Examine the US-China Tariff War from a Theoretical Perspective: Discussion Questions from Students in FASH455

#1 In class, we discussed that trade always creates both winners and losers. So who are the winners and losers in the US-China tariff war? Also, why should or should not the government use trade policy to pick up winners and losers in international trade?

#2 Why do you think U.S. fashion brands and retailers oppose Section 301 tariffs on apparel imports from China, whereas the National Council of Textile Organizations (NCTO), which represents the US textile industry, supports Trump’s tariff action?

#3 The U.S.-China tariff war continues during the pandemic, resulting in higher sourcing costs for U.S. fashion brands and retailers, which have been struggling hard financially. In such a case, if you were the CEO of Macy’s, 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 agree with the Trump Administration to lift the Section 301 tariffs on PPE imports from China? Isn’t a high tariff typically protects the domestic industry and would incentivize more U.S.-based PPE production?

#5 Most classic trade theories (such as the comparative advantage trade theory and the factor proportion trade theory) advocate free trade with no government interventions. However, international trade in the real world has been so heavily influenced by government policy, such as tariffs. How to explain this phenomenon? Are trade theories wrong, or is the government wrong?

[Anyone is welcome to join the online discussion. For students in FASH455, please address at least two questions in your comment. Please also mention the question number in your comment]

What Do You Take Away from FASH455?

I encourage everyone to watch the video above, which provides an excellent wrap-up for FASH455 and reminds 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 TextileOrganizations, 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. No matter 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 apparel companies’ social responsibility practices, the debate on the textile and apparel provisions in the U.S.-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0) and Trump Administration’s trade policy agenda 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 hopeFASH455 can put students into thinking about the meaning of being a FASH major/minor (as well as a college graduate) and how to contribute to the world we are living in today positively. A popular misconception is that T&A 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, globally over 120 million people remain directly employed in the T&A industry 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 will COVID-19 fundamentally change the pattern of apparel sourcing and trade, particularly regarding China?
  • How to make the growth of 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 environmental standards?
  • 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. But 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

Textile and Apparel Products Covered by the U.S.-China Tariff War Reference List (updated January 2020)

(You may also download this post in PDF)

US China tariff war reference list (Jan 15, 2020)_Page_1

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Appendix: Links for the Product List (updated January 15, 2020)

by Sheng Lu

Interview with Modaes.es on the Latest Trends of Apparel Sourcing and Trade

The original interview (in Spanish) is available HERE. Below is the translated version.

Question: Is there a reversal in the globalization of fashion?

Sheng Lu: The fashion industry is becoming more global AND regional — the making and selling of a garment “travel” through more and more countries. Just look at the label of a Gap sweatshirt: it is an American clothing brand, but the product is “Made in Vietnam,” and the label includes the size standards in six different countries. The business model of the fashion industry today is “making anywhere in the world and selling anywhere in the world.”

Q .: What do you mean the industry is becoming more “regional”?

Sheng Lu: The trade flows of textiles and apparel today are heavily influenced by regional free trade agreements (FTAs). For example, while China is known as the world’s largest apparel producer and exporter, nearly 50% of the clothing consumed by European consumers are still produced by EU countries themselves. Notably, consumers have different expectations for clothing: many are price-sensitive, but others prefer more trendy items, which requires “near sourcing”—this explains why fashion companies have to adopt a more balanced sourcing portfolio.

Q .: Is the price still the most important factor in fashion companies’ sourcing decisions?

Sheng Lu: Sourcing is far more than just about chasing for the lowest cost. Sourcing decisions today have to consider a mix of factors, ranging from flexibility, speed to market, sustainability, to compliance risks. In fact, few companies “put all eggs in one basket.” My recent studies show that both in the United States and the EU, fashion companies with more than 1,000 employees, typically sourced from more than twenty different countries—sometimes even exceed forty. Behind such a diversified sourcing practice is the necessity to strike a balance between so many different sourcing factors.

Q .: Is apparel sourcing becoming more diversified today than a decade ago?

Sheng Lu: From my observations, fashion companies are souring from more countries and regions than a decade ago, but not in terms of producers. Especially in the last two or three years, I see some large companies are consolidating their supplier base to build a closer relationship with key vendors. The reason is the same as mentioned earlier: a very competitive price is not enough for apparel sourcing today.

Q .: How has the tariff war between the United States and China affected apparel sourcing?

Sheng Lu: The trade war between the United States and China is having big impacts on apparel sourcing that go beyond the two countries. Notably, American fashion brands and retailers are moving sourcing orders from China to other Asian countries such as Vietnam and Bangladesh. However, finding China’s alternatives is anything but easy. Despite the tariff war, China remains a competitive player in apparel sourcing. The unparalleled production capacity that can fulfill orders nearly for any products in any quantity, and the ability to comply with complex sustainability and social responsibility regulations are among China’s unique competitive advantages. Understandably, companies are not giving up sourcing from China, as there are few other “balanced” sourcing destinations in the world. That being said, it is important to recognize that the big landscape of apparel sourcing is evolving. Even in Europe, which is not having a trade war with China, apparel “Made in China” is seeing a notable decline in its market share.

Q .: How is China adapting?

Sheng Lu: The textile and apparel industry in China is undergoing a structural change. Partially caused by the tariff war, apparel producers in China are increasingly moving their factories to nearby Asian countries (especially for big-volume and/or relatively low value-added product categories). Meanwhile, China itself is changing from an apparel producer to become a leading textile supplier for other apparel-exporting countries in Asia. This is NOT a temporary move, but a permanent transition, which has happened in many industrialized economies in history. Somehow, the tariff war has accelerated the adjustment process, however.

Q .: Will Africa be the next hub for apparel sourcing in the near future?

Sheng Lu: As textile and clothing trade is turning more regional-based, Africa is facing significant challenges to become an attractive tier-1 sourcing base for Western fashion brands and apparel retailers.

Q .: Why is that?

Sheng Lu: In general, there are three primary apparel import markets in the world: the United States, the European Union, and Japan—as of 2018, these three regions altogether still accounted for as many as 70% of the world apparel imports. Surely, Asian countries are important apparel suppliers for all these three regions. However, each of these three markets also has its respective regional suppliers—Mexico and Central & South American countries for the United States, China, and a few Southeast Asian countries for Japan and Eastern European countries for the EU market. Other than geographic proximity, often, these regional suppliers also enjoy preferential market access to the US, EU, and Japan provided by regional free trade agreements.

Africa, on the other hand, is not close to any of these three major apparel import markets geographically. Why would fashion companies in the United States, Japan, or the EU have to source from Africa when there are so many other options available?

Q .: For price?

Sheng Lu: Several trade preference programs currently offer apparel exporters in African countries preferential or duty-free market access to the United States, the EU, and Japan (such as the African Growth Opportunity Act and the EU and Japan Generalized System of Preferences programs). However, sourcing from Africa will entail other extra costs—for example, the raw material cost will be higher as yarns and fabrics have to be imported from Asia first, and the transportation bill could be costly due to the poor infrastructure. Further, not like their counterpart in Asia, the apparel industry is not regarded as a development priority in many African countries, which continue to rely heavily on the export of raw materials instead. Manufacturing for the local market is also complicated—apparel producers in Africa are struggling with both the cheap clothing imported from Asia and the mounting used clothing sent from the West.

Q .: It is said that fashion might be the most regulated sector in international trade other than agriculture. How to explain this?

Sheng Lu:  I think we need some changes here. For example, in 2018, textiles and apparel accounted for only 5% of the total U.S. merchandise imports but contributed nearly 40% of the tariff revenue collected. This phenomenon, which makes no sense economically, is the result of the industry lobby—trying to protect domestic manufacturers from import competition.

As another example, around 15%-17% of Mexico’s clothing exports to the United States do not claim the duty-free benefits provided by the North American Free Trade Agreement (NAFTA), as the NAFTA rules of origin strictly require the using of regional yarns and fabrics for qualified apparel items. In the end, companies prefer bigger savings on the raw material cost than claiming the NAFTA duty-saving benefits. We should think about how to modernize these trade rules and make them more supply-chain friendly in the 21st century.

Meanwhile, policymakers are developing new regulations to address some emerging areas in international trade, such as E-commerce, labor standards and environmental protection. Increasingly, trade policy is moving from “measures at the border” to “measures behind the borders.”

Top Ten Most-read Blog Posts on Shenglufashion in 2019

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#1 WTO reports world textile and apparel trade in 2018

#2 Wage level for garment workers in the world (updated in 2017)

#3 China’s changing role in the world textile and apparel supply chain

#4 Timeline of trade policy in the Trump administration

#5 State of the EU textile and apparel industry (updated April 2019)

#6  2019 U.S. fashion industry benchmarking study released

#7 U.S. textile and apparel industry is NOT immune to the U.S.-China tariff war

#8 U.S. apparel retailers’ shifting sourcing strategy for “Made in China” under the shadow of the tariff war

#9 Demystify the “Made in the USA” apparel sourcing strategy

#10 U.S. textile and apparel industry assesses the impacts of USMCA (NAFTA2.0)

Happy Holidays!

Trade 2030: The Future of World Trade


A group of eminent panelists will bring their experience on how digital technologies are changing international trade and how international trade cooperation can help governments reap the benefits and address the challenges of digital trade.

Speakers/Panalists:

  • Roberto Azevêdo, Director-General, World Trade Organization
  • Abdoullah Cisse, Professeur-Avocat, Carapaces Stratégies & Conformités
  • Caroline Freund, Director, Macroeconomics, Trade, and Investment Climate, World Bank
  • Susan Lund, Partner, McKinsey Global Institute

Trade Wars, Tariffs and Strategic Textile and Apparel Sourcing


Lenzing Texworld USA Winter 2019 Educational Series

Speaker: Gail Strickler, President of Global Trade Brookfield Associates, LLC & former Assistant U.S. Trade Representative for Textiles;

Topics covered:

  • The state of trade in textiles and apparel
  • Trans-Pacific Partnership (TPP)—what is now without the United States?
  • Latest on the U.S. Section 301 tariff against China
  • Updates on free trade agreements and textile and apparel (including USMCA, KORUS, US-EU FTA, CAFTA-DR, and AGOA)

Outlook 2019: Apparel Industry Issues in the Year Ahead

In January 2019, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2019–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. Any comments and suggestions are more than welcome!

1: What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2019, and why?

In my view, uncertainty will remain the single biggest challenge facing the apparel industry in 2019, ranging from a more volatile global economy, the unpredictable outlook of the U.S.-China trade talks to the various possible scenarios of Brexit. While uncertainty creates exciting new research opportunities for scholars like me, it could be a big headache for companies seeking a foreseeable market environment to guide their future business plan and investments. 

Meanwhile, the increasing digitalization of the apparel supply chain based on big-data tools and artificial intelligence (AI) technologies means a huge opportunity for fashion companies. Indeed, the apparel industry is quickly changing in nature—becoming ever more globalized, supply-chain based, technology-intensive and data-driven. Take talent recruitment as an example. In the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), as much as 68 percent of surveyed leading U.S. fashion brands and apparel retailers say they plan to increase hiring of data scientists in the next five years. Googling “apparel industry” together with terms such as “big data” and “data science” also returns much more results than in the past. It is hopeful that the advancement of digital technologies and the smarter use of data will enable apparel companies to overcome market uncertainties better and improve many aspects of their businesses such as speed to market, operational efficiency and even sustainability.

2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2019, and what can apparel firms and their suppliers do to stay ahead?

Based on my research, I have three observations regarding apparel companies’ sourcing trends and the overall sourcing landscape in 2019:

First, apparel companies overall will continue to maintain a diverse sourcing base. For example, in a recent study, we examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Notably, on average these companies sourced from over 20 different countries or regions using more than 200 vendors in 2017. Similarly, in the 2018 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA), we also found companies with more than 1,000 employees typically source from more than ten different countries and regions. Since no sourcing destination is perfect, maintaining a relatively diverse sourcing base allows apparel companies to strike a balance among various sourcing factors ranging from cost, speed, flexibility, to risk management.

Second, while apparel companies are actively seeking new sourcing bases, many of them are reducing either the number of countries they source from or the number of vendors they work with. According to our study, some apparel companies have been strategically reducing the number of sourcing facilities with the purpose of ensuring closer collaborations with their suppliers on social and environmental compliance issues. Some other companies are consolidating their sourcing base within certain regions to improve efficiency and maximize productivity in the supply chain. Related to this trend, it is interesting to note that approximately half of the 50 largest U.S. apparel companies report allocating more sourcing orders to their largest vendor in 2017 than three years ago.

Third, nearshoring or onshoring will become more visible. Take “Made in the USA” apparel for example. According to the 2018 U.S. Fashion Industry Benchmarking Study, around 46 percent of surveyed U.S. fashion brands and apparel retailers report currently sourcing “Made in the USA” products, even though local sourcing typically only account for less than 10 percent of these companies’ total sourcing value or volume. In a recent study, we find that 94 out of the total 348 retailers (or 27 percent) sold “Made in the USA” apparel in the U.S. market between December 2017 and November 2018. These “Made in the USA” apparel items, in general, focus on fashion-oriented women’s wear, particularly in the categories of bottoms (such as skirts, jeans, and trousers), dresses, all-in-ones (such as playsuits and dungarees), swimwear and suits-sets. The advantage of proximity to the market, which makes speedy replenishment for in-season items possible, also allows retailers to price “Made in the USA” apparel substantially higher than imported ones and avoid offering deep discounts. Looking ahead, thanks to automation technology and consumers’ increasing demand for speed to market, I think nearshoring or onshoring, including ”Made in the USA” apparel, will continue to have its unique role to play in fashion brands and retailers’ merchandising and sourcing strategies.

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?

2019 will be a year to test apparel companies’ resources, particularly in the sourcing area. For example, winners will be those companies that have built a sophisticated but nimble global sourcing network that can handle market uncertainties effectively. Likewise, companies that understand and leverage the evolving “rules of the game”, such as the apparel-specific rules of origin and tariff phase-out schedules of existing or newly-reached free trade agreements, will be able to control sourcing cost better and achieve higher profit margins. Given the heavy involvement of trade policy in apparel sourcing this year, companies with solid government relations should also enjoy unique competitive advantages. 

On the other hand, as apparel business is changing in nature, to stay competitive, apparel companies need to start investing the future. This includes but not limited to exploring new sourcing destinations, studying the changing consumer demographics, recruiting new talents with expertise in emerging areas, and adopting new technologies fitting for the digital age. 

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 2019 to be better than 2018, and why?

Two things are at the top of my watchlist:

First, what is the future of China as an apparel sourcing base? While external factors such as the U.S.-China tariff war have attracted most of the public attention, the genuine evolution of China’s textile and apparel industry is something even more critical to watch in the long run. From my observation, China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured by value, 47 percent of Bangladesh’s textile imports came from China in 2017, up from 39 percent in 2005. Similar trends are seen in Cambodia (up from 30 percent to 65 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 71 percent), Malaysia (up from 25 percent to 54 percent), Indonesia (up from 28 percent to 46 percent), Philippines (up from 19 percent to 41 percent) and Sri Lanka (up from 15 percent to 39 percent) over the same time frame. A key question in my mind is how quickly China’s textile and apparel industry will continue to evolve and upgrade by following the paths of most other advanced economies in history.

Second, how will the implementation of several newly-reached free trade agreements (FTAs) affect the big landscape of apparel sourcing and the existing regional apparel supply chains? For example:

  • The newly-reached U.S.-Mexico-Canada Free Trade Agreement (USMCA or commonly called NAFTA2.0) includes several interesting changes to the textile and apparel specific rules of origin provisions, such as the adjustment of the tariff-preference level (TPL) mechanism. Whether these changes will boost textile and apparel production in the Western-Hemisphere and attract more sourcing from the region will be something interesting to watch.
  • The implementation of the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA) will allow Vietnam to get access to nearly 40% of the world apparel import market (i.e., EU + Japan) duty-free. However, restrained by the country’s relatively small population, the apparel industry is increasingly facing the challenge of competing for labor with other export-oriented sectors in Vietnam. Realistically, what is the growth potential of apparel “Made in Vietnam” after the implementation of CPTPP and EVFTA?
  • In 2017, close to 80% of Asian countries’ textile imports came from other Asian countries, up from around 70% in the 2000s. Similarly, in 2017, 85.6% of Asian countries’ apparel imports also came from within the region. The negotiation of the Regional Comprehensive and Economic Partnership (RCEP) is likely to conclude in 2019, whose membership includes member states of the Association of Southeast Asian Nations (ASEAN) and other six economies in the Asia-Pacific region (Australia, China, India, Japan, South Korea and New Zealand). Will RCEP result in an ever more integrated Asia-based textile and apparel supply chain and make the Asia region even more competitive as an apparel sourcing destination?  

(comment for this post is closed)

Why is the used clothing trade such a hot-button issue?

Shannon Brady and Sheng Lu (2018). Why is the used clothing trade such a hot-button issueJust-Style

Key Findings:

First, the world used clothing trade has grown significantly over the past ten years. Statistics from the United Nations show that the value of world used clothing trade (HS code 630900) has quickly increased from $1.8bn in 2006 to $3.7bn in 2016, an increase of 106 percent. Between 2006 and 2016, the value of world used clothing trade enjoyed a 7.6 percent compound annual growth rate (CAGR), which was almost double the pace of 3.4 percent CAGR for new clothing trade (HS chapters 61 and 62) over the same period.

Second, the world used clothing trade flow is highly unbalanced. On the one hand, the developed economies are the dominant suppliers of used clothing to the world. In 2016, nearly 40 percent of the world’s used clothing exports came from three countries alone: the United States (15 percent), the United Kingdom (13 percent) and Germany (11 percent). Data also shows that the European Union and the United States together stably accounted for as much as 65 percent of the value of world clothing exports between 2006 and 2016. The other country worth mentioning is China, which is quickly becoming another leading used clothing exporter in the world. In 2016, China’s used clothing exports totaled US$218m from only US$0.32m in 2006, an increase of more than 684 percent!

On the other hand, most of the world used clothing exports end up sold in the developing countries, especially the least developed ones. For example, in 2016, Sub-Saharan Africa (SSA) as a whole imported approximately 20 percent of the world’s used clothing, far more than any other regions in the world. By value, the top three individual importers of used clothing in 2016 are all developing countries as well, namely Pakistan (6.0 percent), Malaysia (5.8 percent) and Ukraine (4.9 percent).

Third, trade policies regulating used clothing trade often raise controversies. While trade barriers on new clothing attract much of the public attention, the used clothing trade is facing even heavier and trickier restrictions of various kinds. The World Trade Organization (WTO) data shows that in 2016 the average applied tariff rate for used clothing imports was 19.3 percent, higher than 15.4 percent of new clothing (HS Chapters 61 and 62). Of the total 180 countries covered by the WTO tariff database, 115 (or 64 percent) set an equal or higher tariff rate for used clothing than the new one. Further, it is not rare to see extremely high import tariff rates and other quantitative restrictions applied to used clothing trade. For example, in 2016 the applied most-favored-nation (MFN) ad valorem equivalent tariff rate for used clothing was as high as 356.9 percent in Uzbekistan, 167.3 percent in Zimbabwe, 149.2 percent in South Africa, 116.8 percent in Rwanda and 100 percent in Vietnam.

After all, because of the complicated social, economic and political factors involved, how to regulate and manage used clothing trade remains a key challenge facing the world community.

Textile and Apparel Items Removed from USTR’s Original Proposed Product List for the Section 301 Action (September 2018)

On September 17, 2018, President Trump formerly announced to take the Section 301 action against another $200 billion worth of imports from China. The additional tariffs will be effective starting September 24, 2018, and initially will be in the amount of 10 percent.  Starting January 1, 2019, the level of the additional tariffs will increase to 25 percent.

The $200 billion imports from China targeted include 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on July 10, 2018. Included among the products removed from the original proposed list are certain consumer electronics products such as smart watches and Bluetooth devices; certain chemical inputs for manufactured goods, textiles and agriculture; certain health and safety products such as bicycle helmets, and child safety furniture such as car seats and playpens.

Below are the textile and apparel related products removed from the original proposed list:

section 301

Data source: CCCT (2018) 

However, the final $200 billion product list still covers several textile and apparel-related products such as backpacks, handbags, purses, wallets, baseball gloves, hats and leather, and fur apparel, as well as textiles and machinery that are used for domestic manufacturing. In general, the final $200 billion product list includes about 20% consumer products (v.s. only 1% in the $50 billion already subject to the 25% additional tariff), 50% intermediary goods and 30% capital goods.

Trade War Looms over New York Fashion Week

Discussion questions:

  • Why does the U.S. textile industry call for additional tariffs on textile and apparel imports from China whereas U.S. fashion brands and apparel retailers oppose the tariffs?
  • Based on the trade theories we have learned so far, why or why not would you recommend President Trump to impose 25% punitive tariffs on imports from China?

Appendix: Comments on the Proposed Section 301 Tariffs on Imports from China (August 2018)

For the complete timeline of the U.S. Section 301 tariff action against China, please click HERE

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

us-mexico-trade-agreement

The Office of U.S. Trade Representative (USTR) announced that the United States and Mexico have “reached a preliminary agreement in principle” to update the 24-year old North American Free Trade Agreement (NAFTA). According to USTR, compared with the existing NAFTA, the new deal will

  • strengthen the labor and environmental protection provisions
  • provide stronger and more effective protection and enforcement of intellectual property right protection
  • reduce various non-tariff barriers facing U.S. agriculture exports
  • include new rules of origin and origin procedures for autos (including requiring 75 percent of auto content be made in the United States and Mexico AND 40-45 percent of auto content be made by workers earning at least $16 per hour.)
  • include new chapters dealing with digital trade and textiles
  • include a 16-year “sunset period” with a review every six years, at which time the parties can renew the deal for another 16 years.

Specifically for the textile and apparel sector, USTR said that “The new provisions on textiles incentivize greater United States and Mexican production in textiles and apparel trade, strengthen customs enforcement, and facilitate broader consultation and cooperation among the Parties on issues related to textiles and apparel trade.” More specifically, the new textile chapter in renegotiated NAFTA will:

1) Promote greater use of Made-in-the-USA fibers, yarns, and fabrics by limiting rules that allow for some use of non-NAFTA inputs in textile and apparel trade; and requiring that sewing thread, pocketing fabric, narrow elastic bands, and coated fabric, when incorporated in apparel and other finished products, be made in the region for those finished products to qualify for trade benefits. “

2) Include textile-specific verification and customs cooperation provisions that provide new tools for strengthening customs enforcement and preventing fraud and circumvention.

Based on USTR’s statement, it is likely, although not confirmed, that the US-Mexico deal will allow more limited tariff preference level (TPL) than the existing NAFTA.

USTR’s statement also said that the new deal would be subject to “finalization and implementation,” and its relationship with NAFTA remain unclear. The statement did not mention anything about Canada, another NAFTA member, either. Interesting enough, when announcing the US-Mexico deal in front of the press, President Trump said I will terminate the existing deal (NAFTA).  When that happens, I can’t quite tell you; it depends on what the timetable is with Congress.  But I’ll be terminating the existing deal and going into this deal.  We’ll start negotiating with Canada relatively soon.”

In a statement released on the same day, the American Apparel and Footwear Association (AAFA) said it welcomed the conclusion of bilateral talks with Mexico on NAFTA and emphasized the need for Canada to be a part of any final agreement: “The conclusion of talks between the U.S. and Mexico is a positive step in the NAFTA negotiations, however, it is essential that the updated agreement remain trilateral. At the same time, we encourage the administration to share the details of the agreement so the business community can inspect the impact on North American supply chains and share feedback with the administration and Congress…Any update to the agreement must continue to support these American jobs, promote trade linkages, and be seamlessly implemented to be considered a success. It is with this in mind that we are deeply concerned to hear any mention of withdrawal or termination of the existing agreement at this late stage.”

According to Inside U.S. Trade, the National Council of Textile Organizations (NCTO) which represents the U.S. textile industry says it is “encouraged by the information released by USTR with respect to strengthening the rules of origin for textiles and apparel in the announced agreement with Mexico. U.S. talks with Canada are still ongoing, however, and NCTO will wait to review the text of any final agreement before issuing a more detailed statement on the negotiation outcome.”

2018 U.S. Fashion Industry Benchmarking Study Released

The 2019 U.S. Fashion Industry Benchmarking Study is now availablecover

The report can be downloaded from HERE

Key findings of this year’s study:

Business challenges facing U.S. fashion companies: Protectionism is the top challenge for the U.S. fashion industry in 2018. More companies worry about increases in production or sourcing cost, too. For the second year in a row, “protectionist trade policy agenda in the United States” ranks the top challenge for U.S. fashion companies in 2018.

Industry outlook: Despite concerns about trade policy and cost, executives are more confident about the five-year outlook for the U.S. fashion industry in 2018 than they were a year ago, although confidence has not fully recovered to the level seen in 2015 and 2016. In addition, 100 percent of respondents say they plan to hire more employees in the next five years, compared with 80-85 percent in previous studies; market analysts, data scientists, sustainability/compliance related specialists or managers, and supply chain specialists are expected to be the most in-demand.

U.S. fashion companies’ sourcing strategy: When it comes to sourcing, diversification is key for many companies.

  • Most respondents continue to maintain a diverse sourcing base, with 60.7 percent currently sourcing from 10+ different countries or regions, up from 57.6 percent in 2017.
  • Larger companies, in general, continue to be more diversified than smaller companies.
  • Reflecting the U.S. fashion industry’s growing global reach, respondents report sourcing from as many as 51 countries or regions in 2018, the same as in 2017. Asia as a whole continues to take the lead as the dominant sourcing region. Meanwhile, with the growing importance of speed-to-market and flexibility, the Western Hemisphere is becoming an indispensable sourcing base.
  • Keeping a relatively diverse sourcing base will remain a key element of U.S. fashion companies’ sourcing strategy. Nearly 80 percent of respondents plan to source from the same number of countries, or more countries, in the next two years. However, respondents are equally divided on whether to increase or decrease the number of suppliers they will work with.
  • China plus Vietnam plus Many” has become an ever more popular sourcing model among respondents. And this model is evolving as companies further diversify their China production. In particular, China now typically accounts for only 11-30 percent of companies’ total sourcing value or volume, compared with 30-50 percent in the past.
  • Although China’s position as the top sourcing destination is unshakable, companies are actively seeking alternatives to “Made in China.” This does not seem to be due to concerns about cost, but rather the worries about the escalating U.S.-China trade tensions.
  • Benefiting from the diversification away from China, Vietnam and Bangladesh are expected to play a bigger role as apparel suppliers for the U.S. market in the near future.

Rules of origin and the utilization of trade agreements for sourcing: Rules of origin, and exceptions to the rules of origin, significantly impact whether companies use free trade agreements (FTAs) and trade preference programs for sourcing.

  • While FTAs and trade preference programs remain largely underutilized by U.S. fashion companies, more companies are using NAFTA (65 percent), CAFTA-DR (58 percent) and AGOA (50 percent) than in the past two years.
  • Still, it’s concerning that companies often do not claim the duty-free benefits when sourcing from countries with FTAs or preference programs. Companies say this is primarily due to the strict rules of origin.
  • Exceptions to the “yarn-forward” rules of origin, including tariff preference levels (TPLs), commercial availability/short supply lists, and cumulation, are priorities for respondents; 48 percent say they currently use these mechanisms for sourcing. These exceptions provide critical flexibilities that make companies more likely to use FTAs and source from FTA regions.

NAFTA: U.S. fashion companies call for a further reduction of trade barriers and urge trade negotiators to “do no harm” to NAFTA, the most-utilized free trade agreement by respondents.

  • Respondents predominantly support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to restrictive rules of origin in NAFTA and future free trade agreements.
  • More than half of respondents explicitly say NAFTA is important to their business—and they have grave concerns about the uncertain future of the agreement.

Sourcing in sustainable and socially compliant ways: Overall, U.S. fashion companies are making more commitments to sustainability and social responsibility.

  • 85 percent of respondents plan to allocate more resources for sustainability and social compliance in the next two years, in areas including providing training to suppliers and internal employees, adding more employees, and working more closely with third-party certification programs on sustainability and social compliance. However, the availability of operational budget remains the primary hurdle for companies that want to do more.
  • 100 percent of respondents map their supply chains (i.e., keep records of name, location, and function of suppliers), up from 90 percent in 2017. Over 80 percent of respondents track not only Tier 1 suppliers (i.e., factory where the final product is assembled), but also Tier 2 suppliers (i.e., subcontractors or major component suppliers, such as fabrics). However, it’s less common for companies to map Tier 3 (i.e., yarn spinners, finding and trimming suppliers) and Tier 4 suppliers (i.e., raw materials suppliers, such as cattle/pig hides, rubber, cotton, wool, goose down, minerals/metals and chemicals).
  • 100 percent of respondents audit their suppliers for issues including building safety, fire safety, and treatment of workers. The vast majority of respondents (96 percent) currently use third-party certification programs to audit, with both announced and unannounced audits.

The US Fashion Industry Benchmarking Study from 2014 to 2017 can be downloaded from HERE

What Do You Take Away from FASH455?

I encourage everyone to watch the above two short videos, which provide an excellent wrap-up for FASH455 and remind us the meaning and significance of our course.

First of all, I do hope students can take away essential knowledge about textile and apparel (T&A) trade & sourcing from FASH455. So far in the course we’ve examined the phenomenon of globalization and its implications; we also discussed various trade theories and the general pattern of the evolution of T&A industry in a country’s industrialization process; we further explored three primary T&A supply chains in the world (namely the “Western-Hemisphere” supply chain, “Factory Asia” supply chain based on the flying geese model and the phenomenon of intra-region T&A trade in Europe); last but not least, we looked at trade policies that are unique to the T&A sector (e.g.,: MFA and yarn-forward rules of origin) as well as the complicated economic, political and social factors behind the making of these trade policies. No matter your dream 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 perspective 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 apparel companies’ social responsibility practices, the debate on the renegotiation of the North American Free Trade Agreement (NAFTA) and Trump Administration’s trade policy agenda to the controversy of second-hand clothing trade. It is critical to keep in mind that we wear more than just 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 sessions enlightening and inspiring. 

Likewise, I hope FASH455 puts students into thinking the meaning of being a FASH major (as well as a college graduate) and how to contribute to the world we are living today positively. A popular misconception is that T&A 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, globally over 120 million people remain directly employed in the T&A industry, a good proportion of whom are females living in poor rural areas. For most developing countries, T&A usually accounts for 70%–90% of their total merchandise exports and provide one of the very few opportunities for these countries to participate in globalization. Indeed, T&A is such an impactful sector and we are as important as any other majors on the campus!

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

  • How to make the growth of global textile and apparel trade more inclusive?
  • What trade policy can promote and support textile and apparel manufacturing in the United States?
  • How to make sure that tragedies like the Rana Plaza building collapse will never happen again?
  • How to distribute the benefits & cost of globalization among different countries and groups of people more equally?
  • How to use trade policy as a tool to solve some tough global issues such as labor practices and environmental standard?
  • Is inequality a problem caused by global trade? If global trade is the problem, what is the alternative?

These questions have no real answer yet. But 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.

USTR Lighthizer Discusses Philosophies behind Trump Administration’s Trade Policy

At an event hosted by the Center for Strategic and International Studies (CSIS) on September 18, U.S. Trade Representative Robert Lighthizer addressed the U.S. trade policy in the Trump Administration, particularly Trump’s beliefs on trade:

Philosophy 1: The reason why some Americans oppose free trade is NOT that they were “ill-informed.” Rather, it is because the U.S. trade policy for decades has failed to create a “level playing field.” The Trump Administration will proactively use all instruments to “make it expensive” for U.S. trading partners to engage in the non-economic behavior, convince U.S. trading partners to treat U.S. workers, farmers, and ranchers fairly and demand “reciprocity” both in the home and international markets.

Philosophy2: Trade deficits matter. Although trade policy is not the only cause for the trade deficit, it can be a major contributor, such as high tariffs that deny the market access for U.S. products, not imposing the border adjustment tax and currency manipulation.

Philosophy 3: China is the top challenge. According to Lighthizer, “the sheer scale of China’s coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.”

Philosophy 4: The Trump Administrations will exam all existing trade agreements to make sure they provide “roughly equivalent” measured by trade deficits. “Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.”

During the Q&A session, Lighthizer further shared his views on some cutting-edge trade issues:

  1. Regarding the NAFTA renegotiation, Lightlizher said that the negotiation is “moving at warp speed, but we don’t know whether we’re going to get to a conclusion, that’s the problem.” The consultation process with U.S. Congress is complicated and time-consuming, but it is unavoidable.
  2. The Trump Administration prefers bilateral trade deal over regional and multilateral ones. Given the size of the U.S. economy, Lighthizer believes that bilateral trade agreement will provide more negotiation leverages and ensure better enforcement.
  3. The Trump Administration will still stay very much engaged in Asia.
  4. The WTO Dispute-Settlement mechanism doesn’t work well—it has both imposed new obligations for the U.S. and reduced a lot of U.S. benefits.
  5. Regarding the outlook for the Trans-Atlantic Trade and Investment Partnership (T-TIP) negotiation, Lighthizer stressed the importance of the US-EU trade relations. He said that the series of elections in EU is a reason why the negotiation of the agreement hasn’t moved forward.
  6. Regarding TISA (Trade in services agreement), the U.S. objective is to open markets and eliminate market access barriers for U.S. companies.

2017 U.S. Fashion Industry Benchmarking Study Released

The 2018 U.S. Fashion Industry Benchmarking Study is now availablecover

The report can be downloaded from HERE

Key findings of the study:

While the majority of respondents remain confident about the five-year outlook for the U.S. fashion industry, the percentage of those who are “optimistic” or “somewhat optimistic” dropped to a record low since we began conducting this study in 2014. This change could be due to concerns about the “protectionist trade policy agenda in the United States” and “market competition in the United States from e-commerce,” the top two concerns this year.

  • The percentage of those who are “optimistic” or “somewhat optimistic” fell from 92.3 percent in 2016 to 71.0 percent in 2017, a record low since we began conducting this study in 2014. As many as 12.9 percent of respondents are “somewhat pessimistic” about the next five years, mostly large-scale retailers with more than 3,000 employees.
  • Despite the challenges, demand for human talent in the industry overall remains robust. This year, around 80 percent of respondents plan to hire more employees in the next five years, especially supply chain specialists, data scientists, sourcing specialists, and marketing analysts.
  • Cost is no longer one of the top concerns; respondents are less stressed about “increasing production or sourcing cost,” which slipped from #2 challenge in 2016 to #7 challenge in 2017. Only 34 percent rate the issue among their top five challenges this year, significantly lower than 50 percent in 2016 and 76 percent in 2015. Labor cost remains the top factor driving up sourcing cost in 2017.

Although U.S. fashion companies continue to seek alternatives to “Made in China,” China’s position as the top sourcing destination remains unshakable. Meanwhile, sourcing from Vietnam and Bangladesh may continue to grow over the next two years, but at a relatively slow pace.

  • 91 percent of respondents source from China; while 100 percent sourced from China in our past three studies, China is still the top-ranked sourcing destination this year, and the percentage of those expecting to decrease sourcing from the country fell from 60 percent in 2016 to 46 percent this year—and many more expect to maintain their current sourcing value or volume from the country in the next two years.
  • Likely reflecting the United States’ withdrawal from the Trans-Pacific Partnership (TPP) and the expectation of increasing labor costs, only 36 percent of respondents expect to increase sourcing from Vietnam in the next two years, much lower than 53 percent who said the same in 2016.
  • Respondents are cautious about expanding sourcing from Bangladesh in the next two years, with only 32 percent expecting to somewhat increase sourcing While “Made in Bangladesh” enjoys a prominent price advantage over many other Asian suppliers, respondents view Bangladesh as the having the highest risk for compliance.

U.S. fashion companies continue to maintain truly global supply chains.

  • Respondents source from 51 countries or regions in 2017, close to the 56 in last year’s study.
  • 57.6 percent source from 10+ different countries or regions in 2017, up from 51.8 percent in last year’s survey. In general, larger companies have a more diversified sourcing base than smaller companies. Additionally, retailers maintain a more diversified sourcing base than brands, importers/wholesalers, and manufacturers.
  • Around 54 percent expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; among these respondents, over 60 percent currently source from more than 10 different countries or regions.
  • The most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many.” The typical sourcing portfolio today is 30-50 percent from China, 11-30 percent from Vietnam, and the rest from other countries.
  • While Asia as a whole remains the dominant sourcing region for U.S. fashion companies, the Western Hemisphere is growing in popularity. This year, we see a noticeable increase in sourcing from the United States (70 percent, up from 52 percent in 2016) and countries in North, South, and Central Americas, which offer a shorter lead time and relatively lower risk of compliance.

Today, ethical sourcing and sustainability are given more weight in U.S. fashion companies’ sourcing decisions. Respondents also see unmet compliance (factory, social and/or environmental) standards as the top supply chain risk.

  • 5 percent of respondents say ethical sourcing and sustainability have become more important in their company’s sourcing decisions in 2017 compared to five years ago.
  • 100 percent of respondents currently audit their suppliers, including how suppliers treat their workers, suppliers’ fire safety, and suppliers’ building safety. The majority (93 percent) use third-party certification programs to audit, with a mix of announced and unannounced audits.
  • As many as 90 percent of respondents map their supply chains, i.e., keep records of name, location, and function of suppliers. More than half track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e. supplier’s suppliers. It is less common for U.S. fashion companies to map Tier 3 and Tier 4 suppliers though, which could be because of the difficulty of getting access to related information with such a globalized and highly fragmented supply chain.

Free trade agreements (FTAs) and trade preference programs remain underutilized, and several FTAs, including CAFTA-DR, are utilized even less this year than in previous years.

  •  Of the 19 FTAs/preference programs we examined this year, only NAFTA is used by more than 50 percent of respondents for import purposes.
  • Even more concerning, some U.S. fashion companies source from countries/regions with FTAs/preference programs but, for whatever reason, do not claim the benefits. For example, as many as 38 percent and 6 percent of respondents, respectively, do not use CAFTA-DR and NAFTA when they source from these two regions.

Respondents unanimously oppose the U.S. border adjustment tax (BAT) proposal and call for the further removal of trade barriers, including restrictive rules of origin and high tariffs.

  • 100 percent of respondents oppose a border adjustment tax; 84 percent “strongly oppose” it.
  • Respondents support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to the restrictive yarn-forward rules of origin in NAFTA and future free trade agreements.
  • Respondents say the “complex standards on labeling and testing”, “complex rules for the valuation of goods at customs” and “administrative and bureaucratic delays at the border” are the top non-tariff barriers they face when sourcing today.

The benchmarking studies from 2014 to 2016 can be downloaded from https://www.usfashionindustry.com/resources/industry-benchmarking-study 

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

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

Panel:

  • Augustine Tantillo, President, and CEO, National Council of Textile Organizations
  • David Spooner, Counsel representing the U.S. Fashion Industry Association
  • Stephen Lamar, Executive Vice President, American Apparel and Footwear Association
  • Randy Price, VP, Managing Director Product Supply—Americas, VF Corporation
  • Marc Fleischaker, Trade Counsel, Rubber and Plastic Footwear Manufacturers Association
  • Reece Langley, VP of Washington Operations, National Cotton Council
  • Richard Gottuso, Vice President and General Counsel, Bracewell, LLP-Hunter Douglas

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

Trade Policy and the Textile and Apparel Industry: Discussion Questions

Global Partners

#1 Why or why not the textile and apparel industry should get involved in policy advocacy?

#2 Do you think the current U.S. trade policy reflects the interests of the U.S. textile and apparel industry? Please provide detailed examples.

#3 It is said that “trade is a way for countries to strengthen partnerships and alliances, promote peace and trust between the cooperating nations, and help other countries in need.” Do you think this principle still holds today?

#4 President Trump proposes an “America First Trade Policy,” which intends to encourage more “buy America” and reduce the U.S. trade deficit. How should President Trump respond if other countries adopt a similar approach by proposing initiatives such as “EU first trade policy,” “China first trade policy” and “Mexico first trade policy”?

#5 What do you take away from Case Study 2 regarding the making of U.S. trade policy?

Please mention the question # in your comment.

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*:

figure 1

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.

2

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.

3

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

WTO Forecasts World Trade to Grow 2.4% in 2017

world trade

In its latest trade statistics and outlook report, the World Trade Organization (WTO) forecasts the world merchandise trade volume to grow within a range of 1.8-3.6% in 2017 (on average 2.4%). This growth rate is slightly up from a very weak growth of 1.3% in 2016. WTO expects trade growth to further pick up to 2.1-4% in 2018.

On the positive side, the global GDP growth is expected to rebound to 2.7% in 2017 from 2.3% in 2016, which will contribute to the expansion of world trade. Notably, WTO expects emerging economies to return to modest economic growth in 2017. However, WTO sees policy uncertainty, including the imposition of restrictive trade measures and monetary tightening, a main risk factor to world trade this year.

wto

WTO also noted that since the financial crisis, the ratio of trade growth to GDP growth has fallen to around 1:1. And 2016 marked the first time since 2001 that this ratio has dropped below 1, to a ratio of 0.6:1. Historically, the volume of world merchandise trade has tended to grow about 1.5 times faster than world output. WTO is cautiously optimistic that the ratio will partly recover in 2017, but the ratio will remain a cause for concern.

At the press conference, Trump Administration’s trade policy receives significant attention. But according to  Roberto Azevêdo, Director-General of WTO, “just an overall statement of the intention to go one particular way or another, does not tell us what the trade policy is and does not tell us what the impact of that trade policy will be. Instead, the devil is in the details”. Roberto said he is waiting to see Trump’s new trade team in place (for example, the new US Trade Representative) and he looks forward to the meaningful dialogues with the team to know more details and clarity of U.S. trade policy. Until then, any comments on the impact of Trump Administration’s trade policy would be just speculations.

[Discussion for this post is closed]

Gail Strickler, Former Assistant US Trade Representative for Textiles, on Trump’s Trade Policy

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Gail Strickler, Assistant U.S. Trade Representative for Textiles (2009-2015), who negotiated the textile chapter under the Trans-Pacific Partnership (TPP), visited UD on April 13 and delivered a public lecture on The Global Apparel Industry – Style and Substance. The event is part of the Fashion and Diplomacy Lecture Series sponsored by the Institute for Global Studies and the Department of Fashion and Apparel Studies.

During the talk, Gail made a few comments regarding trade policy in the Trump administration:

First, Gail believes that the existing U.S. free trade agreements (FTAs), trade preference programs (PTAs) and the U.S. commitments at the World Trade Organization (WTO) are unlikely to be undone by President Trump because retaliatory actions from other trading partners would be inevitable.

Second, regarding the North American Free Trade Agreement (NAFTA), Gail doesn’t think the proposed renegotiation would threaten the benefits presently enjoyed by the U.S. textile and apparel industry. Gail also thinks the Central America Free Trade Agreement (CAFTA-DR) is a lifeline for the U.S. domestic textile manufacturing sector. Notably, NAFTA and CAFTA-DR together account for almost 70% of U.S. yarn and fabric exports.

Third, as observed by Gail, Wilbur Ross, the Commerce Secretary, has been given an expanded role in trade in the Trump Administration. Gail believes Ross’s appointment is likely to bode well for NAFTA and CAFTA-DR on textiles because Ross until recently owned the International Textile Group (ITG), which has significant investments in Mexico and relies heavily on CAFTA-DR for its textile sales.

However, Gail doesn’t think concentrating on trade deficits to define trade policy is a very “good method” of navigating the trade world. Interesting enough, last time when the U.S. trade deficit significantly shrank was during the 2008 financial crisis.  

Gail is also a strong advocator of sustainability in the textile and apparel sector. She believes that trade programs can play a vital role in encouraging sustainable development, improving labor practices and facilitating sustainable regional supply chains. According to Gail, powerful the labor provisions in trade programs can be if strong incentives are coupled with a credible threat of rapid enforcement – little evidence of effectiveness if only one (or fewer) of these conditions is met. However, comparing with enforcing labor provisions, Gail finds promoting and enforcing environmental sustainability standards through trade agreements is much more complex in the textile and apparel sector and will require creativity and strong participation from private sectors and consumers.

Before the public lecture, Gail visited FASH455 and had a special discussion session with students on topics ranging from the textile and apparel rules of origin in TPP, NAFTA renegotiation, AGOA renewal and state of the U.S. textile and apparel industry.

Is the US Trade Deficit a Problem?

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Do you think the U.S. trade deficit is a problem or not? Please feel free to share your thoughts based on our lectures, the video above as well as a recent op-ed written by Peter Navarro (Director of the White House National Trade Council) for the Wall Street Journal. 

 

Are US Textile and Apparel Imports Using Free Trade Agreements? (Updated February 2017)

Free trade agreements (FTAs) are arrangement among two or more countries under which they agree to eliminate tariffs and non-tariff (NTB) barriers on trade among themselves (Cooper, 2014). Theoretically, companies shall be interested in increasing imports from FTA regions because of the duty-free treatment (i.e., the trade creation effect). Particularly, not paying import tariff duty can be a great cost advantage for textile and apparel (T&A) companies given the fact that the average US import tariff rate was still as high as 8% for textiles and 11.6% for apparel in 2016 (WTO, 2017).

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Despite the potential benefit of using FTAs, data from the Office of Textiles and Apparel show that 85.7% of US T&A imports came from non-FTA regions in 2016. Interesting enough, although more FTAs have taken effect in the United States, T&A imported under FTA as a percent of total T&A imports dropped from 15.1% in 2008 to 14.3% in 2016.

Among the FTAs in force, the North American Free Trade Agreement (NAFTA) and the Dominican-Republic-Central America Free Trade Agreement (CAFTA-DR) altogether accounted for 75.9% of the value of total U.S. T&A imports under FTAs in 2016.

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Statistics further reveal that sometimes companies did not claim duty free benefits of FTAs even though they imported T&A from the FTA region. For example, in 2016 about 29.9% of U.S. T&A imports from South Korea, 24.3% from CAFTA-DR and 16.3% from NAFTA and 12.9% from Columbia did not enjoy the duty free treatment granted by the respective FTAs.

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Some industry experts say the complex T&A rules of origin is a major factor why US T&A companies are not using FTAs enough. According to the Office of Textiles and Apparel (OTEXA), there are more than 20 different tariff lines dealing with various T&A rule of origin situations under respective FTAs.

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Additionally, U.S. T&A importers seem to use the “short supply list” mechanism–an exception to the yarn forward rules of origin under FTAs, more actively. For example, in 2016 around 2.4% of US T&A imports under FTAs took advantage of the “short supply list” mechanism, increased from only 1.2% in 2008. Similarly, a record high of 6.2% of U.S. T&A imports under the CAFTA-DR used the short supply list in 2016.

Sheng Lu

Outlook for Trade Policy in the Trump Administration and Impact on the Textile and Apparel Industry: A Summary of Views from Experts

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TPP is in trouble, but NOT dead

David Spooner, Partner at Barnes & Thornburg LLP, Former Chief Textile & Apparel Negotiator at the Office of the U.S. Trade Representative, and Former Assistant Secretary of Commerce for Import Administration: “it will be a tough road to pass it (the Trans-Pacific Partnership, TPP) during the Trump Administration…However, there may be opportunities for the (fashion) industry if Trump brings new faces to the Office of the U.S. Trade Representative (USTR) and takes a fresh look at trade agreements.” Source: https://www.usfashionindustry.com/news/off-the-cuff-newsletter/2803-recap-28th-apparel-importers-trade-transportation-conference

Jeffrey J. Schott, Senior Fellow of the Peterson Institute for International Economics: “What’s the future for TPP? Most likely, Trump will simply not implement it. Without US participation, the pact cannot definitively enter into force. It’s death by malign neglect.” “But the 11 other TPP countries may not sit idly on the sidelines waiting for US ratification. Instead, they could agree among themselves to extend the TPP benefits to each other on a provisional basis, leaving the door open for US participation in the future. If the United States subsequently ratifies the TPP, the pact would then enter into force on a permanent basis.” Source: https://piie.com/blogs/trade-investment-policy-watch/tpp-could-go-forward-without-united-states

Steve Warner, President/CEO BeaverLake6 Group LLC, former President and CEO of the Industrial Fabrics Association International (IFAI): “TPP was dead going forward. TPP isn’t actually bad for the technical textiles industry except in a few instances. The real bad culprit, though, is the passage of the Trade Promotion Authority (TPA), which I opposed when it was being hotly debated in 2015. TPA gave no wiggle room for lawmakers to make even slight changes in the TPP when it was presented by the Obama administration that could at least mollify a representative’s constituents. You couldn’t just like parts of the agreement; you had to like all of it. Thus, you were either with it entirely or have to go against it. It proved to be safer to go against it. As for T-TIP, it was going to be a tough deal to conclude when the European Union insisted a primary objective for them was the elimination of the Berry Amendment protection for US domestic manufacturers” Source: http://www.beaverlake6.com/in-my-opinion/

Face uncertainties but with hope

Michael Singer, vice president of customs compliance at Macy’s and chairman of the U.S. Fashion Industry Association (USFIA): “I do see some opportunities believe it or not, and I had to struggle really hard to come up with something positive. From the regulatory basis, there may be an opportunity for some easing of government laws and mandates.” “One of the key issues we now face is how the administration and Congress will handle trade issues in 2017… We all know how important trade and the access to world markets is in our ability to provide our customers the choices and products they expected, and yet there is no doubt the protectionist sentiment in our country is at historic levels. USFIA will be doing our best to make sure that this remains a top priority and we clearly communicate the importance and benefit of trade to U.S. consumers and the U.S. economy.” Source: http://wwd.com/business-news/government-trade/donald-trump-on-trade-taxes-and-regulations-10702130/

 Julia Hughes, President of the U.S. Fashion Industry Association (USFIA): “A lot of folks were surprised by the (election) outcome… We can see we have our work cut out for us…We’re going to be dealing with a lot of unknowns even with the continuation of a Republican Congress.” Source: http://www.just-style.com/analysis/tpp-is-not-going-to-happen-in-a-trump-administration_id129272.aspx

Daniel J. Ikenson, director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies: “If he (Trump) is able to expand and diversify the pool of people advising him, there is a reasonable chance that President Trump’s actions will be less bellicose than his rhetoric has been. After all, as someone who wants to make America “great again,” President-elect Trump will want the policies implemented by his administration to help grow the economy. Trade agreements have succeeded in that regard and, in addition to the TPP, there are plenty of countries and regions willing to partner, including the European Union and the United Kingdom (separately), and plenty of alternative negotiating platforms for accomplishing trade and investment liberalization. ” Source: https://www.cato.org/blog/shifting-gears-contemplate-trumps-trade-policies

David Spooner, Partner at Barnes & Thornburg LLP, Former Chief Textile & Apparel Negotiator at the Office of the U.S. Trade Representative, and Former Assistant Secretary of Commerce for Import Administration: “I think there’s some opportunity in a Trump administration…Assuming chaos provides opportunities, and if Trump brings in new faces to USTR, it might give us an opportunity to do new things in trade. We’ve been screwed by the yarn-forward rule for decades. Maybe there’s an opportunity to do things, even if it’s around the margins.” Source: https://sourcingjournalonline.com/tpp-ttip-wont-happen-trump-administration/

Robert Antoshak, managing director at Olah Inc.: “First, (Trump) he’ll let TPP, the Trans-Pacific Partnership) just wither on the vine. It’s pretty easy to kill TPP by doing nothing; Congress hasn’t voted on it yet. Next, he may activate the escape clause in NAFTA (the North American Free Trade Agreement with Canada and Mexico), which gives signatories a six-month window to exit the agreement. During that time, he could use an exit for political gain in the media – imagine the headlines about the US pulling out of NAFTA – but in reality, he could use the time to renegotiate portions of the agreement. And then there’s T-TIP, the Transatlantic Trade and Investment Partnership free trade deal with the EU. Personally, I’m going to keep a close eye on relations between the White House and 10 Downing Street. The commonalities between the forces supporting Brexit and Trump are all too similar. Why negotiate with all of the EU, when it may be more politically expedient for Trump to negotiate a separate economic-trade deal with Theresa May?” “I am confident that he (Trump) will attempt to alter the global hierarchy. One way of changing the system will be to focus on trade. He can make tactical adjustments to trade policy that will not only give him the front-page news he craves, but will enact the kind of systemic change upon which he ran for president.” Source: http://www.just-style.com/comment/trump-trade-policy-who-knows-what-hell-do_id129295.aspx

US-China Trade War? Keep a close watch

Augustine Tantillo, president and chief executive officer of the National Council of Textile Organizations (NCTO): “(I) would be surprised if Trump does not take some steps to crack down on currency devaluation, particularly as it relates to China.” Source: http://wwd.com/business-news/government-trade/donald-trump-on-trade-taxes-and-regulations-10702130/

 Chad Bown, Senior Fellow of the Peterson Institute for International Economics: “What he (Trump) has said is that they (China) manipulate their currency and he has threatened to impose tariffs upwards of 45%. The concerns with doing that is that we (USA) do have a trade agreement with 163 other economies of the world, the WTO. China is a part of that and by doing that (imposing tariffs upwards of 45%) unilaterally, would be violating our commitments, legal commitments to our trading partners under that deal and China would be authorized and probably would retaliate and strike back and probably do the same thing against the United States which would mean U.S. companies and exporters that make goods and agricultural products, and send those to China would suffer as a retaliatory response.” Source: https://www.c-span.org/video/?417891-3/washington-journal-chad-bown-trade-policy-trump-administration

Textile and apparel industry needs NAFTA 

Steve Lamar, executive vice president for the American Apparel & Footwear Association(AAFA): “It is well established that CAFTA and NAFTA are critical for the U.S. textile and apparel industry. The things we have continued to argue is how to find ways to make it better… NAFTA was negotiated when there were no other free-trade agreements and the world was surrounded by quotas and rules of origin that catered to the United States. But the industry has evolved.” “Trump will renegotiate NAFTA and is only threatening to abrogate the free-trade accord… Trump likes to build up leverage to get the best possible deal, and he can view trade with that same lens.” Source: https://www.apparelnews.net/news/2016/nov/17/how-would-end-nafta-affect-la-apparel-industry/

Augustine Tantillo, president and chief executive officer of the National Council of Textile Organizations (NCTO): “there will be a ‘level of caution,’ when it comes to renegotiating NAFTA. This agreement has been in place for a while and it would be clearly disruptive to simply walk away from it at this point.” Source: http://wwd.com/business-news/government-trade/donald-trump-on-trade-taxes-and-regulations-10702130/

Leonie Barrie, Managing editor of Just-Style: “Will a Trump administration revisit NAFTA? Such a prospect is a concerning one because NAFTA’s free trade framework with Mexico has been at the heart of many sourcing strategies in North America. The US exported $6.5bn of apparel and textiles to Mexico last year and, in turn, Mexico shipped $4.2bn to the US. Earlier this year executives told just-style that if Trump went ahead with threats to build a 3,200-kilometre fence on the Mexican-American border to stem immigration, it could cut $2.2bn or 20% of the $11bn in US-Mexican textiles and apparel trade in its first year.” Source: http://www.just-style.com/comment/what-might-a-trump-presidency-mean-for-apparel_id129260.aspx

Please feel free to respond to any comments above or leave your thoughts.

The US Elections Explained: Trade Policy

This video is a great supplement to our discussion on the U.S. trade policy this week. To be noted, the next president’s trade policy will affect millions of Americans, as well as the health and competitiveness of the country’s economy. Done right, trade policy can also advance strategic interests like strengthening the economies of allies, deepening diplomatic ties, and promoting global cooperation that acts as a bulwark against conflict.

Please feel free to share your thoughts on the video, including any points you agree, disagree or find interesting. Additional resources that can facilitate the discussion are also welcome.

TPP: A Conversation with U.S. Trade Representative Michael Froman

The following summary of the event is written by Natalie Smith, a student in FASH455 Fall 2016.

  • Michael Forman continually talked about the benefits of passing the TPP during the end of Obama’s term and during the lame duck period. If the TPP is not passed during this time, the bill could sit in congress for years since the two presidential candidates are against free trade.
  • Michael Forman also mentions some outstanding issues that have surrounded the TPP. One main problem is the dairy industry, which is export and import sensitive and the need for a balance to set their needs. Additionally, the pork industry has problems with implementation, especially with Japan. There are also concerns with the financial services and data flows.
  • However, Michael Forman stated the urgency of implementing the TPP as quick as possible. If it is not implemented rapidly China has the ability to set the rules of trade. China, similar to the U.S. wants to move into the Asian Pacific market, however the TPP has different objectives then other Chinese trade agreements. The TPP has a focus on labor and environmental standards and IP standards. Although, it seems the goal is to eventually get China to join the TPP. Forman mentioned if China does not end up joining the TPP, we want them to be forced to live in a TPP world, which includes high standards.
  • Michael Forman further discusses the Trans-Atlantic Trade and Investment Partnership (T-TIP), which they hope to soon reach an agreement on with the European Union. They recently finished their thirteenth round of negotiations, the main outstanding problems with the TTIP are the uneven growth, Greek crisis, and euro skepticism. Nevertheless, the TTIP is a positive agenda item to help promote job growth in Europe.

A few things that stuck out to me from this dialogue included Forman’s belief of California being the state to benefit the most from the TPP. Currently, California exports $170 billions of goods and are strong in manufacturing, agricultural, entertainment, IP industries, etc. I also found it interesting that he continually reiterated that we have not lost jobs in the U.S. solely because of globalization but mainly because of automation.

Trade Adjustment Assistance (TAA) Program: An Overview

In the class, we briefly introduced the Trade Adjustment Assistance (TAA) program, which has played a critical role in the past decades both financially helping trade-displaced workers and tactically facilitating trade liberalization agendas in U.S. trade policy.

Rationale and purpose of TAA

It is widely acknowledged that trade liberalization can benefit consumers and create new market-access opportunities for export-oriented firms. However, expanded trade may also exert negative and often concentrated effects on domestic industries and workers that face increased import competition. Freer trade is not entirely free, but bears the cost of economic adjustment. TAA program therefore is designed to provide readjustment assistance to firms and workers that suffer dislocation (job loss) due to foreign competition or offshoring. To be noted, TAA has been a significant tool to assist workers in the U.S. textile and apparel industry.

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According to official statistics, since 1974, 2.2 million American workers have benefited from the TAA program, which provides workers with opportunities to obtain the skills, credentials, resources, and support they need to obtain good jobs in an in-demand occupation — and keep them. TAA was last authorized in June 2015 to continue through June 30, 2021.

Eligibility for TAA

To be eligible for TAA, petitioning workers must establish that foreign trade contributed importantly to their loss of employment. The role of foreign trade can be established in one of several ways:

  •  An increase in competitive imports: The sales or production of the petitioning firm have decreased absolutely and imports of articles or services like or directly competitive with those produced by the petitioning firm have increased.
  • A shift in production to a foreign country: The workers’ firm has moved production of the articles or services that the petitioning workers produced to a foreign country or the firm has acquired, from a foreign provider, articles or services that are directly competitive with those produced by the workers.
  • Adversely affected secondary workers: The petitioning firm is a supplier or a downstream producer to a TAA-certified firm and either (1) the sales or production for the TAA-certified firm accounted for at least 20% of the sales or production of the petitioning firm or (2) a loss of business with a TAA-certified firm contributed importantly to the workers’ job losses.

Additionally, workers who lost jobs from firms that have been publicly identified by the United States International Trade Commission (USITC) as injured by a market disruption (for example, in anti-dumping, countervailing duty or safeguard cases) or other qualified action can also submit TAA petition.

Workers’ Benefits under TAA

TAA benefits for individual workers include:

  • Training and reemployment services and income support for workers who have exhausted their unemployment compensation benefits and are enrolled in training.
  • Workers age 50 and over may participate in the Reemployment Trade Adjustment Assistance (RTAA) wage insurance program.
  • Certified workers may also be eligible for a tax credit for a portion of the premium costs for qualified health insurance.

Financial Cost of TAA

TAA is financially covered by the federal government (i.e. taxpayers’ money) through annual appropriations. Appropriations for the program in FY2016 were $861 million, of which $450 million was for training and reemployment services and the remaining $411 million was for income support and other activities.

Role of TAA in U.S. trade policy

TAA is “presented as an alternative to policies that would restrict imports, and so provides assistance while bolstering freer trade and diminishing prospects for potentially costly tension (retaliation) among trade partners.”(Hornbeck, 2013)

Back in 1992, newly elected President Clinton oversaw the implementation of the North America Free Trade Agreement (NAFTA), but did so only after a number of conditions were attached, including TAA. In 2002, President Bush and the Republicans pushed hard to renew the long-expired trade promotion authority (TPA), but Democrats were unwilling to provide it unless TAA was reauthorized. TAA was also directly linked to the passage of three free trade agreements (FTAs) by US Congress in 2011, including US-Korea, US-Columbia and US-Panama FTAs.

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Concerns about TAA

Critics strongly debate the merits of TAA on equity, efficiency, and budgetary grounds:

  • Economic efficiency: some critics argue that economic efficiency was far from guaranteed given that subsidies can operate to reduce worker and firm incentives to relocate, take lower-paying jobs and in other ways to carryout necessary reform.
  • Equity: some critics argue that because many economic groups hurt by changing economic circumstances caused by other than trade policies were not afforded similar economic assistance (for example, domestic competition and technology advancement). For the sake of fairness, if society has a responsibility to help all those dislocated by economic change, then policies should not be narrowly restricted to trade-related harm only.
  • Administrative cost: it is argued by some economists that defining and measuring injury from tariff reduction would be inexact, if not arbitrary. Some studies also suggest that many firms, even smaller ones, could adjust on their own, and that workers could just as well rely on more broadly available unemployment and retraining programs. In addition, the high costs of TAA would dilute political support for the program.

Reference:

Collins, B. (2016). Trade Adjustment Assistance for Workers and the TAA Reauthorization Act of 2015, Congressional Research Service, R44153

Hornbeck, J.F. (2013).Trade Adjustment Assistance (TAA) and Its Role in U.S. Trade Policy, Congressional Research Service, R41922