While the 12-nation Trans-Pacific Partnership is sending tremors through the sourcing world even before the deal has been ratified, it’s not the only issue impacting production plans.
Importers are sweating the details of TPP prior to them being released by the White House, but some executives feel they don’t matter as much as an overall manufacturing strategy that takes into account myriad factors.
Companies are balancing shifts in the cost of materials, labor, shipping and risk assessment, while planning strategies that take current and future duty-free treatment into account.
Steve Lamar, executive vice president of the American Apparel & Footwear Association, speaking at Thursday’s Sourcing Journal Summit, said there could be a half-dozen more countries interested in joining TPP, in addition to the U.S., Vietnam, Canada, Mexico, Japan, Australia, New Zealand, Chile, Singapore, Malaysia, Peru and Brunei. Among them are South Korea, Indonesia and the Philippines.
“I attended several of the negotiating meetings as a stakeholder, and South Korea had a TPP office at every one, even though they weren’t negotiating,” Lamar said. “Some of the countries negotiating didn’t have TPP offices. I don’t think the signatory countries will entertain more countries joining until this is ratified,” because it would only complicate the matter further.
U.S. Trade Representative Michael Froman said on a conference call Thursday that the U.S. took into account the competing interests of industry groups during the negotiations and the feedback he’s gotten since the deal was announced has largely been positive.
“We have a domestic textile industry that is investing in more production in the U.S. and growing their employment in the U.S., and obviously we have a strong sector of our economy that brings in apparel from other countries, apparel importers and retailers,” Froman said. “We worked very closely with both groups of stakeholders to come up with a solution, to come up with an outcome that we think both will be comfortable with and both will be supportive of.”
The industry is awaiting the release of the final text of the deal. In general, they expect it to include new opportunities to open markets and ease costs. But some are concerned it won’t contain enough flexibility in the rules for companies to see broad benefits.
Most experts feel the deal will get through Congress, either next fall or in a lame-duck session after the presidential elections in November 2016. But a vote is expected to be close, with bipartisan support and opposition, including from leading Democratic presidential candidates Hillary Clinton and Bernie Sanders.
As for the details, Julia Hughes, president at the U.S. Fashion Industry Association, said she is concerned the pact will keep in place duties for too long on imports of “sensitive” or high-volume products, from underwear to T-shirts to trousers and tops.
Hughes said in a memo to her members that TPP could keep duties on imports of “sensitive” woven products for up to 12 years and duties on sensitive knit products for up to 10 years.
Vietnam could also be subject to a labor-enforcement mechanism with a penalty process, if it does not live up to its labor commitments, industry groups have been told.
“We’re disappointed that, in general, the framework is very similar to what we have seen in other deals” that include a strict yarn-forward rule of origin, Hughes said in an interview. “Of course, people will use [TPP], but…we are also disappointed with the long duty phaseouts. One of our industry goals was duty-free access on Day One for almost everything.”
On the positive side, companies could start seeing duty reductions and elimination on some products fairly quickly. Another detail that has been circulating is a matching program, called an Earned Income Allowance, for cotton trousers from Vietnam, Hughes said. Under such a program, if a company used U.S. fabric in cotton trousers made in Vietnam, they would be given a matching credit to use a certain amount of non-TPP imported fabric for the trousers.
Hun Quach, vice president for international trade at the Retail Industry Leaders Association, said retailers see a lot of value in potential opportunities in TPP, noting they stand to save “millions of dollars.” She said a potential matching program for Vietnam would be a “positive step that tries to balance the interests of various countries.”
Jonathan Gold, vice president for supply chain and customs policy at the National Retail Federation, said companies are eager to see text and get a full understanding of what is there and how they can make changes to their supply chains to take advantage of it. But he acknowledged there will be concern over the possible inclusion of the labor mechanism for Vietnam.
“If there are duties in later years on apparel and footwear [and the phaseout of duties stops because Vietnam is penalized], it would be an unfair hit on our industry,” Gold said.
The U.S. textile industry was behind the push for a yarn-forward rule of origin and longer tariff phaseouts in TPP, but Augustine Tantillo, president of the National Council of Textile Organizations, said USTR and other agencies made a “concerted effort to find a balance.”
“Many importers and retailers were seeking duty-free treatment on Day One for most sensitive textile products,” Tantillo said. “That simply was not going to be acceptable to the U.S. industry. A 10- to 12-year phaseout is highly rational in the sense that if you look at Vietnam, a major player in the textile chapter, they are not going to transfer their economy from a government-controlled system to a profit-driven, market-based economy overnight. Therefore there needs to be a phaseout that allows the U.S. and our Western Hemisphere partners to adjust to the increased levels of competition coming out of Vietnam.”
Discussion is also taking place about the impact TPP will have on overall sourcing plans and on China, specifically.
Kelly Caruso, president of Target Sourcing Services at Target Corp., speaking at the sourcing summit, said, “China continues to be competitive for us because the factories there continue to innovate when it comes to manufacturing. Vietnam has existing competitiveness and if TPP were to pass, there would be more opportunities for duty-free in Vietnam. We continue to look at Africa and Myanmar to understand what’s going on there, but at this point we don’t have any plans to open any new markets.”
Caruso said factors that generally outweigh duty-free importing are fluctuations in raw material prices and increases in labor costs across the globe. The focus then becomes helping suppliers and factories “mitigate those production costs” through lean process manufacturing, automation and technology.
“From a sourcing perspective for Target, we need to really balance our country production across many different factors, not just cost,” Caruso said. “For us, it’s about skilled labor, strong infrastructure, access to natural resources, but also a supplier matrix that has capabilities to deliver on design, quality and cost….We want to be competitive, but we also want to be very responsible in our sourcing, and give our [customers] a reason to buy at Target that isn’t just based on low retails.”
Trent Janik, vice president of sourcing and manufacturing at Kate Spade, said, “We are moving our sourcing out of China to other countries that potentially will have lower duties with involvement in TPP or GSP, such as Vietnam, the Philippines. Over the last two years, our China sourcing has come down to about 68 percent of our sourcing base, which is about a 13 percent reduction.”
On the other hand, Janik added, “There are still capabilities that a lot of the Chinese factories have that other facilities might not have, so there’s no way we would ever leave China. The same would be true for Bangladesh and Vietnam. It really depends on the product you have and the country’s capabilities.”
David Bassuk, managing director for retail at Alix Partners, said while global labor rates on average have gone up about 15 percent, production efficiency has improved 11 percent, “so there is somewhat of a counterbalance.”
He noted that raw material commodity rates “have come way down,” so the “average unit cost is significantly lower.” This has allowed for “an opportunity to manage costs and prices at retail.”
In that regard, Jon Devine, senior economist at Cotton Incorporated, said the decline in cotton prices to around 60 cents a pound from a historic high of more than $2 a pound a few years ago has caused some uncertainty in material choices.
“There now seems to be some stability at low levels in cotton prices and that is a major development,” Devine added.