Apparel Sourcing in U.S. Trade Preference Program Countries

Speakers:

  • Tarek Kabil – Egyptian Ministry of Trade & Industry
  • Ashraf Rabiey – QIZ Minister of Egypt
  • Gabi Bar – QIZ Minister of Israel
  • Mark D’Sa – Special Project Director for Haiti
  • Moderator: Gail Strickler – former Assistant US Trade Representative for Textiles

Discussion questions:

  1. How are trade preference programs different from free trade agreements? 
  2. What are the financial incentives for US brands and retailers to source apparel in preference program countries? Why do U.S. apparel imports from members of AGOA, QIZs and HELP overall remain at a fairly low level despite the trade preference programs? How to improve the situation?
  3. Overall, why or why not should the US keep the trade preference programs or any critical reforms are needed?
  4. Any other interesting points you learned from the video or questions you may have?
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Turning Africa into a Global Textile and Apparel Hub

Before the 2016 Source Africa Trade event in June 2016, CNBC interviewed Tim Armstrong, Investment Promotion Director for the Textile Development Unit at the Ministry of Industry and Trade in Tanzania. Three questions were discussed during the interview:

  • Are free trade agreements/trade preference programs such as the African Growth and Opportunity Act (AGOA) translating into tangible results we can see that help African clothing exporters?
  • What has AGOA extension done to the textile and apparel industry in Africa, particularly in the context of Tanzania? What are the impacts of rules of origin on investment in the region?
  • Can apparel “Made in Africa” compete in the global marketplace when raw material such as yarns and fabrics has to be sourced from elsewhere?

What is your view on these issues?

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

Tariff Remains a Critical Trade Barrier Worldwide for the Textile and Apparel Sector

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tariff rate

According to data from the World Trade Organization:

  1. In 2013, average applied tariff rate remained at 10.73% for textiles and 18.25% for apparel worldwide. Compared with the average tariff rate for all sectors, the rate for textiles on average is 1.4 percentage points higher and the rate for apparel is 8.9 percentage points higher. This implies that although tariff may not be a critical trade barrier for some sectors anymore, it still significantly matters for the textile and apparel sector.
  2. Least developed countries (LDC) overall set a higher tariff rate for textiles and apparel than the world average level. Ironically, many LDCs heavily rely on imports for textile supply. Should these LDCs lower their tariff rate for textiles, it may help apparel manufacturers there save sourcing cost for yarns and fabrics and improve the price competitiveness of finished apparel products.
  3. At the country level, countries with the highest tariff rate for textiles include Ethiopia (27.8%), Sudan (27.4%), Argentina (23.3%, Brazil (23.3%), Gabon (19.8%), Cameroon (19.6%), Chad (19.6%) and Congo (19.6%). And countries with the highest tariff rate for apparel include Zimbabwe (72.26%), South Africa (41.02%), Namibia (41.02%), Swaziland (41.02%), Botswana (41.02%), Lesotho (41.02%), Bolivia (40.0%), Sudan (40.0%), Argentina (35.0%), Ethiopia (35.0%) and Brazil (35.0%). Interesting enough, many of these countries are members of the African Growth and Opportunity Act (AGOA) which are eligible for the third country fabric provision.

Sheng Lu

Apparel Sourcing Opportunities in Madagascar and Mauritius


Please feel free to share your thoughts on the following discussion questions:

  1. Why does the United States Agency for International Development (USAID) promote apparel sourcing from Africa?
  2. From the video, how do you see the social and economic impact of the textile and apparel industry on Madagascar and Mauritius?
  3. Do we need African Growth and Opportunity Act (AGOA)? Why or why not?
  4. With regard to the status of the textile and apparel industry in Madagascar and Mauritius, anything shown in the video interests or surprises you?

Does AGOA’s “third country fabric” provision discourage the development of Africa’s local textile industry?

African-textilesThe following Q&A is adapted from the 2015 AGOA Forum Preview (15m:44s)

Question: What is the principal obstacle to the development of a local yarn industry in an apparel exporting country such as Kenya? Does AGOA’s “third country fabric” provision in place for 13 years act as a disincentive to such a development?

Florizelle Liser, Assistant US Trade Representative for Africa: That’s a really good question, but the answer is no. 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.

What do you think?

Sourcing Opportunity in Africa

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Although Africa only accounted for 0.55% of world textile and apparel (T&A) exports in 2013(WTO, 2014), numerous studies have suggested that this is a region of strategic importance as a sourcing base in the long term. For example, according to one recent study released by McKinsey & Company, among 40 surveyed apparel chief purchasing officers from January to February 2015, around 40 percent expect to be sourcing a greater share of their portfolio from sub-Saharan Africa in the next 5 years.

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Africa is gaining attention as a sourcing base largely because of its growing working-age population, which is expected to surpass China today by 2035 (Note: In comparison, affected by its one-child policy, China’s labor pool could shrink by one-fifth over the next 50 years). The current wage level in Africa is around USD 120 to 150 monthly for garment workers, higher than Bangladesh (USD 91/month), but lower than Vietnam (USD 254/month) and China (USD 324/month).

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However, sourcing from Africa is not without challenges. One big disadvantage of African countries when competing with “factory Asia” is its nascent local textile industry, meaning most fabrics and raw material needed for apparel assembling in Africa has to be imported. As reported by the McKinsey & Company study, among those surveyed companies which involved in sourcing from Sub-Saharan Africa, only around 50% directly source from the region, 15% source via Asian suppliers’ headquarters and 32% source via agents.

Poor infrastructure in Africa further amplifies the problem of heavy reliance on imported fabrics, trims and other supplies. For example, It can add up to 40 days in transit, for fabrics manufactured overseas to come from abroad and make their way through customs and to the factory in Africa.

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Look into the future, the collaboration between local governments, suppliers and buyers is suggested as the key to fully tap the potential of Africa as a sourcing base. Particularly, the McKinsey & Company report suggests US and EU-based apparel companies to evaluate Africa as a strategic option and think about the region beyond the next 2-3 years. Improving workers’ productivity, upgrading the industry to go beyond cut-make-and-trim (CMT) and establishing long-term partnership with buyers are suggested to be prioritized.