Removing China from textile & apparel supply chain is impossible
Sheng Lu, is an Associate Professor and Director of Graduate Studies in University of Delaware's (URI’s) department of Department of Fashion and Apparel Studies. An expert in the global textile industry and international trade, Professor Lu has a special interest in how the industry drives economic growth, creates jobs, and reduces poverty. Lu spoke to Paulami Chatterjee at length about the current issues plaguing the sourcing of textiles & apparels around the world as the world continues to recover from the Corona pandemic.
After the outbreak of the pandemic, what were the issues which sprang up suddenly and were new to the textile world?
Over the past 1.5 years, textile and apparel companies have been struggling with supply chain disruptions, shipping crises, hiking prices, and market fluctuations caused by COVID-19. While these problems are not necessarily new to the industry, their magnitude is unprecedented this time. COVID-19 also created market uncertainties, making it highly challenging for textile and apparel companies to operate normally. As Covid “sets the agenda,” textile and apparel companies can do little to mitigate the potential market disruptions. Nothing can be worse for businesses than are not being able to tell what to expect next.
Another issue is the Brexit. Is that having any significant impact on the sourcing scenario of the world or is it just limited to the European nations?
Despite Brexit, the trade and business ties between the UK and the rest of the EU for textile and apparel products continue to strengthen. Thanks to the regional supply chain, EU countries remain a critical source of apparel imports for UK fashion brands and apparel retailers. Nearly 35 per cent of the UK’s apparel imports came from the EU region in 2019, a record high since 2010. Meanwhile, the EU region also is the single largest export market for UK fashion companies—about 79 per cent of the UK’s apparel exports went to the EU region in 2019 before the pandemic.
However, trade statistics in the short run may not fully illustrate the impacts of Brexit. For example, some recent studies suggest that Brexit has increased fashion companies’ logistics costs, delayed customs clearance, and made hiring talents more inconvenient. Meanwhile, Brexit provides more freedom and flexibility for the UK to reach trade deals based on its national interests. For example, the UK recently submitted its application to join the Comprehensive Progressive Agreement of the Trans-Pacific Partnership (CPTPP). The UK is also negotiating a bilateral trade agreement with the United States. The reaching of these new trade agreements, particularly with non-EU countries, could significantly promote UK’s luxury apparel exports and help the UK diversify its source of imports.
According to reports, by March 2021, just 40 per cent of global cargo shipments reached their destinations on schedule. How is the increasing shipping prices and limited availability of containers affecting sourcing?
The ongoing shipping crisis has imposed significant challenges on fashion companies right before the holiday season. Unfortunately, there is no perfect and quick solution to the problem. However, the current situation reminds fashion companies about the importance of maintaining a good relationship with their key vendors and the necessity of improving sourcing flexibility and agility.
On the other hand, confirming the impact of shipping crisis on sourcing, my analysis shows that US apparel imports have started to see a notable price increase. While an across-the-board price increase was not a big concern at the beginning of 2021, the increase has become more noticeable since June 2021. For example, of the top 20 US apparel imports (HS chapters 61-62) at the 6-digit HS code level based on import value, the price of thirteen products increased from May to Aug 2021. The price increase at the country level is even more significant. From June to August 2021, the average unit price of US apparel imports from leading sources all went up substantially, including China (14.2 per cent), Vietnam (13 per cent), Bangladesh (11.6 per cent), and India (10.5 per cent).
Further, apparel and footwear products targeting the value and luxury markets seem to experience more significant price increase than those in the mass market. Notably, US fashion companies source most high-volume value products (apparel and footwear) from Southeast Asia, many of which have just began to recover from the newest round of Covid lockdown. With a supply shortage, the price will go up, understandably. Meanwhile, many affluent consumers traveled less and spent more on clothing and shoes during the pandemic. The increased demand pushed the retail price for luxury apparel and footwear items even higher. Industry sources show that many luxury apparel items sold in the US market from May to August 2021 were priced 40 per cent higher than in 2020.
The virus is here to stay. What steps the companies must take to mitigate its impact – be it at the supply chain level or sourcing of raw material, logistics, etc?
The ongoing shipping crisis has imposed significant challenges on fashion companies right before the holiday season. Unfortunately, there is no perfect and quick solution to the problem. However, the current situation reminds fashion companies about the importance of maintaining a good relationship with their key vendors and the necessity of improving sourcing flexibility and agility.
On the other hand, my analysis shows that US apparel imports have started to see a notable price increase. While an across-the-board price increase was not a big concern at the beginning of 2021, the increase has become more noticeable since June 2021. For example, of the top 20 US apparel imports (HS chapters 61-62) at the 6-digit HS code level based on import value, the price of thirteen products increased from May to Aug 2021. The price increase at the country level is even more significant. From June to August 2021, the average unit price of US apparel imports from leading sources all went up substantially, including China (14.2 per cent), Vietnam (13 per cent), Bangladesh (11.6 per cent), and India (10.5 per cent).
Has China’s fall from grace and the US-China trade war really changed the sourcing strategy for the US and other major countries? Has this primarily brought forth the China+1 model in force?
2021 marks the third year into the US-China tariff war. As I write, the Biden administration has not lifted the Section 301 tariffs on imports from China, meaning almost 80 per cent of Chinese textiles and apparel are still subject to the 7.5 per cent punitive tariffs on top of the regular import duties. Again, according to the survey that USFIA and I conducted, nearly 90 per cent of the respondents say that the tariff war has directly increased their company’s sourcing cost this year. Another 74 per cent say that the tariff war has hurt their company’s financials.
To mitigate the tariff war’s broader impacts, respondents, on average, have attempted 3-4 different approaches. For example, 93 per cent of respondents in our 2021 survey say they “moved some sourcing orders from China to other Asian countries.” Notably, around one-third of respondents say that in addition to switching to Asian suppliers, they also moved some sourcing orders from China to countries in the western hemisphere, especially members of US-free trade agreements. By leveraging China’s production capacity and flexibility, 56 per cent of respondents say they “adjusted the types of products sourced from China to mitigate the tariff’s impacts.” Additionally, around 44 per cent of respondents say their vendors in China “lowered the price to keep the sourcing orders.” However, I have to say many fashion companies started to diversify their apparel sourcing away from China far before the trade war, primarily driven by business factors like sourcing cost. The trade war appears to have more or less accelerated the process.
Do you see a rise in nearshoring for the apparel/fashion industry as a result of the pandemic? Is Latin America benefitting out of it?
Amid COVID-19, shipping crisis, and US-China tariff war, US fashion brands and retailers demonstrate a new round of interest in expanding “near-sourcing” from member countries of the US-Mexico-Canada Trade Agreement (USMCA, previously NAFTA) and Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Data shows that 15.2 per cent of US apparel imports came from USMCA and CAFTA-DR members Year-to-date (YTD) in 2021 (January-August), higher than 13.7 per cent in 2020 and about 14.7 per cent before the pandemic (2018-2019). Notably, CAFTA-DR members’ market shares increased to 11 per cent in 2021 (January to Aug) from 9.6 per cent in 2020. The value of US apparel imports from CAFTA-DR also enjoyed a 54 per cent growth in 2021 (January—Aug) from a year ago, faster than 25 per cent of the world’s average.
My analysis also shows that sourcing apparel from USMCA and CAFTA-DR members helps US fashion brands and retailers save around $1.6-1.7 billion tariff duties annually. However, USMCA and CAFTA-DR members still have limited production capacity for many man-made fibers (MMF) clothing categories (such as jackets, swimwear, dresses, and suits), typically facing a higher tariff rate. This result also implies that expanding production capacity and diversifying the export product structure could make USMCA and CAFTA-DR more attractive sourcing destinations.
Fashion executives/brands are increasingly being urged to place sustainability at the core of their business models post Covid-19. Do you see a rise in companies opting for responsible sourcing?
Again, according to the latest survey I conducted in collaboration with USFIA, many US fashion companies are highly committed to sustainability and social compliance despite unprecedented financial and operational challenges during the pandemic. For example, this year, over 80 per cent of respondents say they plan to allocate more resources to sustainability and social compliance over the next two years (i.e through 2023), up from 70 per cent in 2020 and 63 per cent in 2019. Another example--most respondents say that they map their supply chains (i.e keep records of name, location, and function of suppliers). In addition to tier I & tier II suppliers, more respondents track who manufactured yarns, threads, and trimmings (i.e tier III suppliers). Overall, I am confident that we can make the textile and apparel supply chain more sustainable and socially responsible with a joint effort.
If the above is true, which are the countries benefitting out of it and why?
The trade war benefits nobody, period. Today, textiles and apparel are produced through a highly integrated supply chain, meaning the US-China tariff war could increase everyone’s production and sourcing costs. Back in 2018, when the tariff war initially started, the unit price of US apparel imports from Vietnam, Bangladesh, and India--all experienced a notable increase. Whereas companies tried to switch their sourcing orders, but the production capacity was limited outside China. Meanwhile, China plays an increasingly significant role as a leading textile supplier for many apparel exporting countries in Asia. Despite the trade war, removing China from the textile and apparel supply chain is impossible and unrealistic.
What would it take for India to develop as a major textile sourcing hub, if not at par now but as a potential competitor to China?
India is already a major textile and apparel sourcing hub—it ranked as the world’s 3rd largest textile exporter and the 6th largest apparel exporter in 2020. As one of the world’s most populous countries, India’s huge domestic consumer market and growth potential can serve as another engine supporting the development of the local textile and apparel industry.
My recent studies show that fashion brands and retailers see India’s overall competitiveness in terms of production cost. Importers also say that improving speed to market, production flexibility and agility, and further strengthening the industry’s vertical integration could make the “Made in India” concept even more competitive.
How to do you think the power shortages happening across Europe, China, and other nations, are going to impact the apparel supply chains?
One of my primary concerns about power shortage is that it could exacerbate inflation and result in a more severe price hike throughout the textile and apparel supply chain. When Chinese factories are forced to cease production because of power shortage, the impact could be far worse than recent Covid-related lockdowns in Vietnam and Bangladesh. As mentioned earlier, more than half of many leading Asian apparel exporting countries’ textile supplies come from China today. Also, no country can compete with China in terms of the variety of apparel products to offer. In other words, for many western fashion brands and retailers, their stores and shelves could look emptier (i.e, having less variety of products to sell) because of China’s power shortage problem.
How do you compare the African and Asian markets when it comes to sourcing and manufacturing? Which are the advantages both offer?
Asia remains the world’s most dominant textile and apparel sourcing base. According to the statistics from the United Nations (i.e UNComtrade), Asian countries contributed about 65 per cent of the world’s total textile and apparel exports in 2020. In the same year, Asian countries together imported around 31 per cent of the world’s textiles and 19 per cent apparel. Asian countries have also established a highly efficient and integrated regional supply chain by leveraging regional trade agreements or trade blocs. For example, as much as 85 per cent of Asian countries’ textile imports came from other Asian countries in 2019, a substantial increase from only 70 per cent in the 2000s. With the recent reaching of several mega free trade agreements among countries in the Asia-Pacific region, such as the Regional Comprehensive Economic Partnership (RCEP), the pattern of “Made in Asia for Asia” is likely to strengthen further.
In comparison, only about 1 per cent of the world’s apparel imports come from Africa. And this percentage has barely changed over the past decades. Many western fashion brands and retailers have expressed interest in expanding more apparel sourcing from Africa. However, the tricky part is that these fashion companies are hesitant to invest directly in Africa, without which it is challenging to expand African countries’ production and export capacity. Political instability is another primary concern that discourages more investment and sourcing from Africa. For example, because of the recent political turmoil, Ethiopia, one of Africa’s leading apparel sourcing bases, could lose its eligibility for trade preference programmes like the African Growth and Opportunity Act (AGOA). Without AGOA’s critical support, Ethiopia’s apparel exports to the US market could see a detrimental decline. On the other hand, while these trade preference programmes are crucial in supporting Africa’s apparel exports, they haven’t effectively solved the structural issues hindering the long-term development of the textile and apparel industry in the region. More work needs to be done to help African apparel producers improve their genuine export competitiveness.
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