This article tries to evaluate the potential impact of the U.S.-China tariff war on the U.S. textile and apparel (T&A) industry, including manufacturing and related trade activities.
The quantitative evaluation conducted is based on the Global Trade Analysis Project (GTAP) model. Data came from the latest GTAP9 database, which covers trade, employment and production in 57 sectors in 140 countries. In correspondence to the recent development of the U.S.-China tariff war, the analysis focuses on the following three scenarios:
Scenario 1: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, except textiles and apparel
Scenario 2: 10% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel
Scenario 3: 25% punitive tariff + base year tariff rate in 2017 applied to products traded between the U.S. and China, including textiles and apparel
Three findings are of note:
First, the tariff war with China will increase the market price for T&A in the United States and consequentially incentivize more production of T&A “Made in the USA.” As shown in Figure 1, the annual U.S. T&A production will increase when the punitive tariff is imposed on textile and apparel imports from China. The most significant increase will happen in scenario 3 (textile output expands by US$8,829 million and apparel output expands by US$6,044 million) when a 25 percent punitive tariff is imposed and the market price of T&A in the U.S. also correspondingly goes up by nearly 1.5% compared with the base year level in 2017.
Second, the tariff war with China will hurt U.S. textile exports. The results show that the tariff war will increase the production cost of “Made in the USA,” and result in a decline of U.S. textile exports due to reduced price competitiveness. This is the case even in scenario 1 when the tariff war does not target T&A directly, but nevertheless, raises the price of intermediaries for producing textiles in the United States. The results further show that the annual U.S. textile exports will suffer the most significant decline in scenario 3 (down US$1,136 million), especially to China and other Asian countries where U.S. textile products are facing intense competition from local suppliers. In comparison, U.S. textile exports to the Western Hemisphere will suffer a loss as well in the tariff war, but to a much less extent due to the strong supply-chain relationship with the region.
Third, the trade diversion effect of the tariff war will bring in more apparel imports to the U.S. market from Asian suppliers other than China. As shown in the figure above, when the punitive tariff imposed on textile and apparel products, the value of U.S. apparel imports from China will decline ranging from US$4,573 million (10 percent punitive tariff imposed) to US$8,858 million (25 percent punitive tariff imposed) annually compared with the base year level in 2017. This result reflects U.S. apparel importers and retailers’ mounting concerns about sourcing cost in the setting of the tariff war. However, apparently, the tariff war will do little to help U.S. domestic apparel manufacturers reduce the competitive pressure with imports. Particularly, in scenario 3, U.S. apparel imports from suppliers other than China will increase as much as US$10,400 million, worsening the U.S. trade deficit in the apparel sector further.
The UK government on March 13, 2019 released the temporary
rates of customs duty on imports if the country leaves the European Union
with no deal. In the case of no-deal Brexit, these tariff rates will take
effect on March 29, 2019 for up to 12
According to the announced plan, around 87% of UK’s imports by value would be eligible for zero-tariff in the no-deal Brexit scenario.
Specifically for apparel products, 113 out of the total 148 tariff lines (8-digit HS code) in Chapter 61 (Knitted apparel) and 145 out of the total 194 tariff lines (8-digit HS code) in Chapter 62 (Woven apparel) will be duty-free. However, other apparel products will be subject to a Most-Favored-Nation (MFN) tariff rate ranging from 6.5% to 12%.
Meanwhile, the UK will offer preferential tariff duty rates for apparel exports from a few countries/programs, including Chile (zero tariff), EAS countries (zero tariff), Faroe Islands (zero tariff), GSP scheme (reduced tariff rate), Israel (zero tariff), Least Developed Countries (LDC) (zero tariff), Palestinian Authority (zero tariff), and Switzerland (zero tariff).
On the other hand, the EU Commission said it would apply the Most-Favored-Nation (MFN) tariff rates on UK’s products in the no-deal Brexit scenario rather than reciprocate.
Last week in FASH455, we discussed the unique critical role played by textile and apparel trade in generating economic growth in many developing countries. The developed countries also use trade policy tools, such as trade preference programs, to encourage the least developed countries (LDCs) making and exporting more apparel. However, a debate on these trade programs is that they have done little to improve the genuine competitiveness of LDCs’ apparel exports in the world marketplace, but instead have made LDCs rely heavily on these trade programs to continue their apparel exports. Here is one more example:
With growing concerns about “the deterioration of democracy, respect for human rights and the rule of law in Cambodia”, in a statement made on February 12, 2019, the European Union says it has started the process that could lead to a temporary suspension of Cambodia’s eligibility for EU’s Everything But Arms (EBA) program. Specifically, the EU process will include the following three stages:
Stage 1: six
months of intensive monitoring and engagement with the Cambodian government;
Stage 2: another three months for the EU to produce a
report based on the findings in stage 1
Stage 3: after
a total of twelve months in stages 1
& 2, the EU Commission will conclude the procedure with a final decision on
whether or not to withdraw tariff preferences; it is also at this stage that
the Commission will decide the scope and duration of the withdrawal. Any
withdrawal would come into effect after a further six-month period.
However, the EU
Commission also stressed that launching the temporary withdrawal procedure does
not entail an immediate removal of Cambodia’s preferential access to the EU
market, which “would be the option of last resort.”
Developed in 2001, the EBA program establishes duty-free and quota-free
treatment for all Least Developed Countries (LDCs) in the EU market. EBA includes
almost all industries other than arms and armaments. As of February 2019, there
EBA beneficiary countries.
The EBA program has benefited the apparel sector in particular given clothing accounts for the lion’s share in many LDCs’ total merchandise exports. Because of the preferential duty benefits provided by EBA, many LDCs can compete with other competitive apparel powerhouses such as China. Notably, the EBA program also adopts the “cut and sew” rules of origin for apparel, which is more general than the “double transformation” rules of origin typically required by EU free trade agreement and trade preference programs. Under the “cut and sew” rule, Cambodia’s apparel exports to the EU can enjoy the import duty-free treatment while using yarns and fabrics sourced from anywhere in the world.
Cambodia is a major apparel supplier for the EU market, accounting for approximately 4% of EU’s
total apparel imports in 2017. Exporting
apparel to EU through the EBA program is also of particular importance to
Cambodia economically. In 2016, the apparel sector created over 500,000
jobs in Cambodia, of whom 86% were female, working in 556 registered factories.
According to Eurostat, of EU’s €4.9bn imports from Cambodia in 2017, around 74.9% were apparel (HS chapters 61 and
62). Meanwhile, of EU’s €3.7bn apparel imports from Cambodia in 2017, as high
as 96.6% claimed the EBA benefits. Understandably,
losing the EBA eligibility could hurt Cambodia’s apparel exports to the EU significantly.
#1 President Trump has been proposing many tariffs on imports from foreign countries such as China. Do you think that these high tariffs will actually drive more production into North American manufacturers and promote the US economy, or will it hurt the U.S. and inflate the costs of U.S. production? Why?
#2 In class we discussed that trade creates winners and
losers. So will President Trump’s high tariffs create winners and losers too?
Who are they? Also, why should or should not government use trade policy to pick
up winners and losers in international trade?
#3 What are some possible solutions to the trade deficit
between the United States and China other than high tariffs? Why or why not trade
deficit is a problem to worry about?
#4 If Trump is able to impose more tariffs and even the
playing field with China, will a new “China” arise from a rivaling country,
which can continue to pressure US manufacturers? Why?
#5 Why does Columbia refuse to bring production to the US,
as Trump would like?
#6 Columbia has been designing products to specifically get
around the tariffs set by President Trump which creates trade loopholes for
their company. Do you think that it is ethical for them to do this? Why or why
#7 If President Trump keeps raising tariffs and wants goods
to be made domestically, how will other countries respond to this with all of
their excess goods?
#8 Why would President Trump continue to advocate and push
for this tariff even if an overwhelming amount if businesses are hurt by it,
finding ways around it, or getting excused from its implications? Do the pros
outweigh the cons?
[For FASH455: 1)
Please mention the question number in your comments; 2) Please address at least
TWO questions in your comments]
While apparel products are not subject to the Section 301 tariff yet, the trade action nevertheless has created huge market uncertainties for U.S. fashion brands and apparel retailers. Here is how the monthly trade flow of U.S. apparel imports has reflected the impacts of the U.S.-China tariff war:
First, U.S. companies did NOT stop importing from China. Seasonally adjusted data shows that between January and September 2018, the value of U.S. apparel imports from China decreased by 0.6 percent in volume and 0.05 percent in value year on year. Despite the decline, China remained the No.1 apparel supplier for the U.S. market in the first nine months of 2018, accounting for 32.3 percent market share in value and 41.3 percent shares in quantity, only marginally dropped by 1 and 0.7 percentage points from a year earlier respectively .
Second, apparel “Made in China” are becoming even cheaper. Notably, the average unit price of U.S. apparel imports from China dropped from $2.5/SME in 2016,$2.38/SME in 2017 to $2.36/SME in the first nine months of 2018. On the one hand, this result suggests that cost concern is not the most influential factor that drives U.S. companies to source less from China. However, it is also likely that Chinese exporters are intentionally reducing their price to keep their orders and overcome the challenges caused by the Section 301.
Third, there is no perfect replacement for “Made in China”. In response to the market uncertainty created by the Section 301 trade action, U.S. apparel importers are diversifying their sourcing base. That being said, it is difficult to identify a single largest beneficiary–notably, the market shares of apparel exports from Vietnam, Bangladesh, NAFTA, and CAFTA regions only marginally increased in the first nine months of 2018 compared with a year ago.
Additionally, it remains unclear whether the section 301 trade action has benefited U.S. textile and apparel manufacturing. Data shows that in the first ten months of 2018, the production index (2012=100) of textile manufacturing in the United States slightly increased from 92.8 in 2017to 94.3. However, over the same period, the index of apparel manufacturing decreased from 73.6 to 72.4.
Looking ahead, the volume of US textile and apparel imports from China is likely to increase in the short run since U.S. importers are eager to complete their sourcing orders before the new tariff hit. Usually, companies place sourcing orders several months ahead of the selling season. However, it will be interesting to see if the trade data in the first half of 2019 will reveal the negative impact of the Section 301 action on China’s apparel exports to the U.S. market.