Trans-Atlantic Trade and Investment Partnership

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From Just Style, March 2013

Textile and clothing industry groups on both sides of the Atlantic have welcomed the news that the EU and the US are to commence talks on the biggest bilateral trade deal ever negotiated.

European Union (EU) clothing and textile industry association Euratex has hailed the launch of talks between the United States and the EU to forge what the European Commission calls the “biggest bilateral trade deal ever,” saying EU exporters will benefit.

A deal, once sealed, could eliminate American duties as high as 19%, says Euratex.

The EU’s textile and clothing industry already has a positive trade balance with the US. “Tariffs are still high in the US” for textile and clothing, Euratex president Alberto Paccanelli has stressed.

And it is worse when it comes to exporting products containing wool where the “duties are generally higher, sometimes above 19%,” Luisa Santos, head of international trade at Euratex, told just-style.

So “we expect to have duty-free access from the entry into force of the agreement and we are willing to give the same benefit to the US,” Ms Santos noted. With exports being highly price-sensitive, an elimination of the duties could “help substantially our competitiveness in the market.”

The EU’s textile and clothing exports to the US have been steadily increasing and are already substantial. In 2009, these exports stood at EUR2.8bn (US$3.7bn) and in 2010, they rose to EUR3.3bn, while they reached EUR3.7bn in 2011.

In negotiations, the EU would have a “forward looking approach” in terms of tariff and duty-free access from day one, according to Santos.

US sees opportunity

There was also optimism from American importers and retailers. Julie Hughes, president of the United States Association of Importers of Textiles & Apparel (USA-ITA), said a free trade agreement “presents a terrific opportunity” to remove duties and resolve regulatory issues that hold back trade between the US and the EU.

“We are especially enthusiastic about the launch of the US-EU trade negotiations,” Hughes told just-style adding: “Many people don’t realise that the EU is actually one of the top destinations for US exports of yarns, fabrics, and apparel” or that US brands import yarns and fabrics from the EU to manufacture ‘Made in the USA’ garments.

However some US groups are concerned because of different tax and regulatory regimes between the two regions.

“We are eagerly watching how the US government is going to engage with the EU,” said David Trumbull, vice president of the USA’s National Textile Association.

He is concerned about the fact that the US does not have the comprehensive sales tax systems in place in Europe, which do not apply for exports. Meanwhile, American producers can pay more through income tax or corporate tax: so US exporters could be placed at a comparative tax disadvantage, also having to pay VAT in Europe.

He said: “We do not want to get subjected to double taxation when exporting to the EU while EU producers get away with paying import duties to the US.”

Other issues to discuss

Meanwhile, back in Europe, the European Commission is compiling an impact study on “which sector benefits how”, said Helene Banner, EU trade spokesperson. The study will be released in two months.

An earlier report from the EU-US High-Level Working Group on Jobs and Growth (HLWG) had, noted Banner, recommended “eliminating all duties on bilateral trade, with a substantial elimination of tariffs upon entry into force, and a phasing out of all but the most sensitive tariffs in a short time frame.”

But there are host of other issues to discuss, notably, labelling, safety and consumer protection, during clothing and textile talks.

One issue is that “the information that has to be included on the label is more extensive in the US than in the EU,” Ms Santos stressed. For instance, the US has mandatory origin labelling – which is currently only a (recent) proposal in the EU.

And when it comes to safety and consumer protection, the US has its own legislation that varies from the EU. – for example requirements in terms of testing.

Santos said it is important to focus on “harmonisation to reduce costs for companies, especially small-and-medium enterprises in both sides of the Atlantic”.

Brussels and Washington aim to conclude the talks “ideally in about two years from now,” said EU trade Commissioner Karel De Gucht: “But more paramount than speed is achieving an ambitious deal.”

The European Commission will present draft negotiating directives to the EU Council of Ministers for approval in March and similar proposals are being sent to the US Congress. “Both sides aim to advance fast once negotiations are started,” added Banner.

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2013 U.S. Trade Policy Agenda Hearing

This year’s USTR trade agenda hearing at the senate finance committee is quite interesting. Ron Kirk just stepped down and Demetrios took the testimony as the acting USTR. Demetrios looks both young and smart. I am not sure whether he is among the top candidates to be considered for the USTR position but his congressional working experiences and legal background make him at least a qualified candidate in my view. Nevertheless, USTR usually is a political appointee. More interesting to watch is Sherrod Brown and Rob Portman now serve in the same committee. Sherrod obviously holds a very suspicious view about trade liberalization. As I remember he was the only senator who raised question focusing on import restrictions. Demetrios looked like a student before Rob Portman understandably.  Attending such a hearing should make Portman feel quite special too. “Unfortunately”, now he has to speak more for Ohio than for globalization.  TPA (Trade Promotion Act) turned out to be the No.1 hot topic in today’s hearing.  Japan & TPP raised grave concerns as well. I am not sure whether it is the best timing to accept Japan into the TPP. This unavoidably will make the agriculture & auto related negotiations much more challenging than otherwise.    Something a little surprising to me is China was not targeted very often today.

By Sheng Lu

Minimum Wage and Unemployment

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Although the graph above talks about the U.S. economy, the underlying principle applies to all countries in the world: raising minimum wage may reduce employment. The reason is fairly simple: just like how we purchase clothing given a cerain amount of budget, the higher the price, the less quantity we purchase. Similarily, when labor becomes more expensive, to reach the profit goal, companies also have to reduce hiring people if productivity remains unchanged. 

Moreover, a higher minimum wage makes capital, another production input, relatively cheaper. This is why in many developed countries, more and more machines are being used in production in replace of labor. The choice of labor versus capital is based on their relative cost and abundance. 

With that, it is easier to understand why many developing countries show grave concerns about paying more to their workers. The competition is so fierce in the textile & apparel industry and companies can hardly afford an increase of production cost. The only difference with the case of the U.S. economy is: because developing coutries have no money to capitalize production and apparel manufacturing is labor intensive in nature, therefore, a rising minimum wage will simply result in a shift of production to other places where cheaper labors are available.

Outlook of the U.S. Textile Industry in 2013

The latest industry outlook proposed by the Textile World argues that in 2013 the U.S. textile industry will improve industry strategy and planning in the following areas:

  • increased management emphasis in such areas as sourcing, inventory control
  • use of more flexible and efficient machinery and equipment
  • new and upgraded consumer products,
  • more ecologically friendly offerings
  • more Made-in-USA labels

 Don’t misunderstand/misinterpret these terms. The proposed strategies actually tell us:

1. the U.S. textile industry will become even more capitalized in production (as the result of “using more flexible and efficient machinery and equipment”).

2. the success of the U.S. textile industry relies on import (that’s why “management of sourcing” is suggested to be emphasized), despite the intension to promote “made in USA” label which has more to do with the current “rules of origin” defining the nationality of the products.

3. the softgoods industry (textile, apparel and related retailing) is a highly buyer-driven industry. Even textile mills have realized the importance of understanding and directly reaching the consumers.

4. sustainability is a major factor driving technical reform and upgrading in the textile industry. Other than the environmental concerns, there is another strategy behind the efforts: when the U.S. textile industry is fully ready to “be able to produce in a sustainable way”, it will ask for legislation support to require “everybody”(including imported products) to meet the same environmental standards(professionally, we call it “technical barriers of trade”). Developing countries can compete on price, but definitely cannot compete on technology and capital which are the basis of achieving “sustainability”.  Bu then, you will see sustainability becomes a real game changer.     

 Another relevant forecast made by the article “But holding these costs down through efficiency gains can also have a negative impact —namely, a smaller industry workforce. In the textile sector, for instance, squeezed by productivity gains, overall employment should drop from 232,000 in 2012 to near 209,000 by 2015.” As we menioned in the class, technology kills jobs too, although new types of jobs will be created at the same time–but with totally different skill requirements.