In the history of global apparel manufacturing, 2018 will go down as the year China’s dominance took a major downturn, and the outlook is for continued flight.
That doesn’t mean China won’t remain the top supplier of U.S. imports for some time, but the days of high-single-digit or double-digit annual percentage increases appear to be over.
The U.S.-China trade war was certainly a factor, but was actually more of catalyst for a slowdown that had been approaching for some time due to rising labor costs in China, its slower economy and the government’s desire to decrease exports and increase production for domestic consumption, sourcing experts said.
“For most companies in the industry that have been updating their strategies and how to manage the risks, there are some that have basically decided that [the trade war] is my motivation to move production out of China,” Julie Hughes, president of the U.S. Fashion Industry Association, said. “But for most companies, that’s not really viable on either a product basis or the timeliness of being able to do it.”
In the long run, however, Hughes said, “We are looking at less commitment by China for being the world’s supplier of textiles and apparel. That’s not just due to the trade war, that’s because of their economy. In the short term, I think we’ll see a lot of peaks and valleys.”
U.S. apparel imports from China for 2018 increased a meager 1.34 percent in value to $27.37 billion compared to 2017, outpaced by Asian neighbors Vietnam, Bangladesh, India and Cambodia, the U.S. Commerce Department’s Office of Textiles & Apparel (OTEXA) reported Wednesday. Imports from Vietnam rose 5.78 percent year-to-year to $12.22 billion, as shipments from Bangladesh increased 6.65 percent to $5.5 billion, imports from India were up 3.42 percent to $3.81 billion and Cambodia’s shipments jumped 12.19 percent for the year to $2.42 billion, OTEXA data showed.
U.S. apparel imports from the world increased 3.38 percent in 2018 from the previous year to $82.88 billion, OTEXA reported. U.S. apparel exports did increase 6.38 percent last year to $6.08 million, led by knitwear and bottoms.
A recent study from the United Nations Conference on Trade and Development (UNCTAD) showed that the trade war didn’t work to protect domestic industries in the U.S. or China, but instead benefitted other countries.
The study estimated that of the $250 billion in Chinese exports currently subject to the U.S. Section 301 tariff increases, about 82 percent will be captured by firms in other countries and roughly 12 percent will be retained by Chinese firms, and only about 6 percent by U.S. firms. Similarly, of the approximately $110 billion in U.S. exports subject to China’s retaliatory tariffs, roughly 85 percent will be taken by companies in other countries, while U.S. firms will retain less than 10 percent and Chinese companies will keep only 5 percent.
While countries like Vietnam, Cambodia, India and Bangladesh have and will continue to see their exports to the U.S. and the world grow, they all come with some caveats, Gail W. Strickler, president of global trade at Brookfield Associates, said. Bangladesh and Cambodia have ongoing labor and corruption problems, India has been held back by protectionist measures and Vietnam will soon run into capacity problems.
“I think Vietnam can grow another 30 percent or so and then it will become saturated,” Strickler said. “I also think the government there knows it doesn’t want one industry to become so big.”
Indonesia, she added, “could benefit” from China’s stagnancy and “Sri Lanka is getting back in the game, and they have a high-end needle.” But China, Strickler noted, “will continue to see less and less apparel manufactured there.”
Laura Rabinowitz, special counsel at Kelley Drye, said the trade war caused a shift in sourcing strategies.
“Countries like Vietnam, Cambodia, Indonesia and Mexico have been winning the trade war,” Drye said. “Companies have started to looks at issues like where can I go [outside of China], and what will it do to my costs.”
According to Hughes, some sourcing managers are worried about Cambodia and whether the European Union will suspend its duty-free status—as it has threatened to do—over labor and human rights issues.
Central America has also held steady in recent times and shown some growth, and Honduras in particular is seeing foreign investment coming in, Strickler added.
“If enough yarn and fabric production can grow in Central America and Haiti, then you can see the region finally start to get the benefit from some of the business from China and Asia that needs to go elsewhere,” she said.
The Western Hemisphere, according to Hughes, holds a lot of opportunity for “duty free, closer to home” manufacturing, including Mexico and the Central American Free Trade Agreement (CAFTA) countries and Colombia.
In the Western Hemisphere, Nicaragua’s apparel imports to the U.S. grew 9.96 percent to $1.63 billion last year, shipments from Honduras increased 4.39 percent to $2.57 billion and imports from El Salvador were up 0.04 percent to $1.91 billion, according to OTEXA. All these countries are part of CAFTA, which makes their goods eligible to be duty-free when entering the U.S.
Imports from all CAFTA countries were up 5.13 percent for the year to $8.34 billion. This tends to benefit U.S. yarn and fabric producers that export to the region, where the goods are made into apparel for duty-free shipment back to the States. U.S. yarn exports to the CAFTA countries rose 5.06 percent in 2018 to $1.68 billion, while fabric exports increased 6.05 percent to $962.7 million.
Imports from Mexico fell 5.76 percent in 2018 to $3.36 billion. Some of this decline could be traced to the uncertainty of its duty-free status as the U.S., Mexico and Canada were renegotiating the North American Free Trade Agreement, which resulted in the trilateral U.S.-Mexico-Canada-Agreement signed in November and pending legislative approval.
Africa’s potential and actual manufacturing continues to gain ground, Strickler noted, with nations like Ethiopia, Lesotho, Mauritius and Ghana all with levels of growth and expertise.
“Egypt is still a really smart play,” Strickler said. “Since it’s part of the Israel Free Trade Agreement, which has no expiration date and obvious political power, it’s the least likely of any trade preference agreement to be messed with. So there are some really smart sourcing strategies that companies can realize.”
There has also been increased investment in African factories and infrastructure from U.S. and Chinese companies, Hughes noted.
The bottom line, Hughes explained, is that while there are certain countries that have seen increases, “there’s no place that can take all of this business from China and translate it into quality products delivered on time. So I’m not sure we can point to one country or region and say they have taken the business away from China.”