For FASH455: Please feel free to share any thoughts or propose discussion questions based on the three short videos above.
The following findings were based on an analysis of trade volume and tariff data at the 6-digit HTS code level.
#1 Amid COVID-19, shipping crisis, and US-China tariff war, US fashion brands and retailers demonstrate a new round of interest in expanding “near-sourcing” from member countries of the US-Mexico-Canada Trade Agreement (USMCA, previously NAFTA) and Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).
Data shows that 15.2% of US apparel imports came from USMCA and CAFTA-DR members YTD in 2021 (January-August), higher than 13.7% in 2020 and about 14.7% before the pandemic (2018-2019). Notably, CAFTA-DR members’ market shares increased to 11% in 2021 (January to Aug) from 9.6% in 2020. The value of US apparel imports from CAFTA-DR also enjoyed a 54% growth in 2021 (January—Aug) from a year ago, faster than 25% of the world’s average.
#2 Sourcing apparel from USCMA and CAFTA-DR members helps US fashion brands and retailers save around $1.6-1.7 billion tariff duties annually. (note: the estimation considers the value of US apparel imports from USMCA and CAFTA-DR members at the 6-digit HTS code level and the applied MFN tariff rates for these products; we didn’t consider the additional Section 301 tariffs US companies paid for imports from China). Official trade statistics also show that measured by value, about 73% of US apparel imports under free trade agreements came through USMCA (25%) and CAFTA-DR (48%) from 2019 to 2020.
#3 US apparel imports from USMCA and CAFTA-DR members do NOT necessarily focus on items subject to a high tariff rate. Measured at the 6-digit HS code level, apparel items subject to a high tariff rate (i.e., applied MFN tariff rate >17%) only accounted for about 8-9% of US apparel imports from USMCA members and 7-8% imports from CAFTA-DR members. In comparison, even having to pay a significant amount of import duties, around 17% of US apparel imports from Vietnam and 10% of imports from China were subject to a high tariff rate (see table below).
The phenomenon suggests that USCMA and CAFTA-DR members still have limited production capacity for many man-made fibers (MMF) clothing categories (such as jackets, swimwear, dresses, and suits), typically facing a higher tariff rate. This result also implies that expanding production capacity and diversifying the export product structure could make USMCA and CAFTA-DR more attractive sourcing destinations.
#4 US apparel imports from USMCA and CAFTA-DR members tend to focus on large-volume items subject to a medium tariff rate. Specifically, from 2017 to 2021 (Jan-Aug), ten products (at the 6-digit HTS code level) typically contributed around half of the US tariff revenues collected from apparel items (HS chapters 61-62). However, the average applied MFN tariff rates for these items were only about 13%. Meanwhile, these top tariff-revenue-contributing apparel items accounted for about 50% of US apparel imports from USMCA members and nearly 64%-69% of imports from CAFTA-DR members.
Likewise, the top ten products (at the 6-digit HTS code level) typically accounted for 65%-68% of US apparel imports from USMCA members and nearly 73-75% of US apparel imports from CAFTA-DR members. These products also had a medium average applied MFN rate at 11-12% for USMCA and 12-13% in the case of CAFTA-DR.
Given the duty-saving incentives, expanding “near-sourcing” from USMCA and CAFTA-DR members could prioritize these large-volume apparel items with a medium tariff rate in short to medium terms. However, in the long run, a shortcoming of this strategy is that many such items are basic fashion clothing that primarily competes on price (such as T-shirts and trousers) and cannot leverage the unique competitive edge of near-sourcing (such as speed to market). When the US reaches new free trade agreements, particularly those involving leading apparel-producing countries in Asia, it could offset the tariff advantages enjoyed by USMCA and CAFTA-DR members and quickly result in trade diversion.
by Sheng Lu
#1: As of June 2021, US textile production had resumed about 98.8% of its production capacity at the pre-COVID level. Based on the readings, why or why not do you think the industry is already “out of the woods”? How to understand the impact of COVID-19 on the international competitiveness of US textile production?
#2: To which extent do you think the state of the US textile and apparel industry and its performance during the pandemic challenge the conclusions of the classic trade and economic development theories we learned in the class (e.g., comparative advantage, factor proportion, the international division of labor, and stage of development theories)? Do you find any trade or production patterns that existing theories cannot fully explain?
#3 Many US fashion companies’ strategies to “consolidate existing sourcing base and strengthen the relationship with key vendors” during the pandemic. What is your evaluation of this strategy—is it a short-term reaction toward COVID-19 or a long-term trend likely to stay? What does this strategy mean for vendors in the apparel supplying countries?
#4: What are the notable changes in fashion companies’ sourcing criteria during the pandemic? How to explain such changes? Who are the winners and losers? Why?
#5: It is of concern that sustainability and social responsibility become a lower priority for the apparel industry during the pandemic, given the unprecedented operational and financial challenges companies face. What is your assessment based on the readings?
#6: What is your vision for the US textile and apparel industry in the post-COVID world? What are the key issues/questions/development trends we shall watch?
(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question number (#) in your reply)
About Victoria Langro
Victoria Langro is an Honors Marketing & Operations Management Majors and Fashion Management Minor (class of 2022). She is also a 2020 UD Summer Scholar. In summer 2021, Victoria worked with Tapestry, which owns Coach, as a global trade compliance intern.
Victoria is the author of several publications on apparel trade and sourcing, including US-UK Free Trade Agreement: What Does it Mean for the Apparel Industry? and How Has COVID-19 Affected Apparel Exports from China, Vietnam, and Bangladesh?
About the seminar: A look at apparel sourcing trends and the impact of trade policy decisions on a successful sourcing strategy.
- Julie Hughes, President, US Fashion Industry Association (USFIA)
- Dr. Sheng Lu, Associate Professor, Fashion and Apparel Studies, University of Delaware
- Julie Hughes, President, United States Fashion Industry Association
- Rich Harper, Director of Government Affairs, Outdoor Industry Association
- Dr. Sheng Lu, Associate Professor, Fashion and Apparel Studies, University of Delaware
- Discussion: Top US trade policy issues in 2021 (beginning-37 min)
- Presentation: Latest US apparel sourcing trends (38 min—55 min)
First, the shipping crisis and new wave of COVID cases start to affect US apparel imports negatively. While US consumers’ demand for clothing overall remains strong, for the second month in a row, the value of US apparel imports (seasonally adjusted) in July 2021 decreased by 5.5% from a month ago and down 9.7% from May to June. The absolute value of US apparel imports year to date (YTD) in 2021 (January—July) was 25.3% higher than in 2020 and around 87% of the pre-COVID level (benchmark: January-July, 2019). However, the year-over-year growth in July 2021 was only 15.4%, compared with 60.0% in May 2021 and 29.1% in June 2021. Overall, the results remind us that the market environment is far from stable yet as the COVID situation in the US and other parts of the world continues to evolve.
Second, Asian countries lost market shares as some leading apparel supplying countries, including Vietnam and Bangladesh, struggled with new COVID lockdowns. While Asia as a whole remains the single largest apparel sourcing base for US companies, Asian countries’ market shares fell from 74.2% in 2020 to 71.3% in July 2021, the lowest since 2010. The new COVID lockdowns in Vietnam and Bangladesh, the No. 2 and No. 3 top suppliers for the US market, post significant challenges to US fashion companies trying to build inventory for the upcoming holiday season. Notably, US companies source many high-volume products from these two countries, and there is a lack of alternative sourcing destinations in the short run.
Third, US companies continue to treat China as an essential sourcing base during the current challenging time. However, there is no clear sign that companies are reversing their long-term strategy of reducing “China exposure.” China stays the largest supplier for the US market in July 2021, accounting for 41.3% of total US apparel imports in quantity and 26.0% in value. The export product diversification index also suggests that China supplied the most variety of products to the US market. US apparel imports from Bangladesh, Mexico, and CAFTA-DR members are more concentrated on specific product categories. In other words, should China were under lockdowns, the negative impacts on US companies’ inventory management could be even worse.
Nevertheless, the HHI index and market concentration ratios (CR3 and CR5) calculated based on the latest data suggest that US fashion companies continue to move their apparel sourcing orders from China to other Asian countries overall. For example, only 14.7% of US cotton apparel imports came from China in 2021 (January—July), a new record low in the past ten years. Further, as US apparel imports from China typically peak from June to September because of seasonal factors, China’s market shares are likely to drop in the next few months. Additionally, the fundamental concerns about sourcing from China are NOT gone. On the contrary, new US actions against alleged forced labor in Xinjiang are likely in the coming months and affect imports from China beyond cotton products.
Fourth, US apparel sourcing from the Western Hemisphere, especially CAFTA-DR members, gains new momentum. Specifically, 18.1% of US apparel imports came from the Western Hemisphere YTD in 2021 (January-July), higher than 16.1% in 2020 and 17.1% before the pandemic. Notably, CAFTA-DR members’ market shares increased to 11.2% in 2021 (January to July) from 9.6% in 2020. The value of US apparel imports from CAFTA-DR also enjoyed a 58.4% growth in 2021 (January—July) from a year ago, one of the highest among all sourcing destinations. The imports from El Salvador (up 75.2%), Honduras (up 74.6%), Dominican Republic (45.1%), and Guatemala (40.6%) had grown particularly fast so far in 2021.
Meanwhile, US apparel imports from USMCA members stayed stable (i.e., no significant change in market shares). CAFTA-DR and USMCA members currently account for around 60% and 25% of US apparel imports from the Western Hemisphere. They are also the single largest export market for US textile products (about 70%).
Fifth, US apparel imports start to see a notable price increase. While an across-the-board price increase was not a big concern at the beginning of 2021, the increase has become more noticeable since June 2021. For example, of the top 20 US apparel imports (HS chapters 61-62) at the 6-digit HS code level based on import value, the price of thirteen products increased from May to June 2021. The price increase at the country level is even more significant. From May to July 2021, the average unit price of US apparel imports from leading sources all went up substantially, including China (7%), Vietnam (13%), Bangladesh (13.9%), and India (15.6%).
As almost everything is becoming more expensive, from raw material, shipping to labor, the August and September trade data (to be released in October and November) could suggest an even more significant price increase.
by Sheng Lu
According to the media, US footwear retailers face a new round of supply chain disruptions as Vietnam, one of the leading supplying countries, is under COVID lockdown. Industry sources say the country-wide lockdown measures in Vietnam could last until mid-September. So, what does Vietnam’s lockdown mean for US footwear sourcing?
First, footwear sourcing is much less diversified than apparel. As manufacturing footwear both requires specialized machines and can be labor-intensive, over 80% of US footwear imports came from three countries only, namely China, Vietnam, and Indonesia. This sourcing pattern is very different from apparel products, for which US companies have far more choices. Other than the top three, US also imports some high-end footwear products from Italy.
Second, while China remains No.1, Vietnam has quickly become the second-largest footwear supplier for the US market. Vietnam’s market shares (by value) reached a new record high of 32.9% in the first six months of 2021, up from 20% in 2017. Especially since the US Section 301 action began to affect footwear imports from China, US retailers have increasingly moved sourcing orders from China to Vietnam to mitigate trade war’s negative impacts [Note: most footwear products are covered by Tranche 4A].
As of June 2021, top US retailers that carry footwear “Made in Vietnam” include Puma, Nike, UGG, Vans, and New Balance.
Third, US retailers source from Vietnam primarily for volume items targeting the mass market. Industry sources show that from Aug 2020 to Aug 2021, sneakers/trainer shoes “Made in Vietnam” on average were priced 30%+ cheaper than those “Made in China” in the US retail market.
Meanwhile, Vietnam still lags far behind China in terms of the variety of products it makes. For example, industry sources show that from Aug 2020 to Aug 2021, US retailers imported around 110K different types of footwear (at the SKU level) from China, but only 13K from Vietnam.
Overall, Vietnam’s COVID lockdown will primarily affect medium to lower-priced volume products carried by US footwear retailers. However, the lockdown’s impacts on retailers’ sourcing portfolio and product availability in the market could be modest. In other words, US consumers may still find many footwear products to choose from in the store but with a higher price tag. Notably, from June 2020 to July 2021, the US retail price for footwear went up by over 7.4% already.
Related reading: Delta Variant Outbreaks in Sparsely Vaccinated Asian Countries Disrupt Production (WSJ)
The textile and apparel industry plays a significant role in Myanmar’s economy, particularly the export sector. Data from UNComtrade shows that textile and apparel accounted for nearly 69% of Myanmar’s total exports of manufactured goods in 2020, a substantial increase from only 27% in 2011. Data from the International Labor Organization (ILO) also indicates that the textile and industry (ISIC 17 & 18) employed more than 1.1 million workers in Myanmar in 2019, up from 0.69 million in 2015. Most garment workers in Myanmar are women today (around 87%).
Since the United States lifted the import ban on Myanmar and the EU reinstated the Everything But Arms (EBA) trade preferences in 2013, Myanmar was one of the most popular emerging apparel sourcing bases among fashion companies. From 2020 to July 2021, some of the top fashion brands that carry “Made in Myanmar” apparel items include United Colors of Benetton, Next, Only, H&M, Guess, and Jack & Jones.
Thanks to foreign investment (note: 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. Here is an example). This is different from many other apparel-exporting countries like Bangladesh, Vietnam, and Cambodia, mostly exporting low-cost tops and bottoms.
However, the latest trade data shows that Myanmar’s military coup that broke out in early 2021 had hurt the country’s apparel exports significantly. According to the US International Trade Commission (USITC), even though the total US apparel imports enjoyed a robust recovery in the first half of 2021 (up nearly 27%), the value of US apparel (HTS chapters 61 and 62) imports from Myanmar dropped by 0.4%. Almost ALL Myanmar’s top apparel exports to the US suffered a substantial decline or much slower growth in 2021 than the trend BEFORE the military coup (see the Table above). As US fashion companies switch sourcing orders from Myanmar to other suppliers, Myanmar’s market shares fell from 0.5% in 2020 to only 0.3% in the first half of 2021.
Highly consistent with the trade data, according to the 2021 Fashion Industry Benchmarking Study, many surveyed US fashion companies expressed concerns about the military coup in Myanmar and the rising labor and social compliance risks when sourcing from the country. Some respondents explicitly say they are leaving because of the current situation. “(We) have terminated sourcing from Myanmar due to instability.” says one respondent. Another adds, “We had orders in Myanmar that have already been moved to Cambodia. We are unlikely to place orders until the current situation is resolved.”
In another recent 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 today. In other words, the reputation risks matter for sourcing.
Unfortunately, the situation could get worse. The international community, including the US and the EU, is considering new sanctions against Myanmar, including suspending Myanmmar’s trade-preference program eligibility.
Designated as a “least developed country” (LDC) by the World Trade Organization, Myanmar’s apparel exports enjoy duty-free market access in the EU, Japan, and South Korea. These countries also, in general, offer very liberal “single transformation” (or commonly known as cut and sew) rules of origin for qualifying apparel made in Myanmar. This explains why Myanmar’s apparel exports mostly go to the EU (56%), Japan, and South Korea (around 30%).
The United States is another important export market for Myanmar, accounting for 7% of the country’s total apparel exports in 2020. As a beneficiary of the US Generalized System of Preferences (GSP) program, Myanmar’s luggage exports enjoy duty-free benefits in the US market. However, the US GSP program excludes textile and apparel products, meaning Myanmar’s apparel exports to the US still are subject to the regular Most-Favored-Nation (MFN) tariff rate at around 14.3% on average in 2020.
The Office of the US Trade Representative (USTR) already hinted that even if US Congress renews the GSP program, which expired on 31 December 2020, the US government likely will suspend Myanmar’s GSP eligibility because of the military coup in the country. Likewise, in February 2021, the European Union suspended its support for development projects in Myanmar to avoid providing financial assistance to the military after the coup. Should Myanmar lose the EU’s Everything But Arms (EBA) program eligibility, its export-oriented garment sector and millions of garment workers could be among the biggest losers.
Further, given Myanmar’s highly concentrated apparel export markets and the pandemic, it will be challenging for Myanmar’s garment producers to find alternative apparel export markets in a relatively short period. For example, although China is recognized as one of the world’s largest and fastest-growing emerging import markets, only 1.4% of Myanmar’s apparel exports went to China in 2020.
by Sheng Lu
Further reading: Lu, Sheng (2021). A snapshot of the Myanmar apparel and exports industry in 2021. Just-Style.
The prospect of China as a textile and apparel sourcing base for US fashion companies is becoming ever more intriguing. While China remains the top textile and apparel supplier to the US market, US fashion companies have been actively seeking China’s alternatives due to concerns ranging from rising wages, trade wars to perceived supply chain risks.
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 326 factories worldwide to make these apparel items and related textile raw materials. We conducted a statistical analysis of these factories, focusing on exploring their geographic locations, production features, and related factors. The results help us gain new insights into VF Corporation’s supply chain strategy and offer a unique firm-level perspective to understand China’s outlook as a textile and apparel sourcing base for US fashion companies. Specifically:
First, China remains the single largest sourcing base across VF Corporation’s entire textile and apparel supply chain. Specifically, as many as 113 (or 35%) of the total 326 factories used by VF Corporation are China-based, far exceeding any other country or region. Besides China, VF Corporation sourced products from the US (42), Taiwan (31), South Korea (16), Mexico (13), Honduras (12), Vietnam (11), Indonesia (8), as well as a few EU countries, such as Germany, Czech Republic, and France.
Notably, thanks to its unparalleled production capacity, China also offered the most variety of textiles and apparel among all suppliers. Chinese factories supplied products ranging from chemicals, yarns, fibers, trims, threads, labels, packing materials to finished garments. In comparison, most other countries or regions serve a narrower role in VF Corporation’s supply chain. For example, 65% of US-based factories supplied yarns, threads, trims, and fabrics; 80% of Taiwan-based factories supplied trims, fabrics, and zippers; and VF Corporation used most factories from Vietnam, Mexico, Honduras, and Indonesia to cut and sew garments only.
Second, VF Corporation is more likely to source from China when a higher percentage of the production processes across the apparel supply chain happens in Asia. For example, VF did not use any Chinese textile and apparel factory for its Williamson Dickies’s Original 874® Work Pant. Instead, Williamson Dickies’s supply chain was primarily based in the Western Hemisphere, involving the US (yarns, trims, and fabric suppliers), Mexico (fabric suppliers and garment manufacturers), Honduras (garment manufacturers), and Nicaragua (garment manufacturers).
In comparison, VF used China-made textiles for Napapijri’s Parka Coat Celsius. Nearly 83% of this product’s production processes also happened in the Asia region, such as Taiwan (fabrics, zippers, plastic suppliers), Hong Kong (trim suppliers), and Vietnam (garment manufacturers). This pattern reflects China’s deep involvement and central role in the Asia-based regional textile and apparel production network. We may also expect such an Asia-based regional supply chain to become more economically integrated and efficient after implementing the Regional Comprehensive and Economic Partnership (RCEP) and other regional trade facilitation initiatives in the next few years.
Third, reflecting the evolving nature of China’s textile and apparel industry, the result shows that VF Corporation is more likely to use China as a supplier of textile intermediaries than the finished garment. Due to various reasons, from the US Section 301 tariffs to the wage increases, China already plays a less significant role as a garment supplier for VF Corporation, accounting for just around 10% of the company’s tier 1 suppliers. This result is highly consistent with the official trade statistics—measured by value, only 23.7% of US apparel imports came from China in 2020, a new record low over the past decade.
Fourth, interesting enough, the results indicate that when an apparel item involves more production stages or needs a greater variety of inputs, it will reduce VF Corporation’s likelihood of sourcing from China. For example, the supply chain of Icebreaker’s Men’s Merino 200 Oasis Long Sleeve Crewe included five different processes (e.g., wool fiber, wool yarn, and finished garments). VF Corporation used around 21 various factories and facilities across the supply chain, of which 57.1% were China-based. In comparison, North Face’s Women’s Denali 2 Jacket included around 21 different processes (e.g., polyester yarn, nylon yarn, tape, zipper, trim, polyester interlining, thread, eyelet, label, and finished products). The supply chain included around 24 various factories and facilities, of which only 16.7% were China-based. One possible contributing factor behind this phenomenon is the cost of moving intermediaries across China’s borders. Sourcing from China seems to be disadvantaged by the relatively high trade barriers and a lack of free trade agreements with key trading partners, especially when some components in the supply chain need to come from outside the Asia region, such as the Western Hemisphere and the EU.
Additionally, NO clear evidence suggests that pricing and environmental and social compliance significantly affect VF Corporation’s decision to source from China. For example, the apparel items using either China-made textile raw material or cut and sew in China had a wide price range in the retail market, from as little as $26 to as much as $740. The retail price of those apparel cut and sew in China ranged from $56 to $86, which was neither exceptionally high nor low (i.e., no particular pattern).
Meanwhile, according to VF Corporation, around 61.9% of its China-based factories across the apparel supply chain had received at least one type of “environmental & chemical management certification.” This record was on par with non-Chinese factories (64.8%). Likewise, around 29.0% of China-based tier 1 & tier 2 factories had received one type of “Health, Safety and Social Responsibility Certification(s),” similar to 22.5% of non-Chinese factories. Overall, how US fashion companies like VF Corporation factored in pricing, environmental, and social compliance in their sourcing decisions need to be explored further.
By Sheng Lu
The study will be presented at the 2021 ITAA-KSCT Joint Symposium in November 2021
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 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.
Speaker: Julia Hughes, President, United States Fashion Industry Association (USFIA)
- 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)
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
The article is available HERE (need Just-Style subscription)
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
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.
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
Speaker: Linda Ollmann, Director – Sourcing Operations, ModCloth
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)
#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)
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.
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.
#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)
#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?
- 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.
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
- Myanmar’s Garment Factories Suffer One-Two Punch of Covid and Coup (Wall Street Journal)
- Myanmar coup clouds future of country’s crucial garment industry (Nikkei Asia Review)
- 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.
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
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
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.]
- 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?
- How has TAL Apparel responded to COVID-19? What lessons can we learn from their experiences?
- From TAL Apparel’s story, how is the big landscape of apparel sourcing changing because of COVID-19?
- What long term business decisions apparel companies like TAL Apparel have to make, and what are your recommendations?
- Anything else you find interesting/intriguing/surprising/enlightening from the video?