African Growth and Oppertunity Act and Textile & Apparel

(In the video: Gail Strickler, former Assistant US Trade Representative for Textiles, highlights the immense opportunities created by the renewal of AGOA for duty free access to the massive US market for African textile and apparel producers.)

The African Growth and Opportunity Act (AGOA) is a non-reciprocal trade agreement enacted in 2000 that provides duty-free treatment to U.S. imports of certain products from eligible sub-Saharan African (SSA) countries. AGOA intends to promote market-led economic growth and development in SSA and deepen U.S. trade and investment ties with the region. (note: non-reciprocal means SSA countries do not need to offer equivalent benefits to imports from the United States.)

Because apparel production plays a dominant role in many SSA countries’ economic development, apparel has become one of the top exports for many SSA countries under AGOA.  Like many trade agreements and trade preference programs, AGOA also set unique rules of origin for textile and apparel (T&A):

First, to enjoy duty-free and quota-free treatment in the US market, eligible T&A products made in qualifying AGOA countries need to be one of the following categories:

  • Apparel made with US yarns and fabrics;
  • Apparel made with Sub-Saharan African (SSA) regional yarns and fabrics, subject to a cap;
  • Apparel made with yarns and fabrics not produced in commercial quantities in the United States;
  • Certain cashmere and merino wool sweaters; and
  • Eligible hand-loomed, handmade or folklore articles and ethnic printed fabrics.

Second, under a special rule called “third-country fabric” provision, AGOA countries with lesser-developed countries (LDBC) status can further enjoy duty-free access in the US market for apparel made from yarns and fabric originating anywhere in the world (such as China, South Korea and Taiwan). This special rule is deemed as critical because most SSA countries still have no capacity in producing capital and technology intensive textile products. [Note: Although the US imports of apparel made with third-country fabric are subject to a cap, the cap has never been reached].

According to a 2014 comprehensive study conducted by the USITC, the “third-country fabric” provision has three major benefits to the AGOA members:

1) Increase exports of apparel. This can be evidenced by the fact that most US apparel imports under AGOA came from those countries that are eligible for the “third-country fabric” provision, such as Lesotho, Kenya, Mauritius and Swaziland. In comparison, because South Africa is not eligible for the “third-country fabric” provision, its apparel exports to the United States had significantly dropped since 2003 and only accounted for 0.6% among AGOA countries in 2013.

2) Encourage foreign investment. From 2003 to 2013, a total 21 T&A FDI projects were made in SSA, among which 18 projects (or 85.7%) were greenfield FDI. The third-country fabric provision is the main driver for these FDI projects. For example, many Chinese and Taiwanese investors had opened apparel factories in Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Namibia, Nigeria and Tanzania as a source of exports to the United States and the EU.

3) Enhance trade diversification. Theoretically, relaxing rules of origin (RoO) such as the third-fabric provision can free up companies’ resources and allow them to expand export product lines. As observed by a few empirical studies, AGOA’s third-country fabric provision helped related countries increase the varieties of apparel exports between 39 and 61 percent.

AGOA receives new authorization in 2015, which will last for 10 years until 2025 (including the 3rd country fabric provision). This ten-year renewal of AGOA is regarded as critical and necessary to encourage more long-term investment to the region. As put by Florizelle Liser, Assistant US Trade Representative for Africa “What we know is that African producers of apparel, like producers of apparel all around the world, need to have the flexibility to source their input from wherever of those can be produced most effectively, cost effectively for the products that they are sewing. So we want through the “third country fabric” provision to give the African producers of apparel that flexibility. We do know in terms of establishing textiles business on the ground producing those inputs right there in Africa and that more of that indeed is going to happen. The reason is that as U.S. buyers of apparel and this is an enormous market for apparel… as U.S. buyers of apparel source more of their apparel from Africa, then investors in textile mills, which are very expensive, will be incentivized and are being incentivized to actually establish those fabric mills right there in Africa, and then be able to save time, in terms of getting those inputs that are needed for the clothing that is being produced. So we see that happening already: it’s happening in Kenya, it’s happening in Ethiopia and around the continent. And that is what we need to have more of as we go forward in this ten-year extension of AGOA.”

AGOA 1

AGOA 2

AGOA 3

Advertisements

Why NCTO and Euratex Disagree on the Textile and Apparel Rules of Origin in T-TIP?

eu-and-us-ta-rules-of-origin1

In an April 13 press briefing, the National Council of Textile Organizations (NCTO) which represents the U.S. textile industry, insists the Trans-Atlantic Trade and Investment Partnership (T-TIP) shall adopt the so called “yarn-forward” Rules of origin (RoO). Yarn-forward (or “triple transformation”) in T-TIP means, in order to receive preferential duty treatment provided under the trade agreement, yarns used in textile production in general need to be sourced either from the US or EU.  All 14 existing free trade agreements (FTA) in the United States adopt the yarn-forward RoO.

In comparison, in its position paper released in June 2015, the European Apparel and Textile Confederation (Euratex), which represents the EU textile and apparel industry, favors a so called “fabric forward” RoO in T-TIP instead of “yarn-forward”. Fabric-forward (or “double transformation”) in T-TIP means in order to receive preferential duty treatment provided under the trade agreement, fabrics used in apparel production in general need to be sourced either from the US or EU, but yarns used in textile production can be sourced from anywhere in the world.

US

Exploring data at the 4-digit NAICS code level can find that the United States remains a leading yarn producer. Value of U.S. yarn production (NAICS 3131) even exceeded fabric production (NAICS 3132) in 2014. This means: 1) U.S. has sufficient capacity of yarn production; 2) it will be in the financial interests of the U.S. textile industry to encourage more use of U.S.-made yarns in textile production in the T-TIP region (i.e. pushing the “yarn-forward” RoO).

eu textile production

EU yarn import

However, data at the 4-digit NACE R.2 code level suggests that EU(28) was short of €5,643 million local supply of yarns (NACE C1310) for its manufacturing of fabrics (NACE C1320) in 2013 (latest statistics available). This figure well matched with the value of €4,514 million yarns that EU (28) imported from outside the region that year. Among these yarn imports (SITC 651), over half came from China (22%), Turkey (19%) and India (13%), whereas only 5% came from the United States. Should the “yarn-forward” RoO is adopted in T-TIP, EU textile and apparel manufacturers may face a shortage of yarn supply or see an increase of their sourcing & production cost at least in the short run.

Sheng Lu

TPP and the U.S. Textile and Apparel Industry: Questions from FASH455

tpp textileThe following discussion questions are proposed by students enrolled in FASH455 (Spring 2016). Please feel free to join our online discussion.

#1 Is TPP successful in terms of “creating new market access opportunities” for the U.S. textile and apparel industry? Why or why not?

#2 Should the U.S. textile industry be worried that Vietnam is quickly building its own textile industry because of TPP?

#3 Compared with the case of Vietnam in TPP, why was there little discussion on Mexico and Central American countries developing their local textile industry and becoming less reliant on textile imports from the United States in the context of NAFTA and CAFTA-DR?  

#4 If China joins the TPP, do you think they would support a “yarn-forward” rules of origin or a less restrictive one? Why?

#5 Given the grave concerns about the potential impact of TPP on the U.S. textile industry, what is the point of negotiating such a trade deal?

[Discussion is closed for this post]

Reference: TPP Chapter Summary: Textiles and Apparel

The L.A. Apparel Industry Gets Involved in the Debate on Minimum Wage

LA wage

minimum wage.jpg

According to the Los Angeles Times, California’s newly proposed $15/hour minimum wage by 2022 could spur more local apparel manufacturers to exit the state if not leaving the country. For example, the American Apparel, the biggest clothing maker in Los Angeles, has announced it might wipe out about 500 local jobs and outsource the making of some garments to another manufacturer in the United States.

Statistics from the Bureau of Labor Statistics (BLS) show that the number of employment in the L.A. apparel manufacturing sector (NAICS315) decreased by around 32% from 61.8 thousand in 2005 to 42.0 thousand in 2015. Meanwhile, average hourly wage for sewing operators in California increased by around 25.5% from $8.98/hour to $11.27/hour. As another source,  the California Fashion Association says that the hourly wage for LA apparel workers was around $15/hour in 2014 (all occupations).

As reported by the Los Angeles Times, many apparel companies see L.A. increasingly become a difficult place to do business because of the expensive and limited commercial real estate, the rising pressures of raw material cost and the difficulty of finding sufficient skilled workers who can afford to live in the city. Companies expect the situation to get even worse after the minimum-wage hike further raises their operation expenses in the years to come.  

Some industry professionals suggest L.A. may “become for apparel what Silicon Valley is for technology: the hub for the design, but not the manufacturing, of products”. Data from the California Fashion Association shows that in May 2012, 3,770 independent fashion designers worked in Los Angeles, earning about $30 an hour in Orange County and $35 an hour in the L.A. County metro area. However, such a prospect is unclear given the advancement of technologies such as the CAD system which makes location less critical for fashion designers. On the other hand, L.A. is facing competitions from other apparel hubs such as the New York City for design businesses and talents.

fashion designer

Sourcing Practices and Free Trade Agreements: Discussion Questions Proposed by FASH455

trans-pacific-partnership

Sourcing Practices

#1 Many US fashion companies choose to continue to diversify their sourcing base and they are actively seeking supplementary sourcing destinations. How to explain this phenomenon?

#2 U.S. apparel imports from Vietnam has been growing rapidly in recent years. Why do you think Vietnam has been able to expand as a garment exporter so quickly, outperforming most of its Asian competitors?

#3 Why would, after everything that happened at Rana Plaza, U.S. apparel companies still outsource to Bangladesh?

#4 Why would U.S. fashion companies want to become more diversified with the countries and factories that they are currently sourcing from? Is there still room for expansion for larger corporations who are already quite diverse with their sourcing base? Why or Why not?

#5 Why does the U.S. fashion industry still hold a positive view on the future of the industry despite the reported rising pressures of increasing production or sourcing costs? If China is a major factor causing the pressure of rising production and sourcing cost, why didn’t U.S. fashion companies just move out of China and switch to source from elsewhere?

Free Trade Agreement and Rules of Origin

#6 America most often applies the “yarn forward” standard for textiles and apparel. This states that the fibers can be produced in any country, but the spinning into yarn must take place in free trade area. Do you think this is the most beneficial method the U.S. can use? Would the United States be able to, in reality, employ a “fiber forward” standard instead and use the land in the U.S. Midwest to use domestically grown cotton or wool?

#7 Two debates over free trade agreements (FTAs) include: 1) FTAs act as a “stumbling block” to global trade liberalization, and 2) FTAs act as a “building block” to multilateral trade liberalization. What is your view, especially based on our analysis on the impact of NAFTA, CAFTA-DR and TPP?

#8 In class we discussed the special relationship between NAFTA & CAFTA-DR and the US  textile industry. Will the Trans-Pacific Partnership (TPP) help the U.S. textile industry further expand export opportunities in the Asia-Pacific region? On the other hand, how will TPP potentially affect the U.S. textile and apparel trade with the NAFTA and CAFTA-DR regions?

#9 Do you think that Rules of Origin (RoO)  are having a negative impact on the larger picture of global trade? Since RoO intends to limit preferential treatments to FTA member countries only, is this simultaneously hindering outside countries from maximizing their opportunities with countries they are not in an FTA with?

#10 If the “Yarn-Forward” rule were to be implemented by the TPP, what types of effects do you think we would see on US apparel consumers? What benefits would the US textile manufacturers have if this were to happen and would the benefits outweigh the cost to US consumers and the limits that would be placed on countries such as Vietnam?

[Please feel free to join our online discussion. For the purpose of convenience, please mention the question # in your reply/comment.]


The Percent of U.S. Apparel Imports Entering under Free Trade Agreements Fell to a Record Low Level in 2015

FTA use 2015 1

Latest statistics from the Office of Textiles and Apparel (OTEXA) show that the share of U.S. apparel imports entering under free trade agreements (FTAs) fell to a record low level of only 15.4 percent in 2015. This figure was not only lower than 16.2 percent in 2014, but also was THE lowest one since 2006, despite the implementation of a few new FTAs during that period.  

FTA use 2015 2

Among the major FTAs reached by the United States, the U.S.-Bahrain has the highest utilization rate of 99.7 percent in 2015 (note: utilization rate =value of imports entering under FTA from a particular country/value of imports from a particular country), whereas a couple of FTAs whose utilization rate is below 80 percent, such as CAFTA-DR (75.8 percent), U.S.-Korea FTA (75.2 percent), U.S.-Israel FTA (65.5 percent), U.S.-Australia FTA (53.7 percent) and U.S.-Morocco FTA (34.6 percent). A low utilization rate implies that U.S. companies did not claim the preferential duty benefits while importing apparel from these FTA regions.

FTA use 2015 3   

On the other hand, CAFTA-DR and NAFTA altogether account for around 76 percent of U.S. apparel imports entering under FTAs in 2015. This result is consistent with the findings in the 2015 U.S. Fashion Industry Benchmarking Study which also finds that CAFTA-DR and NAFTA were the two most frequently utilized FTAs reported by the survey respondents.

As a result of the lower share of apparel imports entering under FTAs, the American Apparel and Footwear Association Apparelstat 2015 released this week found that the effective average U.S. apparel import duty reached 13.54 percent in 2014, which is even higher than 11.97 percent in 2001. In comparison, over the same period, the average U.S. import duty on ALL products dropped from 1.64 percent in 2001 to 1.40 percent in 2014.

by Sheng Lu

Extra-EU Trade for Textile & Apparel Went Up in 2015

EU export (2015)

EU import (2015)

According to statistics released by the European Apparel and Textile Confederation (Euratex), extra-EU trade for textile and apparel (T&A) achieved record high in 2015, suggesting a positive economic state of the industry.

Specifically, extra-EU T&A exports went up by 3.6 percent in 2015. Among the key export markets: thanks to the appreciation of U.S. dollar against Euro last year, EU’s textile and apparel exports to the United States respectively increased by 16 percent and 21 percent. Despite China’s slowed economic growth, EU’s export to China was also robust: 6 percent growth for textile and 19 percent growth for apparel. However, EU’s T&A exports to Russia (down 27 percent for textile and down 29 percent for apparel) and Ukraine (down 26 percent for apparel) sharped dropped, reflecting the substantial impact of political instability on trade.  

In terms of the import side, extra-EU T&A imports rose 9.6% in 2015. China remained the top external T&A supplier to the EU, however, other Asian countries with lower-production cost are quickly catching up. This is particularly the case for apparel: while EU’s apparel imports from China went up 6 percent in 2015, imports from Bangladesh (up 24 percent), Cambodia (up 33 percent), Vietnam (up 26 percent), Pakistan (up 25 percent) and Myanmar (up 79 percent) grew much faster, suggesting a relative decline of China’s market share in the EU market.