State of the U.S. Textile and Apparel Industry and Companies’ Sourcing Strategy—Discussion Questions from FASH455

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#1 How is international trade associated with the prosperity of the U.S. textile and apparel industry today?

#2 Can trade policy bring textile and apparel manufacturing back to the United States? If so, how?

#3 The Trump Administration has decided to impose additional import tariffs to protect U.S. steel and aluminum production in the name of “national security.” Should U.S. textile mills and apparel manufacturers ask for similar trade protection too? Why or why not?

#4 The U.S. textile industry seems to be doing quite well— since 2009 its total value of output has risen 11%. However, why do you think the apparel factories in Los Angeles are struggling?

#5 Most U.S. apparel companies have already shifted their businesses to non-manufacturing activities such as design, branding, sourcing and retailing. Is it still meaningful to give so much attention to apparel manufacturing in the U.S.?

#6 According to the readings, the increasing minimum wage is a critical factor behind the closure of many garment factories in LA. Does it imply that we have to choose between paying garment workers poorly and keeping the factory open?

#7 Assume you are a sourcing manager for a major US fashion brand, how would you rank the following regarding importance when determining a sourcing destination: Speed to Market, Sourcing Cost, Risk of Compliance?  Why would you rank them as such?

#8 Why do you think U.S. fashion brands and apparel retailers are sticking with sourcing from China, when there are less expensive products in other countries, such as Bangladesh and Vietnam?

#9 According to the study, some apparel retailers source from more than 10 or even 20 different countries or regions. What are the benefits of adopting such a diversified sourcing base? Is it necessary?

(Welcome to our online discussion. Please mention the question # in your reply)

Outlook 2018: Apparel Industry Issues in the Year Ahead

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In January 2018, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2018–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. All suggestions and comments are most welcome!

1. What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2018, and why?

One of the biggest opportunities facing the apparel industry in 2018 could be the faster growth of the world economy. According to the International Monetary Fund (IMF), the global growth forecast for 2018 is expected to reach 3.7 percent, about 0.1 percent points higher than 2017 and 0.6 percent points higher than 2016. Notably, the upward economic growth will be broad-based, including the United States, the Euro area, Japan, China, emerging Europe and Russia. Hopefully, the improved growth of the world economy will translate into increased consumer demand for clothing in 2018.

Nevertheless, from the macroeconomic perspective, oversupply will remain a significant challenge facing the apparel industry in 2018. Data from the World Bank and the World Trade Organization (WTO) shows that, while the world population increased by 21.6 percent between 2000 and 2016, the value of clothing exports (inflation-adjusted) surged by 123.5 percent over the same period. Similarly, between 2000 and 2016, the total U.S. population increased by 14.5 percent and the GDP per capita increased by 22.2 percent, but the supply of apparel to the U.S. retail market surged by over 67.8 percent during the same time frame. The problem of oversupply is the root of many challenges faced by apparel companies today, from the intense market competition, pressure of controlling production and sourcing cost, struggling with excessive inventory and deep discounts to balancing sustainability and business growth.

2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2018, and what can apparel firms and their suppliers do to stay ahead?

The 2017 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA) earlier this year, provides some interesting insights into companies’ latest sourcing strategies and trends. Based on a survey of 34 executives at the leading U.S. fashion companies, we find that:

First, most surveyed companies continue to maintain a relatively diversified sourcing base, with 57.6 percent currently sourcing from 10+ different countries or regions, up from 51.8 percent last year. Larger companies, in general, continue to have a more diversified sourcing base than smaller companies. Further, around 54 percent of respondents expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; over 60 percent of those expecting to diversify currently source from more than 10 different countries or regions already. Given the uncertainties in the market and the regulatory environment (such as the Trump Administration’s trade policy agenda), companies may use diversification to mitigate potential market risks and supply chain disruptions due to protectionism.

Second, although U.S. fashion companies continue to seek alternatives to “Made in China” actively, China’s position as top sourcing destination remains unshakable. Many respondents attribute China’s competitiveness to its enormous manufacturing capacity and overall supply chain efficiency. Meanwhile, it is interesting to note that the most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many” (i.e. China typically accounts for 30-50 percent of total sourcing value or volume, 11-30 percent for Vietnam and less than 10 percent for other sourcing destinations). I think this sourcing model will likely to continue in 2018.

Third, social responsibility and sustainability continue to grow in importance in sourcing decisions. In the study, we find that nearly 90 percent of respondents give more weight to sustainability when choosing where to source now than in the past. Around 90 percent of respondents also say they map their supply chains, i.e., keeping records of name, location, and function of suppliers. Notably, more than half of respondents track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e., supplier’s suppliers. However, the result also suggests that a more diversified sourcing base makes it more difficult to monitor supply chains closely. Making the apparel supply chain more socially responsible, sustainable and transparent will continue to be a hot topic in 2018.

3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?

I assume many experts will suggest what apparel firms should change to stay competitive into the future. However, the question in my mind is what should companies keep doing regardless of the external business environment? First, I think companies should always strive to understand and impress consumers and control their supply chains. Despite the growing popularity of e-commerce and the adoption of transformative new technologies, the fundamental nature of apparel as a buyer-driven business will remain the same. Second, companies should always leverage their resources and stay “unique,” no matter it means offering differentiated products or value-added services, maintaining exclusive distribution channels or keeping the leadership position in a particular niche market. Third, apparel firms should always follow the principle of “comparative advantage” and smartly define the scope of their core business functions instead of trying to do everything. Additionally, winners will always be those companies that can take advantage of the mega-development trends of the industry and be willing to make long-term and visionary investments, both physical and intangible (such as human talents).

4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2018 to be better than 2017, and why?

I think the apparel industry should keep a close eye on the following issues in 2018:

  • The destiny of the North American Free Trade Agreement (NAFTA): The potential policy change to NAFTA means so much to the U.S. textile and apparel industry as well as suppliers in other parts of the world. Notably, through a regional textile and apparel supply chain facilitated by the agreement over the past 23 years, the NAFTA region has grown into the single largest export market for U.S. textile and apparel products as well as a major apparel sourcing base for U.S. fashion brands and retailers. In 2016, as much as half of U.S. textile and apparel exports went to the NAFTA region, totaling US$11billion, and U.S. apparel imports from Mexico and Canada exceeded US$3.9billion. Understandably, if NAFTA no longer exists, sweeping changes in the trade rules, such as import duties, could significantly affect the sourcing and manufacturing behaviors of U.S. textile and apparel companies and consequentially alter the current textile and apparel trade patterns in the NAFTA region. For example, Mexico’s focus on basic apparel items suggests that U.S. importers could quickly source from elsewhere if duty savings under NAFTA are eliminated.
  • The possible reaching of the Regional Comprehensive Economic Partnership (RCEP): Even though RCEP is less well-known than the Trans-Pacific Partnership (TPP), we should not ignore the potential impact of the agreement on the future landscape of textile and apparel supply chain in the Asia-Pacific region. One recent study of mine shows that the RCEP will lead to a more integrated textile and apparel supply chain among its members but make it even harder for non-RCEP members to get involved in the regional T&A supply chain in the Asia-Pacific. This conclusion is backed by the latest data from the World Trade Organization (WTO): In 2016, around 91 percent of Asian countries’ textile imports came from other Asian countries, up from 86 percent in 2006. The more efficient regional supply chain as a result of RCEP will further help improve the price competitiveness of apparel made by “factory Asia” in the world marketplace. Particularly in the past few years, textile and apparel exports from Asia have already posted substantial pressures on the operation of the textile and apparel regional supply chain in the Western Hemisphere.
  • Automation of apparel manufacturing and its impact on the job market: Recall my observations at the MAGIC this August, several vendors showcased their latest technologies which have the potential to automate the cut and sew process entirely or substantially reduce the labor inputs in garment making. The impact of automation on the future of jobs is not a new topic, but the apparel industry presents a unique situation. Globally, over 120 million people remain directly employed in the textile and apparel industries today, a good proportion of whom are females living in poor rural areas. According to the World Trade Organization (WTO), for quite a few low-income and lower-middle income countries such as Bangladesh, Gambia, Pakistan, Madagascar, Sri Lanka, and Cambodia, as much as over 70 percent of their total merchandise exports were textile and apparel products in 2016. Should these labor-intensive garment sewing jobs in the developing countries were replaced by machines, the social and economic impacts will be consequential. I think it is the time to start thinking about the possible scenarios and the appropriate policy responses.

NAFTA Renegotiating Objectives Related to the Textile and Apparel Industry

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On Tuesday (July 17, 2017), the Office of the U.S. Trade Representative (USTR) released its detailed and comprehensive summary of the renegotiating objectives of the North American Free Trade Agreement (NAFTA). In the statement, USTR says that “through the renegotiation of NAFTA, the Trump Administration will seek a much better agreement that reduces the U.S. trade deficit and is fair for all Americans by improving market access in Canada and Mexico for U.S. manufacturing, agriculture, and services.”

Several released negotiating objectives address textile and apparel (T&A) directly or are highly relevant to the sector:

Trade in Goods

  • Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.
  • Maintain existing duty-free access to NAFTA country markets for U.S. textile and apparel products and seek to improve competitive opportunities for exports of U.S. textile and apparel products while taking into account U.S. import sensitivities.

Rules of Origin

  • Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.
  • Ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America.
  • Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.
  • -Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.

Customs and Trade Facilitation

  • Provide for automation of import, export, and transit processes, including through supply chain integration; reduced import, export, and transit forms, documents, and formalities; enhanced harmonization of customs data requirements; and advance rulings regarding the treatment that will be provided to a good at the time of importation.

Comments:

  1. Notably, reducing the trade deficit and bringing more manufacturing jobs back to the United States are at the core of the NAFTA’s renegotiating objectives. These two goals are also highly consistent with Trump’s rhetoric on his trade policy.
  2. A dilemma facing the T&A sectoral negotiation is that the United States currently runs a robust trade surplus with Canada and Mexico for textiles: in 2016, the value of U.S. trade surplus (i.e. the value of exports minus the value of imports) totaled $680 million for yarns (up 56.7% from 1994), $4,342 million for fabrics (up 202.9% from 1994) and $1,461 million for made-up textiles (up 223.5% from 1994). Meanwhile, although the United States is in a trade deficit with NAFTA partners for apparel ($1,130 million in 2016), U.S. apparel imports from Canada and Mexico often contain textile inputs “Made in the USA” through the Western-Hemisphere supply chain. Blindly cutting the trade deficit on apparel ironically could affect the U.S. textile exports to the NAFTA region negatively.
  3. Based on the released objectives, it seems unlikely that the NAFTA renegotiation will liberalize the yarn-forward rules of origin for textile and apparel. On the contrary, USTR could review the current exceptions to the yarn-forward rules, including the tariff preference levels (TPL) and some special regimes such as the 9802 program related to fabric sourcing to strengthen the manufacturing base and create MANUFACTURING jobs in the United States. Recognizing the competing arguments between the U.S. textile industry and the apparel industry (fashion brands and retailers) regarding the necessity and impact of these exceptions, USTR also needs more inputs of how companies use exceptions like the TPL in sourcing and why they use them.
  4. Other than the rules of origin, trade facilitation and customs enforcement will be another major agenda related to the T&A sector in the NAFTA renegotiation. Elements from the newly enforced Trade Facilitation and Trade Enforcement Act of 2015 could be added to the updated NAFTA.
  5. A positive aspect of the NAFTA T&A sectoral negotiation is that all parties alongside the supply chain, from U.S. cotton growers, textile mills to apparel retailers and brands recognize the value of NAFTA and no one calls for pulling out of the agreement. It is also a consensus view of the U.S. T&A industry that NAFTA renegotiation should “do no harm”, i.e. strengthening rather than weakening the current supply-chain partnership between NAFTA members. Additionally, stakeholders in the U.S. T&A industry unanimously support keeping the renegotiation trilateral, but agree to use bilateral provisions to address some particular concerns.
  6. The NAFTA renegotiation may officially start on August 17 or 18, 2017. However, Time is the enemy of the NAFTA renegotiation. While there is a strong incentive for all parties to finish the negotiation by the end of 2017 given the upcoming U.S. mid-term election and the Mexican presidential election in 2018, the ambitious renegotiation agenda makes it extremely challenging to meet that goal. Risks are still there that Trump may pull the United States out of NAFTA should he lose patience for the renegotiation. Notably, Trump’s dislike of NAFTA is real.

Sheng Lu

Related: US Textile and Apparel Industry and NAFTA: Key Statistics (updated July 2017)

USTR Hearing on the Renegotiation of NAFTA: Textile and Apparel Industry

US Textile and Apparel Associations Comment on NAFTA Renegotiation

US Textile and Apparel Industry Associations Comment on NAFTA Renegotiation

This week, several leading U.S. textile and apparel industry associations submitted their comments to the Office of the United States Trade Representative (USTR) regarding the renegotiation objectives of the North American Free Trade Agreement (NAFTA). Below is a summary of these organizations’ viewpoints based on their submissions:

NAFTA renegotiation

Appendix: Submitted written comments

Market Size of the Global Textile and Apparel Industry: 2015 to 2020

Textile Mills Market

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The textile mills market includes yarns and fabrics. The market value includes domestic production plus imports minus exports, all valued at manufacturer prices.

The value of the global textile mills market totaled $667.5 billion in 2015 (around 83.1% were fabrics and 16.9% were yarns), up 1.5% from a year earlier. The compound annual growth rate of the market was 4.4% between 2011–15. Asia-Pacific accounted for 54.6% of the global textile mills market value in 2015 and Europe accounted for a further 20.6% of the market.

The global textile mills market is forecast to reach $842.6 billion in value in 2020, an increase of 26.2% since 2015. The compound annual growth rate of the market in the period 2015–20 is predicted to be 4.8%.

Apparel market

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The apparel market covers all clothing except leather, footwear and knitted items as well as other technical, household, and made-up products. The market value includes domestic production plus imports minus exports, all valued at manufacturer prices.

The value of the global apparel market totaled $842.7 billion in 2016, up 5.5% from a year earlier. The compound annual growth rate of the market was 5.2% between 2012–16. Asia-Pacific accounted for 60.7% of the global textile mills market value in 2016 and Europe accounted for a further 15.0% of the market.

The global apparel market is forecast to reach $1,004.6 billion in value in 2021, an increase of 19.2% since 2016. The compound annual growth rate of the market in the period 2015–20 is predicted to be 3.6%.

Apparel retail market

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The apparel retail industry consists of the sale of all menswear, womenswear and childrenswear. The industry value is calculated at retail selling price (RSP), and includes all taxes and duties.

The value of the global apparel retail market totaled $1,254.1 billion in 2015 (52.9% womenswear, 31.2% menswear and 15.9% childrenswear), up 4.8% from a year earlier. The compound annual growth rate of the market was 4.5% between 2011–15. Asia-Pacific accounted for 36.8% of the global textile mills market value in 2015, followed by Europe (27.8%) and the United States (24.0%).

The global apparel retail market is forecast to reach $1,65.2 billion in value in 2020, an increase of 31.8% since 2015. The compound annual growth rate of the market in the period 2015–20 is predicted to be 5.7%.

Data source: MarketLine (2017)

I am Textiles and Apparel

This video is a recent joint effort by faculty in the textile and apparel (T&A) programs across the country with the hope to inspire critical thinking on the future of the T&A academic discipline and help others know better about what we are doing in terms of teaching and scholarships.

How should the T&A academic discipline define itself in the 21st century? What are our unique contributions to the university community, the society and the world? How are we different from programs such as “Art & Design” and “Business”? What is your vision for the future of the T&A academic discipline? Please feel free to share your view.

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

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Since its taking effect in 1995, NAFTA, a trade deal between the United States, Mexico, and Canada, has raised heated debate regarding its impact on the U.S. economy. President Trump has repeatedly derided NAFTA, describing it as “very, very bad” for U.S. companies and workers, and he promised during his campaign that he would remove the United States from the trade agreement if he could not negotiate improvements.

The U.S. textile and apparel (T&A) industry is a critical stakeholder of the potential policy change, because of its deep involvement in the regional T&A supply chain established by the NAFTA. Particularly, over the past decades, trade creation effect of the NAFTA has significantly facilitated the formation of a regional T&A supply chain among its members. Within this supply chain, the United States typically exports textiles to Mexico, which turns imported yarns and fabrics into apparel and then exports finished apparel back to the United and Canada for consumption.

So what will happen to the U.S. T&A industry if NAFTA no longer exists? Here is what I find*:

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First, results show that ending the NAFTA will significantly hurt U.S. textile exports. Specifically, the annual U.S. textile exports to Mexico and Canada will sharply decline by $2,081 million (down 47.7%) and $351 million (down 14%) respectively compared to the base year level in 2015.Although U.S. textile exports to other members of the Central America Free Trade Agreement (CAFTA-DR), will slightly increase by $42 million (up 1.5%), the potential gains will be far less than the loss of exports to the NAFTA region.

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Second, results show that ending the NAFTA will significantly reduce U.S. apparel imports from the NAFTA region. Specifically, annual U.S. apparel imports from Mexico and Canada will sharply decrease by $1,610 million (down 45.3%) and $916 million (down 154.2%) respectively compared to the base year level in 2015 (H2 is supported). However, ending the NAFTA would do little to curb the total U.S. apparel imports, largely because U.S. companies will simply switch to importing more apparel from other suppliers such as China and Vietnam.

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Third, ending NAFTA will further undercut textile and apparel manufacturing in the United States rather than bring back “Made in the USA.” Specifically, annual U.S. textile and apparel manufacturing will decline by $1,923 million (down 12.8%) and $308 million (down 3.0%) respectively compared to the base year level in 2015 (H3 is supported). Weaker demand from the NAFTA region is the primary reason why U.S. T&A manufacturing will suffer a decline.

These findings have several important implications. On the one hand, the results suggest that the U.S. T&A will be a big loser if the NAFTA no longer exists. Particularly, ending the agreement will put the regional T&A supply chain in jeopardy and make the U.S. textile industry lose its single largest export market—Mexico. On the other hand, findings of the study confirm that in an almost perfectly competitive market like apparel, raising tariff rate is bound to result in trade diversion. With so many alternative suppliers out there, understandably, ending the NAFTA will NOT increase demand for T&A “Made in the USA,” nor create more manufacturing jobs in the sector. Rather, Asian textile and apparel suppliers will take away market shares from Mexico and ironically benefit most from NAFTA’s dismantlement.

*Note: The study is based on the computable general equilibrium (CGE) model developed by the Global Trade Analysis Project (GTAP). Data of the analysis came from the latest GTAP9 database, which includes trade and production data of 57 sectors in 140 countries in 2015 as the base year. For the purpose of the study, we assume that if NAFTA no longer exists, the tariff rate applied for T&A traded between NAFTA members will increase from zero to the normal duty rate (i.e. the Most-Favored-Nation duty rate) in respective countries.

by Sheng Lu