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Trade Issues Weigh on Sourcing Decisions

From TPP talks to the U.S.-EU FTA, executives have much to mull over.

Francisco Sanchez

WASHINGTON — A growing slate of trade policy measures and issues this year has wide-ranging implications for apparel and textile production in Asia, Africa and the Western Hemisphere and will impact sourcing executives who are planning their fabric and yarn purchases as they head into trade shows in New York this month.

This story first appeared in the July 9, 2013 issue of WWD.  Subscribe Today.

The U.S. fashion industry imported $102.2 billion worth of apparel and textiles in the year ending May 31. China remains the top supplier of apparel to the U.S., controlling a 40 percent share of the U.S. import market based on value, but several Southeast Asian countries are gaining ground against China as higher wage rates continue to force executives to find alternative sourcing hubs.

Rick Helfenbein, president of Luen Thai USA, said the eyes of the fashion world are on the Trans-Pacific Partnership negotiations between the U.S. and 11 countries, which the Obama administration said it hopes to finalize this year.

Key areas such as rules governing textile and apparel trade are being hammered out. The U.S. has proposed a yarn-forward rule of origin, supported by the domestic textile industry but opposed by apparel importers, that requires apparel be made of fabric and yarns supplied by the U.S. and other TPP countries to qualify for duty-free benefits. The U.S. has also proposed a permanent and short-supply list that contains items that are not made in the U.S. or other TPP countries and allows them to qualify for duty-free treatment under the agreement.

“Everyone is looking at one country [in the TPP talks], not 11 countries, and that one county is Vietnam,” Helfenbein said. “The smart money says, ‘Let’s cover our bases.’ Textile mills are going to open in Vietnam, which would be in total compliance with the [proposed] yarn-forward rule of origin. That is covering one base. The second base is the short-supply scenario, and if both of those are in play, holy cow, Vietnam will be a tremendous force.”

He said countries such as Vietnam, Cambodia and Indonesia will likely start to pick up apparel orders that he expects to leave Bangladesh in the wake of the recent Rana Plaza building collapse and Tazreen Fashion fire that claimed the lives of more than 1,200 people and have shaken the global fashion industry.

“I don’t think you will see the falloff in apparel imports from Bangladesh [to the U.S.] until the first quarter [of 2014] because there is too much in the pipeline and people don’t have another place to go. You can’t move production that fast,” Helfenbein said. “Unless the government of Bangladesh leads the effort and changes [laws and enforcement], you won’t see real change. All you will see are a lot of companies trying to protect themselves by forming strong agreements, but I don’t know that you will solve the root cause of the problem, which is subcontracting…and that world needs to be regulated.”

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The U.S. said on June 27 that it would suspend Bangladesh’s trade benefits under the Generalized System of Preferences in 60 days. While apparel, Bangladesh’s largest export, is not covered by the U.S. GSP program, the punitive action sent a strong warning to the government of Bangladesh. The European Union is also reviewing whether to eliminate benefits under a similar trade preference program, which does cover apparel and would have a huge economic impact on Bangladesh.

“It is not that every company sources in Bangladesh or that every brand and retailer has substantial sourcing out of Bangladesh, but the North American industry’s response and the effort to improve the compliance environment in Bangladesh is going to continue to be one of the major issues for the rest of this year and beyond,” said Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel. “I think what the tragedies this past year have shown is that there are no fast or easy solutions to the problems to bring compliance in Bangladesh up to the standards of American brands and retailers. That is huge. That is the elephant in the room.”

Another major issue that has been plaguing textile producers for a year and a half has been Mexico’s produce verification audits on U.S. textile exports to the country.

In June, Francisco Sánchez, undersecretary of international trade at the U.S. Commerce Department, joined a group of 20 U.S. textile companies on a trip to Mexico City, where the Mexican government held a workshop outlining new procedures that could lessen the burden and costs of audits on U.S. textile producers that have cost tens of thousands of dollars and forced some companies to stop exporting to Mexico, according to Cass Johnson, president of the National Council of Textile Organizations.

The U.S. and Mexico plan to hold a second workshop in Washington this month. The new streamlined procedures will incorporate a sampling method aimed at reducing the amount of paperwork, cost and time for U.S. companies trying to comply with the rules, Sánchez has said.

“While there has been progress, I don’t think anyone feels the problem is yet fully behind us,” Johnson said. “It is so costly for some U.S. companies that they have stopped doing business in Mexico because of it. The U.S. industry wants to see that any new audits by the Mexican authorities take into account that the domestic industry is playing by the rules and they should not be the ones targeted by new investigations, that the industry has gotten a clean bill of health. We expect them to tighten up their targeting criteria and not put well-established U.S. suppliers through these onerous audit procedures.”

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On a larger front, the U.S. and EU launched negotiations on a trans-Atlantic trade deal in Washington in Monday, which if successful would have significant implications for the fashion industry.

“There is a substantial amount of two-way trade in apparel, textile, footwear and accessories products,” said Hughes. “One of the main goals of this FTA is harmonizing the regulations between the EU and U.S.,” Hughes said. “If we can harmonize the regulations, that could improve the smoothness of the supply chain and definitely expand the amount of business between the EU and U.S.”

Stephen Lamar, executive vice president at the American Apparel & Footwear Association, said the industry hopes the U.S. will soon resolve a trade dispute with the EU that has imposed a 38 percent retaliatory tariff on U.S. exports of women’s cotton denim jeans.

Lamar said another front-burner issue is the expiration of a 100 million square meters equivalent tariff preference level for Nicaragua in 2014. The Obama administration has said it will not renew the special program that allows U.S. companies to bring in a certain amount of fabrics and yarns from other countries outside of the Central American Free Trade Agreement, and also has a matching one-for-one component requiring the use of U.S. or CAFTA region yarns and fabrics.

“By not extending the provision, you are disincentivizing the production of apparel in Nicaragua and you are also disincentivizing the use of U.S. fabric under the matching program,” he added. “I think it has the potential to hurt companies both large and small if they invested and built up a supply chain in Nicaragua. They would no longer be able to use it because the competitive underpinning in the supply chain would be gone.”