Following the steps of many countries in history, China is gradually shifting its role in the world textile and apparel supply chain. While China unshakably remains the world’s largest apparel exporter, its market shares measured by value fell from 38.6 percent in 2015 to 35.8 percent in 2016. China’s market shares in the world’s top three largest apparel import markets, namely the United States, EU and Japan, also indicate a clear downward trend in the past five years. This result is consistent with several recent survey studies, which find that fashion brands and retailers are actively seeking alternative apparel sourcing bases to China. Indeed, no country, including China, can forever keep its comparative advantage in making labor-intensive garments when its economy becomes more industrialized and advanced.
However, it is also important to recognize that China is playing an increasingly important role as a textile supplier for apparel-exporting countries in Asia. For example, measured in value, 47 percent of Bangladesh’s textile imports came from China in 2015, up from only 39 percent in 2005. We can observe similar trends in Cambodia (up from 30 percent to 63 percent), Vietnam (up from 23 percent to 50 percent), Pakistan (up from 32 percent to 68 percent), Malaysia (up from 25 percent to 49 percent), Indonesia (up from 26 percent to 40 percent), Philippines (up from 19 percent to 40 percent) and Sri Lanka (up from 15 percent to 38 percent) over the same time frame.
So maybe the right question to ask in the future is: how much value of “Made in China” actually contains in Asian countries’ apparel exports to the world?
China’s Textile and Apparel Factories Today
At an event hosted by the Center for Strategic and International Studies (CSIS) on September 18, U.S. Trade Representative Robert Lighthizer addressed the U.S. trade policy in the Trump Administration, particularly Trump’s beliefs on trade:
Philosophy 1: The reason why some Americans oppose free trade is NOT that they were “ill-informed.” Rather, it is because the U.S. trade policy for decades has failed to create a “level playing field.” The Trump Administration will proactively use all instruments to “make it expensive” for U.S. trading partners to engage in the non-economic behavior, convince U.S. trading partners to treat U.S. workers, farmers, and ranchers fairly and demand “reciprocity” both in the home and international markets.
Philosophy2: Trade deficits matter. Although trade policy is not the only cause for the trade deficit, it can be a major contributor, such as high tariffs that deny the market access for U.S. products, not imposing the border adjustment tax and currency manipulation.
Philosophy 3: China is the top challenge. According to Lighthizer, “the sheer scale of China’s coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.”
Philosophy 4: The Trump Administrations will exam all existing trade agreements to make sure they provide “roughly equivalent” measured by trade deficits. “Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.”
During the Q&A session, Lighthizer further shared his views on some cutting-edge trade issues:
- Regarding the NAFTA renegotiation, Lightlizher said that the negotiation is “moving at warp speed, but we don’t know whether we’re going to get to a conclusion, that’s the problem.” The consultation process with U.S. Congress is complicated and time-consuming, but it is unavoidable.
- The Trump Administration prefers bilateral trade deal over regional and multilateral ones. Given the size of the U.S. economy, Lighthizer believes that bilateral trade agreement will provide more negotiation leverages and ensure better enforcement.
- The Trump Administration will still stay very much engaged in Asia.
- The WTO Dispute-Settlement mechanism doesn’t work well—it has both imposed new obligations for the U.S. and reduced a lot of U.S. benefits.
- Regarding the outlook for the Trans-Atlantic Trade and Investment Partnership (T-TIP) negotiation, Lighthizer stressed the importance of the US-EU trade relations. He said that the series of elections in EU is a reason why the negotiation of the agreement hasn’t moved forward.
- Regarding TISA (Trade in services agreement), the U.S. objective is to open markets and eliminate market access barriers for U.S. companies.
First, apparel (defined by HS Chapters 61 & 62) is one of the top categories of North Korea’s merchandise exports. Statistics from the International Trade Center (ITC) show that of North Korea’s total US$2,339.9 million merchandise exports in 2016, US$564.7 million (or 19.4%) were apparel.
Second, apparel is also one of the fastest-growing categories of North Korea’s exports over the past decade. From 2003 to 2016, the value of North Korea’s apparel exports surged by 416%, compared to only 171% increase of other products over the same period.
Third, over 99.4% of North Korea’s apparel exports went to China in 2016. Notably, back in 2003, China only accounted for 49.7% of North Korea’s apparel exports. However, apparel exports from North Korea to China received two substantial boosts just in the past ten years: one in 2009 (the year when UN resolution 1874 was adopted) and another in 2013 (the year when UN resolution 2087 was adopted).
Fourth, interesting enough, North Korea’s apparel exports predominantly concentrate on men and women’s overcoats (HS 6201 and 6202) as well as suits, jackets, and blazers (HS 6203 and 6204). This is a notable difference from most other developing countries, such as Bangladesh, Vietnam, and Cambodia whose apparel exports usually focus on more basic items like shirts and trousers.
by Sheng Lu
Disclaimer: All blog posts on this site are for FASH455 educational purposes only and they are nonpolitical and nonpartisan in nature. No blog post has the intention to favor or oppose any particular public policy, nor shall be interpreted in that way.
The report can be downloaded from HERE
Key findings of the study:
While the majority of respondents remain confident about the five-year outlook for the U.S. fashion industry, the percentage of those who are “optimistic” or “somewhat optimistic” dropped to a record low since we began conducting this study in 2014. This change could be due to concerns about the “protectionist trade policy agenda in the United States” and “market competition in the United States from e-commerce,” the top two concerns this year.
- The percentage of those who are “optimistic” or “somewhat optimistic” fell from 92.3 percent in 2016 to 71.0 percent in 2017, a record low since we began conducting this study in 2014. As many as 12.9 percent of respondents are “somewhat pessimistic” about the next five years, mostly large-scale retailers with more than 3,000 employees.
- Despite the challenges, demand for human talent in the industry overall remains robust. This year, around 80 percent of respondents plan to hire more employees in the next five years, especially supply chain specialists, data scientists, sourcing specialists, and marketing analysts.
- Cost is no longer one of the top concerns; respondents are less stressed about “increasing production or sourcing cost,” which slipped from #2 challenge in 2016 to #7 challenge in 2017. Only 34 percent rate the issue among their top five challenges this year, significantly lower than 50 percent in 2016 and 76 percent in 2015. Labor cost remains the top factor driving up sourcing cost in 2017.
Although U.S. fashion companies continue to seek alternatives to “Made in China,” China’s position as the top sourcing destination remains unshakable. Meanwhile, sourcing from Vietnam and Bangladesh may continue to grow over the next two years, but at a relatively slow pace.
- 91 percent of respondents source from China; while 100 percent sourced from China in our past three studies, China is still the top-ranked sourcing destination this year, and the percentage of those expecting to decrease sourcing from the country fell from 60 percent in 2016 to 46 percent this year—and many more expect to maintain their current sourcing value or volume from the country in the next two years.
- Likely reflecting the United States’ withdrawal from the Trans-Pacific Partnership (TPP) and the expectation of increasing labor costs, only 36 percent of respondents expect to increase sourcing from Vietnam in the next two years, much lower than 53 percent who said the same in 2016.
- Respondents are cautious about expanding sourcing from Bangladesh in the next two years, with only 32 percent expecting to somewhat increase sourcing While “Made in Bangladesh” enjoys a prominent price advantage over many other Asian suppliers, respondents view Bangladesh as the having the highest risk for compliance.
U.S. fashion companies continue to maintain truly global supply chains.
- Respondents source from 51 countries or regions in 2017, close to the 56 in last year’s study.
- 6 percent source from 10+ different countries or regions in 2017, up from 51.8 percent in last year’s survey. In general, larger companies have a more diversified sourcing base than smaller companies. Additionally, retailers maintain a more diversified sourcing base than brands, importers/wholesalers, and manufacturers.
- Around 54 percent expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; among these respondents, over 60 percent currently source from more than 10 different countries or regions.
- The most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many.” The typical sourcing portfolio today is 30-50 percent from China, 11-30 percent from Vietnam, and the rest from other countries.
- While Asia as a whole remains the dominant sourcing region for U.S. fashion companies, the Western Hemisphere is growing in popularity. This year, we see a noticeable increase in sourcing from the United States (70 percent, up from 52 percent in 2016) and countries in North, South, and Central Americas, which offer a shorter lead time and relatively lower risk of compliance.
Today, ethical sourcing and sustainability are given more weight in U.S. fashion companies’ sourcing decisions. Respondents also see unmet compliance (factory, social and/or environmental) standards as the top supply chain risk.
- 5 percent of respondents say ethical sourcing and sustainability have become more important in their company’s sourcing decisions in 2017 compared to five years ago.
- 100 percent of respondents currently audit their suppliers, including how suppliers treat their workers, suppliers’ fire safety, and suppliers’ building safety. The majority (93 percent) use third-party certification programs to audit, with a mix of announced and unannounced audits.
- As many as 90 percent of respondents map their supply chains, i.e., keep records of name, location, and function of suppliers. More than half track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e. supplier’s suppliers. It is less common for U.S. fashion companies to map Tier 3 and Tier 4 suppliers though, which could be because of the difficulty of getting access to related information with such a globalized and highly fragmented supply chain.
Free trade agreements (FTAs) and trade preference programs remain underutilized, and several FTAs, including CAFTA-DR, are utilized even less this year than in previous years.
- Of the 19 FTAs/preference programs we examined this year, only NAFTA is used by more than 50 percent of respondents for import purposes.
- Even more concerning, some U.S. fashion companies source from countries/regions with FTAs/preference programs but, for whatever reason, do not claim the benefits. For example, as many as 38 percent and 6 percent of respondents, respectively, do not use CAFTA-DR and NAFTA when they source from these two regions.
Respondents unanimously oppose the U.S. border adjustment tax (BAT) proposal and call for the further removal of trade barriers, including restrictive rules of origin and high tariffs.
- 100 percent of respondents oppose a border adjustment tax; 84 percent “strongly oppose” it.
- Respondents support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to the restrictive yarn-forward rules of origin in NAFTA and future free trade agreements.
- Respondents say the “complex standards on labeling and testing”, “complex rules for the valuation of goods at customs” and “administrative and bureaucratic delays at the border” are the top non-tariff barriers they face when sourcing today.
The benchmarking studies from 2014 to 2016 can be downloaded from https://www.usfashionindustry.com/resources/industry-benchmarking-study
A New York Times article back in August 2015 suggests that “yarn production costs in China are now 30 percent higher than in the United States” because of savings in raw and auxiliary material. The article believes the cost difference is why some Chinese textile companies are coming to build factories in the United States, such as Keer Group’s cotton mill in South Carolina.
However, in a recent interview with China Textile News, Chairman of the Cixi Jiangnan Chemical Fiber Co (Cixi) provides a different cost sheet (above). In September 2013, Cixi invested a $45million polyester staple fiber mill in South Carolina. Because nearly 80% of Cixi’s outputs are sold outside of China, and the United States is its single largest export market, the investment intends to help the company maintain its presence in the U.S. market and substantially save transportation cost.
According to Cixi, it is a misunderstanding that making textiles in the United States is cheaper than in China. Although moving factories to the United States may help Chinese companies save money in land, electricity, natural gas, and logistics, it will significantly increase the costs in purchasing manufacturing equipment, building factories and managing daily operation of the company. Additionally, culture and language barriers, as well as labor policy in the United States, could also become critical challenges facing Chinese investors. Cixi admits that to keep its U.S. factory running smoothly, members of its management team all come from China.
The following analysis is from the latest Just-Style Op-ed Is China Losing Its Edge as a US Apparel Supplier.
A fact-checking review of trade statistics in 2016 of a total 167 categories of T&A products categorized by the Office of Textiles and Apparel (OTEXA) suggests that textile and apparel (T&A) “Made in China” have no near competitors in the U.S. import market. Specifically, in 2016:
- Of the total 11 categories of yarn, China was the top supplier for 2 categories (or 18%);
- Of the total 34 categories of fabric, China was the top supplier for 25 categories (or 74%);
- Of the total 106 categories of apparel, China was the top supplier for 88 categories (or 83%);
- Of the total 16 categories of made-up textiles, China was the top supplier for 12 categories (or 68%);
In comparison, for those Asian T&A suppliers regarded as China’s top competitors:
- Vietnam was the top supplier for only 5 categories of apparel (less than 5% of the total);
- Bangladesh was the top supplier for only 2 categories of apparel (less than 2% of the total)
- India was the top supplier for 2 categories of fabric (9% of the total), one category of apparel (1% of the total) and 5 categories of made-up textiles (41.7% of the total)
Notably, China not only was the top supplier for many T&A products but also held a lion’s market shares. For example, in 2016:
- For the 34 categories of fabric that China was the top supplier, China’s average market shares reached 41%, 23 percentage points higher than the 2nd top suppliers for these categories
- For the 88 categories of apparel that China was the top supplier, China’s average market shares reached 53%, 38 percentage points higher than the 2nd top suppliers for these categories.
- For the 16 categories of made-up textiles that China was the top supplier, China’s average market shares reached 57%, 40 percentage points higher than the 2nd top suppliers for these categories.
It is also interesting to see that despite the reported rising labor cost, T&A “Made in China” are NOT becoming more expensive. On the contrary, the unit price of U.S. T&A imports from China in 2016 was 6.8% lower than a year earlier, whereas over the same period the unit price for U.S. T&A imports from rest of the world only declined by 2.9%.
Furthermore, T&A “Made in China” are demonstrating even bigger price competitiveness compared with other suppliers to the U.S. market. For example, in 2016, the unit price of “Made China” was only 78% of the price of “Made in Vietnam” (in 2012 was 89%), 88% of “Made in Bangladesh” (in 2012 was 100%), 86% of “Made in Mexico” (in 2012 was 103%) and 72% of “Made in India” (in 2012 was 81%).
Are the results surprising? How to explain China’s demonstrated price competitiveness despite its reported rising labor cost? What’s your outlook for the future of China as a sourcing destination for U.S. fashion brands and retailers? Please feel free to share your views.