov) from a year ago.

Fourth, 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 U.S.-China tariff war. In the first eleven months of 2020, 9.4% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.4% from USMCA members (down from 4.5% in 2019). The limited local textile production capacity and the high production cost are the two notable disadvantages of sourcing from the region.

by Sheng Lu

TAL Apparel in response to COVID-19

About TAL Apparel

TAL Apparel is one of the world’s largest apparel companies, with over 70 years of history.  Owned by Hong-Kong based TAL group, TAL Apparel employs about 26,000 garment workers in 10 factories globally, producing roughly 50 million pieces of apparel each year, including men’s chinos, polo tees, outerwear, and dress shirts. TAL Apparel claims it makes one in six dress shirts sold in the United States, including for well-known U.S. fashion brands such as Brooks Brothers, Bonobos, and LL Bean.

Other than owning factories in Asian countries such as Vietnam, China, Malaysia, Indonesia, and Thailand, TAL Apparel opened its first garment factory in Ethiopia in 2018 – based at the country’s flagship Hawassa Industrial Park. Among the reasons behind the decision is Ethiopia’s duty-free access to the US under the African Growth and Opportunity Act (AGOA), and to Europe under the Everything But Arms (EBA) initiative.

Discussion questions [Anyone is more than welcome to join our online discussions; For FASH455, please address at least two questions in your comment; please also mention the question number in your comment.]

  1. From TAL Apparel’s perspective, what are the major impacts of COVID-19 on the apparel industry, especially regarding sourcing and supply chain management? What are the key challenges apparel companies facing?
  2. How has TAL Apparel responded to COVID-19? What lessons can we learn from their experiences?
  3. From TAL Apparel’s story, how is the big landscape of apparel sourcing changing because of COVID-19?
  4. What long term business decisions apparel companies like TAL Apparel have to make, and what are your recommendations?
  5. Anything else you find interesting/intriguing/surprising/enlightening from the video?

The Impact and Insights of Trade – the 2020 Shakeup & the 2021 Outlook for the Fashion Industry

The panel discussion is part of the 2020 Virtual Apparel and Textile Sourcing Show. Topics covered by the session include:

  • Impact of COVID-19 on US fashion companies’ businesses and sourcing strategies
  • Impact of the 2020 US presidential election on the fashion industry
  • Key US trade policy issues related to the fashion industry 2020-2021
  • Patterns of US apparel sourcing and trade 2020-2021
  • Sourcing from Asia vs. near sourcing from the Western Hemisphere

COVID-19 and U.S. Apparel Imports: Key Trends (Updated: November 2020)

First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. The value of U.S. apparel imports in September 2020 went up by 8.8% from August 2020 (seasonally adjusted), a new record high since March 2020 when COVID-19 broke out in the States. As of September 2020, the volume of U.S. apparel imports has recovered to around 84-85% of the pre-coronavirus level.  This result echoes the trend of U.S. apparel retail sales (NAICS 4481), which also indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports hopefully will last for another 1-2 months.

Data also shows that compared with the 2008 world financial crisis, Covid-19 has caused a more significant drop in the value of U.S. apparel imports. However, it seems the post-Covid recovery process has been more robust than the 2008 financial crisis. Notably, the Auto Regressive Integrated Moving Average (ARIMA) model forecasts that at the current speed of recovery, the value of U.S. apparel imports (seasonally adjusted) could start to enjoy a positive year over year (YoY) growth by February 2021 (or around 11 months after the outbreak of Covid-19 in March 2020). In comparison, when recovering from the 2008 world financial crisis, it took almost 15 months to turn the YoY growth rate from negative to positive.

Second, still, no evidence suggests that U.S. fashion companies are giving up China as one of their essential apparel-sourcing bases. Notably, since May 2020, China had quickly regained its position as the top apparel supplier to the U.S. market. From June to September 2020, China’s market shares have stably stayed at around 27-28% in value and 40-42% in quantity.

According to the media, some sourcing orders are returning to China as China’s competitors in Asia are struggling with more limited production capacity, shortage of raw material and supply chain disruption caused by Covid-19.

CR5 (exclude China) includes Vietnam, Bangladesh, Indonesia, India and Cambodia

That being said, trade data suggests that U.S. fashion companies continue to reduce their “China exposure” overall. For example, both the HHI index and the market concentration ratios (CR3–total market shares of top 3 suppliers and CR5–total market shares of top 5 suppliers) indicate that apparel sourcing orders are gradually moving from China to other Asian countries–it is interesting to see HHI, CR3 and CR5 all suggest a more diversified apparel sourcing base in 2020 (Jan-Sep) than in 2018 and 2019; however, the value of CR5 (exclude China) reached a new record high in 2020 (Jan-Sep).

Third, related to the point above, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.0% YTD in 2020 vs. 16.2% in 2019), ASEAN (33.1% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.4% YTD in 2020 vs.7.1% in 2019), and Cambodia (4.4% YTD in 2020 vs. 3.2% in 2019) all gain additional market shares in 2020 from a year ago.

Fourth, 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 nine months of 2020, only 9.1% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.4% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first nine months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 26% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the major contributing factors.

Just an anecdote–according to some industry insiders, the booming of E-commerce during the pandemic may also possibly explain why “near sourcing” is not reflected in trade data despite its reported growing popularity. Specifically, US fashion retailers would:1) import products from Asia and stock them in the bonded warehouses in Mexico (note: bonded warehouse means dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty). 2) When US consumers place orders, the retailer will ship products directly from these bonded warehouses in Mexico to the final destination. Most importantly, retailers could take advantage of the US de minimis rule (i.e., goods valued at $800 or less could enter the U.S. duty-free one person one day) and avoid paying tariffs– even though these products are counted as imports from Asian countries that do not have a free trade agreement with the United States. In other words, these products are not officially treated as imports from Mexico even though they are shipped from bonded warehouse in Mexico.

by Sheng Lu

COVID-19 and U.S. Apparel Imports: Key Trends (Updated: October 2020)

First, U.S. apparel imports continue to rebound thanks to consumers’ robust demand. The value of U.S. apparel imports in August 2020 went up by 7.6% from July 2020 (seasonally adjusted), a new record high since March 2020 when COVID-19 broke out in the States. As of August 2020, the volume of U.S. apparel imports has recovered to around 80% of the pre-coronavirus level.  This result echoes the trend of U.S. apparel retail sales (NAICS 448), which also indicates a “V-shape” rebound since May 2020. As fashion brands and retailers typically build their inventory for holiday sales (such as back to school, Thanksgiving, and Christmas) from July to October, the upward trend of U.S. apparel imports hopefully will last for another 1-2 months.

Nevertheless, between January and August 2020, the value of U.S. apparel imports decreased by almost 30% year over year, which has been MUCH worse than the performance during the 2008-2009 global financial crisis (down 11.8%).

Second, no evidence suggests that U.S. fashion companies are giving up China as one of their essential apparel-sourcing bases. Notably, since May 2020, China had quickly regained its position as the top apparel supplier to the U.S. market. From June to August 2020, China’s market shares have stably stayed at around 27-28% in value and 40-42% in quantity.

Some industry sources show that “Made in China” enjoys two notable advantages that other apparel supplying countries cannot catch up in the short term. 1) unparalleled production capacity, meaning importers can source almost all products in any quantity from China vs. more limited production capacity (both in terms of variety and volume) in other alternative sourcing destinations. 2) China can mostly produce textile raw material locally vs. many apparel exporting countries still rely heavily on imported yarns and fabrics (supplied by China).

However, non-economic factors, particularly the reported Xinjiang forced labor issue, are complicating fashion companies’ sourcing decisions. Notably, US cotton apparel imports from China year-to-date (YTD) in 2020 (Jan to August) significantly decreased by 54% from a year ago, much higher than the 22% drop in US imports from the rest of the world.  As a result, China’s market share in the US cotton apparel import market sharply declined from 22% in 2019 to only 15.1% in 2020 (Jan-Aug), a record low in the past ten years. This unusual trade pattern suggests that the concerns about social compliance risk are holding US fashion companies back from sourcing cotton apparel products from China. As the forced labor issue continues to evolve and become ever more sensitive and high profile, it is not unlikely that US fashion companies may substantially cut their China sourcing further, even if it is not a preferred choice economically.

Third, despite Covid-19, Asia as a whole remains the single largest source of apparel for the U.S. market. Other than China, Vietnam (20.2% YTD in 2020 vs. 16.2% in 2019), ASEAN (33.6% YTD in 2020 and vs. 27.4% in 2019), Bangladesh (8.6% 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.

Likewise, thanks to a highly integrated regional textile and apparel supply chain, Asian countries all together were able to maintain fairly stable market shares on the world stage over the past decade despite all market disruptions, from the financial crisis, trade war to the wage increase.

Fourth, 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 seven months of 2020, only 8.9% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from USMCA members (down from 4.5% in 2019). Confirming the trend, in the first eight months of 2020, the value of U.S. yarns and fabrics exports to USMCA and CAFTA-DR members also suffered a 28.0% decline from a year ago. The heavy reliance on textile supply from the U.S. (implying more vulnerability to the Covid-19 supply chain disruptions) and the price disadvantage could be among the contributing factors.

Further, industry sources show that the apparel products U.S. fashion companies import from members of USMCA and CAFTA-DR predominantly are tops and bottoms. The lack of production capacity for other product categories significantly limits the growth potential of these countries playing the role as a leading sourcing base.

by Sheng Lu

Textiles and Apparel – Being Responsible Stakeholders

Panelists:

  • Anna Ashton– US-China Business Council (USCBC)
  • Amy Lehr – Center for Strategic and International Studies (CSIS)
  • Nate Herman – American Apparel and Footwear Association (AAFA)
  • John Foote – Baker McKenzie

Related readings

FASH455 Exclusive Interview with Jason Prescott, CEO of Apparel Textile Sourcing Trade Shows

Guest Speaker: Jason Prescott

Jason Prescott founded JP Communications INC in 2005 and rapidly established TopTenWholesale.com and Manufacturer.com as the largest US-based B2B global trade network for manufacturers, retailers, department stores, discounters, importers, wholesalers, buyers and brands.  A decade later, in 2016, he established the Apparel Textile Sourcing trade show platform with the China Chamber of Commerce for Import & Export of Textile & Apparel to connect the global B2B network of over 2 million with manufacturers around the globe via in-person events.  By 2020, the ATS brand has created the fastest-growing trade shows in the industry producing annual events in Miami, Toronto, Montreal, Berlin and virtually.

Jason is active in search marketing models and technology and provides consulting and seminars in around the world for organizations looking to invest in the USA market.  He is the author of two best-selling books, Wholesale 101 and Retail 101, published by McGraw Hill as well as articles on business and technology appearing in B2B Online, Omma, IMediaConnection, CEO Magazine, Entrepreneur Online, and been cited in Inc Magazine, Business Week and Forbes Online.

Moderator: Kendall Keough

Kendall Keough is a recent graduate from the University of Delaware (UD) with a Master of Science in Fashion & Apparel Studies. She also graduated from the UD with a Bachelor’s Science in Fashion Merchandising & Honors in 2019. Kendall was a recipient of the 2018 YMA Fashion Scholarship Fund national case study competition. While studying at UD, she also held several leadership positions, including serving as the President of the Synergy Fashion Group between 2018 and 2019. Kendall is the author of several recent papers addressing the U.S. textile and apparel industry and related trade issues, including: Explore the export performance of textiles and apparel “Made in the USA”: A firm-level analysis. (Journal of the Textile Institute, 2020); US-Kenya trade deal – Here’s what the apparel industry wants (Just-Style, 2020); ‘Made in the USA’ textiles and apparel – Key production and export trends (Just-Style, 2020).

Interview highlights

Kendall: What has motivated you to get involved in the apparel business, especially running the Apparel Textile Sourcing Trade (ATS) Shows, which has grown into one of the most popular and influential sourcing events today?

Jason: We started our company in 2005 w/ our flagship product – www.TopTenWholesale.com – which is a search engine for wholesale suppliers and products.  In 2010 we acquired www.manufacturer.com – a sourcing platform to find global producers and manufacturers.  It would be fair to say that never in our wildest imagination did we think we would be producing some of the world’s top sourcing trade fairs in the apparel and textile industry.  I’d like to say it was a natural evolution but to be frank the opportunity came up over a cup of tea with a very good friend of mine, Mr. Chen Zhirong – Director for the China Chamber of Commerce for Import & Export of Textiles (CCCT) – in Dec 2015.  What started from a cup of tea wound up growing into a trade show company that now produces events 4 cities, 3 countries and 2 continents (Miami, Toronto, Montreal, Berlin).

More than 200 of the world’s top producers of apparel, textiles, accessories, footwear, and personal protective equipment will exhibit virtually at Apparel Textile Sourcing trade shows this fall.  Attendance is always free and the interactive event also specializes in seminars, sessions, workshops and panels from experts in the industries of sourcing, fashion, design and retail. 

Kendall: COVID-19 is the single biggest challenge facing the textile and apparel industry today. From your observation, how has COVID-19 affected textile and apparel companies’ sourcing practices? What will be the medium to the long-term impact of COVID on textile and apparel sourcing?

Jason: The fallout from the pandemic – particularly in the textile and apparel industry – and how it impacts sourcing, has had such a far-reaching magnitude that it’s still very challenging to figure out how sourcing practices will be impacted.  Over the long term, there is no question that this pandemic will speed up near-sourcing, on-shoring, digitization, and real-time production.  The interim has resulted in massive layoffs, geo-political uncertainty and a turbulent political atmosphere that has rattled the cages of just about every sourcing director.  The industry has seen purchase orders defaulted on, behavior in the supply chain that should not be tolerated, and a general lack of accountability.   I also have no question that as we continue to emerge out of the pandemic there will be an advanced focus much more on the global revolution of sustainability, fair labor practices, plus a far-keener eye on the eco-systems in which the textile industry lives and breathes.

Kendall: There have been more heated debates on the future of China as an apparel sourcing base for US fashion companies, especially given the escalating U.S.-China trade war and the COVID-19. What is your view?

Jason: It should be noted that more than a billion dollars of trade in the textile sector in China was lost in export shipments to the USA during the first half of 2019 – primarily due to the trade war.  The pandemic has since crippled exports of textile and apparel – in not just China – but also in every sourcing region on the planet.  While many media outlets and others talk about the demise of China as a producer for textile and apparel that is just not the case.  The Chinese have built an infrastructure, invested billions of dollars in the best technology, and have mastered the art of production over the last 3+ decades.  We must not also forget that much of this infrastructure was built with trillions of dollars by the world’s leading brands, retailers, and governments.  To bail on that would not be prudent.  The Chinese are extremely adaptive and there is no question they have taken the time during the pandemic – and I should also note that they have emerged quicker than anyone else from the pandemic – to invest much more in technology, made-to-order, customization, and enhances on sustainable practices by utilizing more renewables.

Kendall: Many studies suggest that fashion companies continue to actively look for China’s alternatives. Do we have a “Next China” yet– Vietnam, Bangladesh, India, Ethiopia, or somewhere else?

Jason: No we do not have a next China yet.  The production in many regions that have competent supply chains – like Vietnam – are full and at over-capacity.  It should further be noted that a large portion in places like Vietnam are owned in partnerships thru the Chinese.  Simply stated, many of the other regions such as Bangladesh, India, and the AGOA regions lack infrastructure and the decades of experience that the Chinese have. 

Kendall: Some predict that near sourcing rather than global sourcing will become ever more popular as fashion companies are prioritizing speed to market and building a shorter supply chain. Why or why not do you think the shift to near sourcing or reshoring is happening?

Jason: This is correct.  On-demand production, near-sourcing, and the evolution of digitization will of course lead to increased manufacturing domestically.  Neither of these options are yet a solution for the high-volume production which is at the heart of the industry.  I will agree that the continued emergence of micro-brands, and continually evolving shifts in consumer behavior which generally has resulted in ‘disloyalty’ to brands is another factor that makes on-shoring or near-shoring more attractive.

Kendall: Building a more sustainable and socially responsible textile and apparel supply chain is also growing in importance. From interacting with fashion brands and retailers, can you provide us with some updates in this area, such as companies’ best practices, issues they are working on, or the key challenges that remain?

Jason: The circularity of the industry encompassing the producer, the brand, logistics, and the consumer will continue to evolve in their social responsibilities and awareness of sustainable practices engaged in by the brand.  There are great organizations out there like WRAP, TESTEX and Better Buying who are growing and have a much larger voice than what they have had in the past.  Post-pandemic, I believe we will see social responsibility as one of the top priorities with so many millions of people displaces from COVID-19.

Kendall: For our students interested in pursuing a career in the textile and apparel industry, especially related to sourcing, do you have any suggestions?

Jason: The top suggestion I can offer is to pursue experience as you are actively engaged in your studies.  One of the key elements I can advise of is to take the time and learn culture over language.  Having a cultural understanding of the key regions where sourcing occurs will catapult your career and bring significant relationships to the table that you never thought you would have had before.   Also, attend trade shows!  Walking thru international apparel trade shows – like The Apparel Textile Sourcing – will help you immerse yourself with numerous different nationalities and personalities that you would otherwise never have the chance to meet.  Jump on any opportunity you can to go abroad.  Especially to regions in Asia and Latin America.  Most importantly never forget that your credibility in life is everything and maintain the highest pedigree of integrity as possible.

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US-UK Free Trade Agreement: What Does it Mean for the Apparel Industry?

By Victoria Langro (2020 UD Summer Scholar) and Dr. Sheng Lu (advisor)

Key findings:

US-UK bilateral apparel trade

Over the past decade, the US and UK bilateral trade in apparel enjoyed steady growth, reflecting ever closer business ties of fashion companies in the two countries. While US apparel exports still predominantly go to geographically nearby countries such as Mexico and Canada, the UK has emerged to become the single largest export market for “Made in the USA” apparel outside the Western Hemisphere. Similarly, the United States has always been the UK’s single largest export market outside the EU region.

On the other hand, the apparel products that the US and the UK export to each other target different segments of the market. Industry sources indicate that the clothing exported from the US to the UK primarily focuses on the premium market. Garments “Made in the USA” in the UK are mostly carried by premium brands and retailers such as Free People, J. Crew, and Moda Operandi. However, due to a lack of brand power, clothing “Made in the USA” is typically priced 30%-50% lower than similar products locally made in the UK or elsewhere in Western EU, such as France and Italy.

In comparison, approximately 70% of apparel exported from the UK to the US are luxury goods. With a relatively clear-cut market position, luxury and high-end designer UK brands, such as Burberry, Roland Mouret, and Victoria Beckham, can effectively reach out to their target markets.

How Might the US-UK FTA Affect the Bilateral Apparel Trade

According to the released negotiation objectives, both the US and the UK seem to be willing to consider a substantial cut or even a full elimination of the apparel tariff rate as part of the trade deal. Should this happen, fashion companies across the Atlantic could benefit from a proportional reduction of their sourcing cost, resulting in a considerable expansion of the US-UK bilateral apparel trade flows.

On the other hand, to enjoy the preferential duty benefit under a free trade agreement, rules of origin will always be a requirement. Notably, most US trade agreements currently adopt the so-called “yarn-forward” rules of origin. In contrast, most EU-based trade deals adopt a more liberal “fabric-forward” rule.

While it is hard to predict which specific rules of origin the proposed US-UK trade agreement will adopt, it seems the result will have a more significant impact on the US apparel exports to the UK than the other way around. Restrained by the limited domestic supply and high cost, a substantial proportion of US apparel exports contain imported textile raw materials. This means US apparel producers may have to either switch to use more expensive domestic textile inputs or forgo the FTA duty-saving benefits should restrictive rules of origin are adopted. Meanwhile, the UK apparel exports to the US will be less sensitive to the rules of origin in the proposed FTA, as most of these luxury items are already 100% “Made in the UK” to meet customers’ expectations.

Uncertainties associated with the US-UK FTA

The US-UK trade negotiations have to deal with an evolving Brexit. Given the EU’s economic cloud, understandably, some argue that the UK may have to reach a comprehensive trade agreement with the EU before it can consider a trade deal with the US. Additionally, several US domestic politics and policy factors may further slow down the progress of the US-UK trade negotiation, from the US presidential election to the upcoming expiration of the trade promotion authority (TPA).

Further reading: Langro, V., & Lu, S. (2020). US-UK Free Trade Agreement: What Does it Mean for the Apparel Industry? Just-Style.

2020 USFIA Fashion Industry Benchmarking Study Released

The 2021 USFIA Fashion Industry Benchmarking Study is Released

The full report is available HERE

Key findings of this year’s report:

Impact of COVID19 on Fashion Companies’ Businesses

The overwhelming majority of respondents report “economic and business impacts of the coronavirus (COVID-19)” as their top business challenge in 2020. The business difficulties caused by COVID-19 will not go away anytime soon, and U.S. fashion companies have to prepare for a medium to the long-term impact of the pandemic.

COVID-19 has caused severe supply chain disruptions to U.S. fashion companies. The disruptions come from multiple aspects, ranging from a labor shortage, shortages of textile raw materials, and a substantial cost increase in shipping and logistics.

COVID-19 has resulted in a widespread sales decline and order cancellation among U.S. fashion companies. Almost all respondents (96 percent) expect their companies’ sales revenue to decrease in 2020.

As sales drop and business operations are significantly disrupted, not surprisingly, all respondents (100 percent) say they more or less have postponed or canceled sourcing orders. Nearly half of self-identified retailers say the sourcing orders they canceled or postponed go beyond the 2nd quarter of 2020. Another 40 percent expect order cancellation and postponement could extend further to the fourth quarter of 2020 or even beyond. The order cancellation or postponement has affected vendors in China, Bangladesh, and India the most.

Impact of COVID-19 and US-China Trade War on Fashion Companies’ Sourcing

As high as 90 percent of respondents explicitly say, the U.S. Section 301 action against China has increased their company’s sourcing cost in 2020, up from 63 percent last year.

COVID-19 and the trade war are pushing U.S. fashion companies to reduce their “China exposure” further. While “China plus Vietnam plus Many” remains the most popular sourcing model among respondents, around 29 percent of respondents indicate that they source MORE from Vietnam than from China in 2020, up further from 25 percent in 2019.

As U.S. fashion companies are sourcing relatively less from China, they are moving orders mostly to China’s competitors in Asia. All respondents (100 percent) say they have “moved some sourcing orders from China to other Asian suppliers” this year, up from 77 percent in 2019.

However, no clear evidence suggests that U.S. fashion companies are sourcing more from the Western Hemisphere because of COVID-19 and the U.S.-China trade war.

Emerging Sourcing Trends

Sourcing diversification is slowing down, and more U.S. fashion companies are switching to consolidate their existing sourcing base. Close to half of the respondents say they plan to “source from the same number of countries, but work with fewer vendors,” up from 40 percent in last year’s survey.

China most likely will remain a critical sourcing base for U.S. fashion companies. However, non-economic factors could complicate companies’ sourcing decisions. Benefiting from U.S. fashion companies’ reduced sourcing from China, Vietnam and Bangladesh are expected to play a more significant role as primary apparel suppliers for the U.S. market.

Given the supply chain disruptions experienced during the pandemic, U.S. fashion companies are more actively exploring “Made in the USA” sourcing opportunities to improve agility and flexibility and reduce sourcing risks. Around 25 percent of respondents expect to somewhat increase sourcing locally from the U.S. in the next two years, which is the highest level since 2016.

US-Mexico-Canada Trade Agreement (USMCA)

For companies that were already using NAFTA for sourcing, the vast majority (77.8 percent) say they are “ready to achieve any USMCA benefits immediately,” up more than 31 percent from 2019. Even for respondents who were not using NAFTA or sourcing from the region, about half of them this year say they may “consider North American sourcing in the future” and explore the USMCA benefits. Some respondents expressed concerns about the rules of origin changes. These worries seem to concentrate on denim products in particular.

African Growth and Opportunity Act (AGOA)

Close to 37 percent of respondents say they have been sourcing MORE textile and apparel from sub-Saharan Africa (SSA) since the latest AGOA renewal in 2015, a substantial increase from 27 percent in the 2019 survey. More than 40 percent of respondents say AGOA and its “third-country fabric provision” are critical for their sourcing from the SSA region. More than 40 percent of respondents say AGOA and its “third-country fabric provision” are critical for their sourcing from the SSA region.

However, respondents still demonstrate a low level of interest in investing in the SSA region directly. Around 27 percent of respondents say the temporary nature of AGOA and the uncertainty associated with the future of the agreement have discouraged them.

With AGOA’s expiration date quickly approaching, the discussions on the future of the agreement and the prospect of sourcing from SSA begin to intensify. Among the various policy options to consider, “Renew AGOA for another ten years with no major change of its current provisions” and “Replace AGOA with a permanent free trade agreement that requires reciprocal tariff cut and continues to allow the third-country fabric provision” are the most preferred by respondents.

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

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:

Presentation1

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.

USITC Report: U.S. Apparel Sourcing under African Growth and Opportunity Act (AGOA)

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A newly released study by the U.S. International Trade Commission (USITC) suggests that the African Growth Opportunity Act (AGOA) and its “third-country fabric provision” are critical for U.S. apparel sourcing from sub-Saharan Africa (SSA). Specifically:

U.S. apparel imports from SSA grew faster than the world average. During 2016–19, U.S. apparel imports from SSA enjoyed a compound annual growth rate (CAGR) of 11.8 percent (compared with 1.3 percent CAGR of all countries), from $1.0 billion in 2016 to $1.4 billion in 2019. However, SSA overall remained a small apparel supplier to the U.S. market, accounting for only 1.7 percent of the market shares in 2019 (lower than 2.7 percent in 2004, but was a record high since 2015).

U.S. apparel imports from SSA remain uneven across countries. The five SSA countries–Kenya, Lesotho, Madagascar, Mauritius, and Ethiopia altogether accounted for almost 95 percent of all apparel imported from the SSA region under AGOA. The growth of U.S. apparel imports from Ethiopia was particularly fast (86.4% CAGR during 2016-2019), thanks to the country’s industrial parks and its increased use of AGOA benefits. Several global brands such as H&M, Calvin Klein, and Tommy Hilfiger currently source apparel from garment factories located in these industrial parks.

The USITC report suggests that the duty-free preferences awarded under AGOA and the liberal rules of origin available for apparel under the “third-country fabric provision”* are the key competitive advantages of SSA serving as an apparel sourcing destination for U.S. companies. Due to limited yarn and fabric production in SSA, the third-country fabric provision remained critical for SSA exports of apparel to receive duty-free entrance to the United States. Notably, nearly all U.S. imports of apparel from SSA countries entered under AGOA (98 percent). Of these imports, virtually all of them (95.8 percent) used the third-country fabric provision in 2018.

Further, the USITC report used Madagascar as an example to illustrate the significance of AGOA and its third-country fabric provision in particular to SSA countries’ apparel exports to the United States. As noted by USITC:

  • Madagascar was evidenced by the sharp decline in its apparel exports to the U.S. after the country lost its AGOA eligibility in 2009. Without duty-free access to the United States, the average duty rate for U.S. imports of apparel from Madagascar rose to 19.6 percent, and apparel exports to the United States from Madagascar fell from over $211 million in 2009 to only $40 million in 2011.
  • Madagascar’s AGOA benefits were reinstated in 2014. Just in two years, U.S. apparel imports from Madagascar bounced back to one-half of the 2009 level. In 2019, U.S. apparel imports from Madagascar totaled $243 billion, a new record high since 2015.

The USITC report mentioned several factors that are encouraging more U.S. apparel sourcing from SSA. For example:

  • U.S. fashion companies’ sourcing diversification strategy
  • U.S. fashion companies’ rising emphasis on corporate social responsibility (CSR) in sourcing
  • Deepened regional economic integration among SSA countries through regional trade arrangements such as the African Continental Free Trade Area

However, it remains a concern that SSA countries are lack of genuine competitiveness as apparel sourcing destinations. According to the USITC report, SSA countries’ current competitive advantage in apparel “comes solely through the cutting of tariffs on apparel to zero, since the apparel sectors of Bangladesh, Vietnam, and China are more cost-competitive than those of SSA countries. The current competitive advantage that SSA countries have in the apparel sector will decline significantly if AGOA expires in 2025. The uncertainty about AGOA renewal will likely discourage U.S. FDI in the SSA apparel sector.”

Related, as quoted by the USITC report, according to the 2019 Fashion Industry Benchmarking Study, almost half of the surveyed U.S. fashion companies expressed hesitancy about investing in the SSA region due to the temporary nature of AGOA. Moreover, long lead times, lack of infrastructure, and high logistical costs continue to deter apparel retailers from investing in the AGOA region.

*About the African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to US imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen US trade and investment ties with the region.

Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA. Particularly, the “third-country fabric provision” under AGOA allows US apparel imports from certain SSA countries to be qualified for duty-free treatment even if the apparel use yarns and fabrics produced by non-AGOA countries/regions (such as China, South Korea, and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology-intensive textile products.

On 29 June 2015, the Obama Administration signed a new bill to extend the AGOA (including the third-country fabric provision) for another ten years (until 30 September 2025). The new law simplifies the AGOA rules of origin; gives the president the ability to withdraw, suspend or limit benefits (rather than just terminate eligibility) if designated AGOA countries do not comply with the eligibility criteria; adds notification and reporting requirements; and improves transparency and participation in the AGOA review process.

About the “Third-Country Fabric” provision under AGOA

This is a “Special Rule” for lesser-developed SSA countries (LDCs) under AGOA. According to the rule, these SSA LDCs can enjoy duty-free and quota-free access to the U.S. market for apparel made from yarns and fabrics originating from anywhere in the world. In comparison, most U.S. free trade agreements require the more restrictive “yarn-forward” rules of origin.

Related reading: Challenges facing Sub-Saharan Africa (SSA) as an Apparel Sourcing Base