Textile and Apparel in the 2015 US Trade Policy Agenda

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Two hearings were held on January 27 where US Trade Representative Michael Froman testified before the Senate Finance Committee and the House Ways & Means Committee on the 2015 US Trade Policy Agenda. During the Senate hearing, two questions were directly related to the textile and apparel (T&A) industry:

Senator Robert Menendez (D-NJ) expressed concerns that inclusion of several concessions requested by Vietnam regarding rule of origin and short supply list for T&A in the Trans-Pacific Partnership (TPP) will result in severe job losses and potentially hurt the T&A industry in the Western Hemisphere. In response, Froman said that:

“We worked in the textile area through the yarn forward rule, the short supply list, rules of origin and customer enforcement and corporation to take these things into consideration. We’ve worked very closely with textile manufacturers in the US who are part of this supply chain with Central America to get the best of our understanding of what are the sensitivities are and take that into account in our negotiations.”

John Isakson (R-GA) raised the question about China’s recent cotton reserve & subsidy policy and its negative impact on the world cotton price which “has declined from 83-85 cents/pound not a long ago to 55-57 cents/pound recently.” Isakson wondered if anything USTR would do to address the problem, such as bringing the case to the World Trade Organization (WTO) Dispute Settlement Body (DSB). In response, Froman said that:

“The whole pattern of agriculture subsidies has changed a lot over the last ten to fifteen years. When (WTO) Doha Round was first started, focus on the subsidy was really the United States and the European Union. But in both of those areas subsidies have come down, while subsidies from China and India in the agriculture area have been increased. By some measures, China is now the largest subsidizer of cotton. We are engaging with them. We have conversations in the last couple of days also about that, about taking a fresh look at where subsidies have been provided, how it distorted the market and how that should play into the global trading negotiations. It is important to update our views on where the subsidies come from and what impact it has. For poor farmers in Africa, it doesn’t matter whether the subsidies come from the US or from China. It matters that the subsidy exists and so we will be engaged with China on this and create some disciplines around us. We are looking at all options out there. We are not yet determined whether there will be a (WTO DSB) case brought in that area.”

Other hot topics covered by the hearing include passing Trade Promotion Authority (TPA) bill, creating jobs through trade, addressing agriculture, digital trade & data flow, State owned enterprises (SOE), currency manipulation, transparency and Intellectual property right (IPR) protection issues in TPP, strengthening trade enforcement, renewing African Growth and Opportunity Act (AGOA), and making further progress of Trade in Service Agreement (TiSA) and Information Technology Agreement (ITA) at WTO.

The followings are some personal comments on the overall atmosphere in the Senate hearing:

  • It doesn’t seem possible to be able to conclude TPP without TPA, for at least two reasons: 1) Congress doesn’t want to give up its authority on trade policy. If TPP negotiation were concluded before the passage of TPA, Congress would feel it had little influence on shaping TPP through the mechanism of TPA trade negotiating objectives. This will add to the difficulty of potentially passing the TPP implementing bill under expedited legislative procedures. 2) Other TPP members, such as Japan, are unlikely to put the final offer on the negotiation table, especially for politically sensitive issues, without having the assurance provided by TPA.
  • There is a growing call for “strong” labor and environmental provisions in TPP. This is not surprising given the fact that the general public is attaching greater importance to labor and environmental impact of international trade. NGOs, such as labor and environmental groups have become more critical players in trade politics nowadays as well. Practically, strong labor and environmental provisions are regarded as important means to create “a level playing field” for US products competing in the world marketplace. These provisions can also be used as leverages to push for better human right practices in some foreign countries. That being said, as noted by many trade experts, trade policy shall not be expected to solve environmental and labor problems.
  • Currency manipulation becomes a hot discussion topic again, but USTR doesn’t seem to be interested in including the currency provision in TPP. Many senators raised the currency issue during the hearing, however, it shall be noted that: 1) Free trade agreement (FTA) and even WTO is not an appropriate venue to deal with currency issues; 2) the business community actually does not see currency as a priority issue to address. They care more about things like market access, IPR protection, national treatment and dealing with SOEs. 3) Currency manipulation provision is not an effective way to solve currency concerns. For example, it would be impossible to determine what shall be the “right” exchange rate–ten economists may give twelve different answers. 4) It will be interesting to see what language the potential TPA bill will use to define currency issue as a  trade negotiating objective.
  • Benefit of trade is still largely misunderstood. During the hearing, almost all support for TPA & TPP came from the export side: “export is good for the US economy”, “export can create higher-paid middle class jobs”, “US runs trade surplus with all FTA partners and all trade deficits came from those non-FTA partners”…However, nobody in the hearing talked about the benefits of imports and the global nature of supply chain in the 21st Mercantilism is still a popular view in Congress.

Sheng Lu

2014 World Textile Industry Labor Cost Comparison

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According to the latest Werner International Labor Cost Comparison Report, labor cost gaps remained huge among textile industries worldwide in 2014. Within the 40 countries covered by the report, labor cost in Switzerland ($51.36/hour), the highest, was 82 times higher than in Bangladesh and Pakistan ($0.62/hour), the lowest, in 2014. Overall, labor cost in Western European countries (such as Italy, France and Germany)+Japan remained the highest in the world, followed by (from high to low):

  • the United States
  • advanced economies in East Asia (South Korea and Taiwan)
  • Eastern European countries (such as Poland)
  • South American countries (such as Brazil and Peru) 
  • developing countries in East and Southeast Asia (such as Bangladesh and Pakistan).

[Note: The report does not cover African countries].

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On the other hand, consistent with statistics from other sources, Werner’s report also suggests remarkable labor cost increase in China, which is rapidly approaching the $3 per operator hour (up from $2.1 in 2011 and up from only 0.69 US$ in the year 2000). From 2000 to 2014, labor cost in the U.S. textile industry went up about 25 percent. However, in terms of absolute difference, China’s labor cost was still only 15 percent of the level in the United States in 2014. As noted by the publisher, the labor cost comparison report covers all primary textile industry sectors, consisting of spinning, weaving and dyeing & finishing. Cut & sewing operations are not part of these comparisons. Labor cost in the clothing industry is not covered by the report however.

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Tariff or Not

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Tariff is a tax levied on imports only. Tariff will make imports more expensive in the market. For example, if the original price of a “Made in China” T-shirt is $5, with a 20% tariff, it becomes $5*(1+20%)=$6 when sold in the U.S. market.

Tariff has multiple impacts. On one hand, tariff may protect the domestic industry from foreign competition and help government of the importing country gain some tax revenues. On the other hand, consumers will have to pay more (or consume less) because of increased market price as result of tariff. Tariff also hurts exporters and those sectors operating on a global basis. For example, a high tariff rate on imported fabrics may raise the production cost of a clothing manufacturer which sells its finished products to the world market. According to the World Trade Organization, nearly 60 percent of world trade today are inputs and components. 

Questions for discussion:

  • How to explain the phenomenon that tariff rates are so different across different types of product in the picture? Should they be so different?
  • Should tariffs on flats, sneakers, boots and moccasins be lowered or eliminated in the U.S. or even world wide? What issues need to be considered?

Latest Trends in the US Apparel Industry (update: January 2015)

Latest statistics released by the American Apparel and Footwear Association (AAFA) indicate several trends in the U.S. apparel industry:

  • First, the retail market is gradually recovering. According to AAFA, on average, every American spent $907 on clothing (or purchased 64 garments) in 2013. Although this figure is still less than the one before the 2008 financial crisis, it is the highest level since 2012.
  • Second, “Made in USA” is growing but US consumers still rely on imports. Data from AAFA shows that US apparel production increased 6.2 percent from 2012 to 2013, accounting for 2.55% share of U.S. apparel market. However, nearly 98% of apparel consumed in the US were still imports in 2013.
  • Third, China remains the top apparel supplier to the United States. Despite the concerns about the rising production cost in China, latest data from OTEXA shows that, in 2014 (January to November) China still accounted for 42.5% of US apparel imports in terms of quantity and 39.1% in terms of value–almost the highest level in history. These two numbers were 41.7% and 39.9% a year earlier. On the other hand, Vietnam’s market share has reached 9.3% (by value) and 10.7% (by quantity) in 2014 (January to November), about ¼ of China’s exports to the United States.
  • Fourth, job market reflects continuous shift of the apparel industry. According to AAFA, among the total 2.8 million workers directly employed by the US apparel industry in 2013, only 5% were in the manufacturing sector, 5% were in the wholesaling sector and as many as 90% were working for retailers. However, within the apparel retail sector, total employment by the department stores is quickly shrinking—dropped 7.6 percent from 2012 to 2013 and cumulatively 21.3 percent from 1998 to 2013. At the same time, specialty clothing stores and sporting goods stores are hiring more people: 13.8% and 64.5% increase of employment from 1998 to 2013 respectively. The contrasting employment trend reflects the changing nature of the U.S. apparel retail market and the channels through which U.S. consumers purchase clothing.
  • Fifth, US consumers are paying higher taxes on imported clothing. Calculated by AAFA, while the overall U.S. imports were only charged by a 1.4% tariff rate, the effective duty rate on all apparel imports rose to 13.6% in 2013. The higher effective duty rate may be caused by the fact that less apparel were imported utilizing free trade agreement or trade preference programs.

Appendix: Facts on the US Apparel Market in 2012

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Data Source: http://www.statista.com/

Top 10 Most Read Articles of TMD433 Course Blog in 2014

2014

1. Global Apparel and Footwear Market Update—2014

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3. Exclusive Interview with Julia K. Hughes, President of the United States Fashion Industry Association

4. 3D Printing and the Future of the Fashion Industry

5. World Textile and Apparel Trade (Update: August 2014)

6.Why does the US Textile Industry Want Yan-forward Rule of Origin (RoO) in TPP?

7. Why Textile and Apparel Majors Need to Know about Trade Policy

8. I am Textiles and Apparel

9. Digital Economy and the Fashion Industry: A Macroview

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