WASHINGTON — President Trump’s new trade agenda has the fashion industry on high alert out of the gate, as executives brace for upheaval related to a new paradigm and the potential for significant changes to their sourcing strategies.
Trump’s executive action withdrawing the U.S. from the 12-nation Trans-Pacific Partnership deal on Monday and his signal of intent to renegotiate the North American Free Trade Agreement with Mexico and Canada has sent a strong message to brands, retailers and domestic textile producers.
That message is that the new norm will be one built on evaluating and potentially changing existing trade deals, stepping up enforcement against unfair practices and focusing on bilateral agreements while rejecting regional and multilateral ones.
One of the administration officials who will be key to pushing forward that agenda will be Commerce Secretary-designate Wilbur Ross, who moved a step closer to being confirmed after the Senate Commerce, Science and Transportation Committee, approved his nomination Tuesday on a voice vote and sent it to the full Senate.
“Trade is going to be a bumpy policy area,” proclaimed Phillip Swagel, a professor of international economic policy at the University of Maryland. “I expect the U.S. to negotiate bilateral agreements with the U.K. and Japan, in that order, with the Japan agreement covering the same territory as the TPP.”
While the withdrawal from TPP was highly anticipated — a campaign pledge Trump made repeatedly — the symbolic gesture to walk away from the sweeping trade deal signaled a new era for fashion companies that have built their businesses on global supply chains.
Trade ministers signed TPP in February 2016. It includes the U.S., Australia, Japan, Mexico, Canada, Vietnam, Malaysia, Peru, Singapore, Chile, Brunei and New Zealand and aimed to remove barriers to trade to encompass nearly 40 percent of the world’s gross domestic product, if enacted.
Industry executives were counting on market-opening opportunities in TPP, particularly with the inclusion of Vietnam, already the second-largest apparel supplier to the U.S.
“We’re disappointed,” said Stephen Lamar, executive vice president at the American Apparel & Footwear Association, of Trump’s executive action. “It’s something that a lot of companies in the industry were working toward. It really represents a missed opportunity to squeeze some of the cost out of the supply chain and to address fundamental market access issues,” he said, pointing to a tariff rate quota that Japan imposes on U.S. footwear exports, restricting the amount that can be shipped to the country. “That is going to have to persist for awhile longer.”
As for Vietnam, Lamar said the country will remain a strong supplier to the U.S., regardless of the fact that TPP is not going into force.
“I think a lot of things are on the table. Certainly the administration signaled that they want to use trade to create jobs. They want to use trade to promote growth in the American economy,” Lamar said. “So we will be joining with them in that conversation. How does that materialize? Does that become new free trade agreements with other countries that were in TPP? Quite possibly. Does it become FTAs with other countries [such as the U.K.] that were not in TPP? That is possible as well.”
The demise of TPP could actually be a positive for the U.S. textile industry, said Augustine Tantillo, president and chief executive officer at the National Council of Trade Organizations, which counts the Western Hemisphere, not Asia, as its top export market.
“Keeping the status quo with Asian partners as opposed to giving them preferences [in TPP] should by its nature continue to strengthen the Western Hemisphere, which is a good thing,” Tantillo said. “The vast majority of the U.S. textile industry’s focus and interest is centered on the Western Hemisphere.”
The overall impact of TPP on the U.S. economy was projected to be modest, with some positive gains in annual real income, GDP, imports and exports, but a negative for U.S. output, according to the U.S. International Trade Commission.
The ITC estimated that TPP would boost U.S. annual real income by 0.23 percent, or about $57.3 billion, by 2032 compared to a baseline projection that did not include TPP. Real GDP was projected to be $42.7 billion, 0.15 percent higher than baseline projections and employment would be 0.07 percent, or about 128,000 full-time equivalents higher than the baseline.
U.S. exports were projected to increase 1 percent, or $27.2 billion, while imports would gain 1.1 percent, or $48.9 billion, relative to baseline projections, the ITC report said.
“We are the losers,” said Gary Hufbauer, senior fellow at the Peterson Institute of International Economics. “Geopolitically, it is a very big loss because the U.S. walked away from engagement with the Asia-Pacific area. Economically, any one of these agreements makes a small but permanent difference in the U.S. economy. For the TPP, it was about a half of a percent of GDP. It’s a pretty big change for any government policy to sacrifice that. We’ve thrown that opportunity away.”
Hufbauer said TPP’s failure will give China a “grand diplomatic opening.”
“For Asia, the question is whether disappointment leads countries to turn to China,” Swagel said. “[Chinese] President Xi was adroit in positioning for this with his remarks at Davos. Still, with Chinese economic reforms proceeding at a modest pace, it’s hard to see China becoming an import engine and replacing the United States as the focus of Asian countries’ trade priority.”
The 23-year-old NAFTA trade deal between the U.S., Mexico and Canada has been a key driver in Western Hemisphere apparel and textile production.
Mexico is the number-one market for U.S. textile and apparel exports,totaling $5.96 billion for the year ending Nov. 30, while Canada is the second-largest market for U.S. textile and apparel exports, which totaled $5.15 billion, according to government data. Textile exports account for the bulk of the combined total of $11.1 billion in exports to Mexico and Canada.
“If we really do a renegotiation of NAFTA, there is both a danger and opportunity for retailers and brands,” said David Spooner, a partner at Barnes & Thornburg and a former chief textile and apparel negotiator at the U.S. Trade Representative’s Office. “There is of course the danger of the U.S. pulling out of NAFTA altogether and disrupting supply chains but then again let’s not kid ourselves — the [strict] rules of origin in NAFTA are not the best [for importers].”
Julia Hughes, president at the U.S. Fashion Industry Association, said: “While there is anxiety and nervousness [about renegotiation], the Western Hemisphere is very important to our sector.
“We’re trying to keep an open door to the new administration and to talk about what works and what doesn’t work with NAFTA,” she said. “In many ways for our sector, textile and apparel and many other consumer products, there aren’t many complaints and for the most part it [NAFTA] has been a successful strategy. It has been good for U.S. manufacturers and for Mexican and Canadian manufacturers that can share inputs and remain duty free across borders.”
On NAFTA, Tantillo said: “The domestic textile industry understands and values the relationships that it has developed through NAFTA,” he said. “It is an important agreement to us. We think and feel strongly that the agreement should remain in place and we also agree with the Trump administration that like anything the agreement deserves a potential facelift, a review and analysis to determine what aspects are working, what aspects may not be working and what provisions are no longer warranted.”