Debate on Used-clothing Trade, Sustainable Development Strategy and Wage Level in the Garment Industry: Discussion Questions from FASH455

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Debate on used-clothing trade and strategy for building a sustainable garment industry

#1 Should countries in East Africa ban on imported used-clothing for the survival of its own apparel manufacturing industry, which is at the nascent stage of development?

#2 From an environmental sustainability standpoint, wouldn’t it make sense for East Africa to continue importing used clothes for their Mitumba wholesale center rather than ceasing this trade and manufacturing new clothes? What is your view?

#3 If clothing manufacturing has significantly helped Haiti grow its economy, should East African countries follow the same development path?

#4 The reading article says that trade agreements have extended Haiti’s duty free access to the United States until 2020. What might happen to Haiti’s garment exports after 2020? Can it survive? In your view, is Haiti’s garment industry a model for sustainable development?

#5 Why is the United States willing to offer duty free access for apparel made in Haiti but not made in other Asian countries, such as Bangladesh? Is it fair?

Debate on Wage level of garment workers

#6 Garment manufacturing and exporting are picking up Haiti’s economy, although most Haitian garment workers only make roughly $180-$200 per month. Meanwhile, Haiti is looking to attract retailers’ further investment. Given the fact that there are so many places in the world that retailers can source clothing from, will an increase of wage level drive away foreign investment in Haiti and negatively affect Hait’s garment exports?

#7 If consumers are willing to pay higher, will it help increase the wages of factory workers in developing countries? Or as consumers, we can do little about it?

#8 Should globalization be responsible for the low wage of garment workers in the developing countries? Without globalization, would garment workers in the developing countries live a better life?

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

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

Q&A for International Trade Theories

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Q1: How mercantilism and the absolute advantage theory see international trade differently?

Mercantilism believes everything shall be produced domestically and maximizing exports & minimizing imports is the best route to national prosperity.

Instead, absolute advantage theory believes countries should specialize in what they do best (means making a product cheaper, better and faster) while trading with other countries who are also doing what they’re best at. With specialization and free trade, all countries can end up consuming more products than in the absence of trade.  

Q2: What are the similarities and differences between the absolute advantage theory and the comparative advantage theory?

Similarities:

  • Both theories believe any economy has limited resources and there will be opportunity cost for making any product. Opportunity cost refers to the loss of potential gain from making one product because of choosing to make another product.
  • Both theories believe countries should specialize in production (rather than making everything by itself as suggested by the mercantilism).
  • Both theories also support free trade (rather than intentionally maximizing exports and minimizing imports as suggested by the mercantilism).

Differences:

  • According to the absolute advantage theory, countries can only specialize in producing and exporting products that they can make absolutely cheaper, better and faster than other nations. Whereas according to the comparative advantage theory, countries should specialize in producing and exporting products that they have relatively bigger advantages or relatively smaller disadvantages [i.e. a country should choose to make and export products with a lower opportunity cost].
  • Developed countries like the US may enjoy absolute advantages over a less developed country such as Haiti, for ALL products. However, a country CANNOT enjoy comparative advantages for ALL products it makes: there will always be some products that a country has bigger advantages or smaller disadvantages in making compared with other nations.
  • According to the absolute advantage theory, least developed countries (LDCs) may not be able to export any products (because they may not have absolute advantages in making any products over developed countries). However, according to the comparative advantage theory, even LDCs can export to developed countries— for those products that LDCs suffer relatively smaller disadvantages in making. Meanwhile, developed countries can focus on making products they enjoy relatively bigger absolute advantages over LDCs. As the example demonstrated in class, with specialization based on comparative advantages and free trade, all countries still can end up consuming more products than in the absence of trade.

Q3: What is the contribution of the factor proportion theory?

Although the comparative advantage theory illustrates how nations should specialize in producing and exporting, it failed to explain what shapes a nation’s comparative advantages. Factor proportion theory answered the question: comparative advantage depends on countries’ relative endowment of factors of production. The country which is relatively abundant in labor will have a comparative advantage in the production of relatively labor intensive goods. The nation which is relatively capital abundant will have a comparative advantage in the production of the relatively capital intensive goods. Surely, factor proportion theory supports everything proposed by the comparative advantage theory, especially the argument that with specialization based on comparative advantages and free trade, all countries can end up consuming more products than in the absence of trade.

Q4: Why most apparel consumed in the U.S. are imported from developing countries?

Because generally developing countries enjoy comparative advantages in making clothing whereas US enjoys comparative advantages in making more capital and technology intensive products such as machinery. To be noted, it doesn’t mean US necessarily makes clothing less productive and more expensive than most developing countries. Just economically it is wiser for the US as a capital abundant country to make more capital  intensive products so as to maximize the gains from using its limited resources.

Q5: Why top U.S. apparel suppliers in the 1980s (Taiwan, Hong Kong and South Korea) are different from today (China, Vietnam and Bangladesh)? How to explain this phenomenon?

In the 1980s, Taiwan, Hong Kong and South Korea had comparative advantages in making clothing on the basis of their relatively abundant supply of cheap labor back then. However, with the gradual growth of economies and accumulation of capital, these countries/regions start to have more capital relative to labor. As a result, their comparative advantages shift from making labor-intensive clothing to more capital-intensive products such as electronics and machinery. Likewise, once China, Vietnam and Bangladesh become more capital abundant, they may also lose comparative advantages in making labor-intensive clothing to other less-developed economies where cheap labor is more abundant relative to capital.  

CRS Releases Updated Study on the U.S. Textile Industry and the Trans-Pacific Partnership (TPP)

crs-reportOn September 1, the Congressional Research Service (CRS) released its updated study on the U.S. textile industry and the Trans-Pacific Partnership (TPP). According to the report:

First, TPP is suggested to have a limited impact on U.S. domestic textile and apparel manufacturing, because:

1) Automation rather than imports is found to be the top factor causing job losses in the U.S. textile industry in the past decade;

2) U.S. is one of the very few TPP members whose textile output mostly went into home textiles, floor coverings and other technical textile products rather than apparel.

3) More than 90% of apparel sold in the United States is already imported. Some companies maintain U.S. manufacturing of high-value products or products requiring quick delivery, which are not likely to be supplied by other TPP members.

4) A quantitative assessment conducted by the U.S. International Trade Commission (USITC) in May also suggests that U.S. imports of textiles will only climb 1.6% by 2032 if TPP enters into force in 2017. Over the same 15-year period, both output and employment in the U.S. textile industry could slightly shrink by 0.4% as a result of the implementation of TPP.

Second, TPP could challenge the Western-Hemisphere supply chain and negatively affect U.S. textile exports to the region:

1) TPP will make apparel manufacturers located in Mexico and Central America lose one important advantage—duty free access to the U.S. market, when competing with Asian TPP members such as Vietnam and Malaysia.  The Central American-Dominican Republic Apparel and Textile Council also estimates the CAFTA-DR region could see a contraction of 15%-18% in industrial employment resulting from lost production orders in the first year after the TPP agreement is implemented.

2) The major products sourced by U.S. apparel companies from the Western Hemisphere region include basic, low-value knitwear garments such as shirts, pants, underwear, and nightwear, with a focus on men’s and boys’ wear. However, these products are with low time sensitivity but high price sensitivity, meaning Asian TPP members can easily offer a more competitive price and take away sourcing orders after the implementation of TPP.  

3) Because of physical distance and abundance of local supply, leading Asian TPP apparel exporters such as Vietnam seldom use US-made yarns and fabrics. Supported by foreign investments, Vietnam is also quickly building up its own textile manufacturing capacity, which is expected to reach 2 million metric tons for fabrics and 650,000 metric tons for fibers by 2020. This implies that TPP may help little creating new export markets for US textile products, despite the restrictive yarn forward rules of origin.

Additionally, TPP could result in intensified competition in the technical textile area, which is of strategic importance to the future of the U.S. textile industry:

1) If the proposed agreement is implemented, those segments of the U.S. textile industry that supply industrial textiles are likely to face greater competition from rising imports from Japan.

2) TPP will allow Japanese industrial textiles to newly get duty free access to Mexico and Canada, which are the largest export markets for U.S. industrial fabrics in 2015. However, TPP won’t help US companies get more favorable access to China, which is the top export market for Japanese industrial fabrics.

Brexit and the U.S. Fashion Industry

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Based on the readings and our class discussions, please feel free to share your views on the following questions:

  • Is “Brexit” a big deal for U.S. fashion companies? Why or why not?
  • Does “Brexit” create any particular winners or losers? If so, who are they?
  • Any observed impact of “Brexit”?

Pattern of U.S. Textile and Apparel Imports (Updated: September 2016)

textile and apparel imports 2015

U.S. textile and apparel imports enjoy steady growth from 2000 to 2015. Specifically, the value of U.S. textile imports reached $26,763 million in 2015, up 4.2 percent from 2014 and 85.1 percent from 2000. The value of U.S. apparel imports reached $85,165 million in 2015, up 4.1 percent from 2014 and 48.8 percent from 2000.  It is forecasted that the value of U.S. textile and apparel imports could reach $27,355 million (up 2.2 percent) and $85,719 million (up 0.7 percent) respectively in 2016.

product structure

Because the United States is no longer a major apparel manufacturer but one of the largest apparel consumption markets in the world, apparel products accounted for 76.1 percent of total U.S. textile and apparel imports in 2015, followed by made-up textiles (16.9 percent), fabrics (5.8 percent) and yarns (1.3 percent).

top supplier

In terms of source of products, U.S. imported apparel from as many as 150 countries in 2015. However, Herfindahl index reached 0.15 for knitted apparel (HS chapter 61) and 0.18 for woven apparel (HS chapter 62) in 2015, suggesting this is a market with a high concentration of supplying countries. Specifically, all top apparel suppliers to the United States in 2015 (by value) are developing countries and most of them are located in Asia, including China (35.9 percent), Vietnam (12.4 percent), Bangladesh (6.3 percent), Indonesia (5.8 percent), India (4.3 percent) and Mexico (4.2 percent).

price

U.S. textile and apparel imports are also becoming even cheaper. For example, U.S. apparel imports in 2015 on average was only 85.7 percent of the price in 1990 and the price of imported fabrics cut almost by half over the same period.

fast growing categories

From 2013 to 2015, the fastest growing textile and apparel import categories unusually include several fabric products, such as blue denim (OTEXA code 225, up 74.8%), Cheesecloths (OTEXA code 226, up 74.3%) and woven fabrics (OTEXA code 611, up 49.3%).  It is likely that the growing business of apparel “Made in USA” has led to an increased demand for imported fabrics.  

growth rate

Additionally, U.S. apparel imports overall mirror the pattern of apparel retail sales in the U.S. market. This reflects the fact that the performance of the U.S. economy is the leading factor shaping the size of demand for imported apparel. It is also interesting to note that the value of U.S. apparel imports grew at a faster rate than the value of U.S. apparel retail sales in 2015 (4.1 percent v.s. 1.7 percent), suggesting import penetration ratio (i.e. the percentage of apparel consumed in the United States that is supplied by imports) continues to rise.

Data source: Office of Textiles and Apparel (OTEXA), U.S. Department of Commerce

by Sheng Lu