WASHINGTON — Threatened by Congress and restrained by a new set of quotas, China has taken some blows, but is still poised to strengthen its lead as the number-one producer of textiles and apparel shipped to the U.S.
Still, the restraints on China have opened up an opportunity for other countries, such as India, to develop their industries, beef up their infrastructures and become more important sources of apparel bound for the U.S.
This story first appeared in the February 14, 2006 issue of WWD. Subscribe Today.
“It continues to be a buyer’s market,” said Bob Zane, senior vice president at Liz Claiborne Inc. “Lots of product is available from lots of different sources, and many of the [factories] continue to solicit business by offering better conditions and more services.”
That advantage for importers won’t last, said Zane, who expects a “shaking out” or consolidation of production down the road.
“The world will wind up with fewer factories in fewer countries doing more things, providing more and more services, as well as more and more product,” he said.
China will continue to grow, eventually producing 50 to 80 percent of U.S.-destined apparel, said Zane.
Last year, the country captured 33 percent of the apparel and textile import market to the U.S. with shipments of 16.8 billion square meter equivalents valued at $22.4 billion.
The overall trade deficit with China, which hit $201.6 billion last year, has fueled efforts to clamp down on the country, including a restrictive import agreement inked in November.
Under that deal, 34 types of goods from China — ranging from cotton trousers to knit fabric and valued at more than $6 billion — are restrained by quotas, which gradually allow larger shipments to the U.S. before expiring at the end of 2008.
There is a provision in the deal that allows for quotas on additional categories, though it is unclear how likely or when those restrictions could be applied. Domestic textile groups are working on somehow extending restraints on Chinese imports beyond 2008.
The accord was counted as a win for the domestic textile industry, which used its clout on Capitol Hill to push for the restrictions. At least some importers, however, seem to have taken what they saw as a lemon of an agreement and made lemonade.
Zane pointed out that the quotas provided by the latest agreement are in some cases four times greater than the 2004 quotas, and Chinese factories are able to buy quota more cheaply than in years past, he said. Quota in China can be traded like a commodity between firms.
“So new quota is less expensive than old quota, so to say, and, if China was competitive with old quota, you can imagine that they continue to be competitive with new quota,” said Zane.
The availability of quota in China also complicates sourcing within the country.
“The costs are a factor; another factor is practicality,” said Mark Jaeger, senior vice president and general counsel at Jockey International. “It’s not as easy to move production to contractors that have not been allocated quota. It’s made it stickier to transfer business amongst customers in China.”
Many doing business in China simply deal with additional costs from quotas as best they can.
“As a collection, when you’re doing production and you’re working closely with a retailer, there are certain categories that you must price-average with certain quota conditions to satisfy the customer’s needs,” said Robert Rosen, chief executive officer of La Rose Inc., which produces the Bob Mackie Studio line.
This mean accepting lower profits on some categories to keep the business in China and the retailers happy.
“It’s all about working for the retailer, and making the retailing community comfortable and profitable, and because of that, we are forced to do this,” said Rosen.
The new arrangement with China is an improvement for importers over the chaos of sourcing last year. Before the deal was reached, importers doing business in the country faced the looming possibility of temporary safeguard quotas being imposed by the U.S. government — they were — and filling them before orders that were already placed could be brought to the U.S. market.
“The whole thing with China is predictability,” said Tom Haugen, president of Li & Fung USA. “If you need something, it’s not a big deal to pay more money for it as long as you know you’re going to get it.”
Even with that stability, the restraints in China are pushing business elsewhere or at least giving other apparel-producing countries some breathing room.
“It’s a great thing for India,” said Haugen. “It buys them a little more time to get their infrastructure [such as roads and ports] pulled together. It’s not terrific now, but it will certainly get better.”
Bangladesh, Indonesia and Vietnam are also likely beneficiaries of restraints on China, said Haugen.
Given that the import agreement with China just went into effect on Jan. 1 and the long lead times for apparel production, it remains unclear exactly how much production will shift and where it will end up.
“From a sourcing perspective for us, everything is sort of status quo,” said Joe McConnell, vice president of strategic sourcing at Kellwood Co. “We’re looking at the costs and the opportunities, and I think that’s what the next few months are going to be about.”
When making those sourcing decisions, McConnell said Kellwood would look at the availability of novelty, basic and specialty fabrics in the region and their proximity to the factory, what type of needlework the factory offers, lead and delivery times and, of course, cost.
For now, he said Kellwood would continue to increase production in China and also look into shifting production to Sri Lanka, Indonesia and Thailand.
As U.S. brands look around the world and reconsider where to produce their goods and how much it will cost, the varying trade restrictions on each country, such as the standard duties placed on foreign goods, become important points of difference.
“As we move forward with the proliferation of so many trade agreements and preferences by the United States, that will further skew how people are responding [to restraints on China],” said Thomas Travis, chairman of Sandler & Travis Trade Advisory Services.
Trade pacts, such as the North American Free Trade Agreement or preference programs such as the African Growth & Opportunity Act, giving special treatment to goods from countries in sub-Saharan Africa, reduce the burden of duties on imports.
The power of trade pacts can be seen in the example of Jordan, which entered into a free-trade agreement with the U.S. in 2001 and has qualified industrial zones that let it take advantage of a trade deal between the U.S. and Israel. Jordanian apparel exports to the U.S. topped $1 billion last year, up from about $12 million in 1999. Liz Claiborne, for one, began manufacturing there about five years ago and last year did $70 million worth of business in the country.
Travis said for companies manufacturing with man-made fiber, where duty rates can be high, producing in countries or regions with free trade or preferential agreements that qualify for duty-free shipments is beneficial.
The Central American Free Trade Agreement, which has passed Congress and was signed by President Bush, but has yet to be implemented, could benefit from restrictions on China. U.S. Trade Representative Rob Portman last week said he hopes El Salvador and Nicaragua will be ready to put the pact into effect on March 1, and Guatemala, Costa Rica, Honduras and the Dominican Republic are working on it.
Other countries might become more attractive places to do business, given the uncertainty surrounding China’s policies managing its currency, the yuan.
U.S. textile firms and many lawmakers believe the yuan is undervalued by as much as 40 percent, giving the country’s goods significant pricing power on the international market.
Last year, Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) introduced a bill that would impose a 27.5 percent tariff on all imports from China if that nation does not revalue its currency.
Despite plenty of tough talk directed at China and its currency policies, Treasury Secretary John Snow has so far refrained from declaring the country a currency manipulator, a distinction that could ultimately lead to World Trade Organization action. He did say in November, however, that steps taken by the Chinese government to let the value of yuan fluctuate mildly were insufficient.
“The actual operation of the new system is highly constricted,” said Snow. “As a result, the distortions and risks created by China’s rigid exchange rate still persist….It is imperative that China move toward greater flexibility as quickly as possible.”
The question of currency reform in China and what the U.S. will ultimately do about it looms large for some importers.
“I just think one day that we’re playing tough guy with China, we’re threatening them with all these sanctions and the next day we’re backing off,” said Steven Feinstein, president of New York-based M.M.&R. Inc., which markets the ECI brand. “One day we’re threatening that if they don’t loosen up on their currency restrictions that we’re going to do this, and then the next day it’s not an issue anymore. It’s just very hard to gauge what’s going on.”