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New Report: Political Instability in South Asia Threatens Footwear Industry

A new report warns that a combination of political discord and the rise of nationalism in South Asia could have a negative impact on the global footwear industry.

The report, entitled “What Conflict in the South China Sea Would Mean for the Footwear Industry,” was issued by the Footwear Distributors and Retailers of America (FDRA), an association based in Washington, D.C. According to the report, conflict fueled by increasingly tempestuous territorial disputes now threatens a footwear industry heavily concentrated in the region. “The prospect of armed conflict in the South China Sea grows daily. While major skirmishes have been avoided thus far, tensions remain high between Southeast Asian nations and China due to territorial disputes in the energy-rich Sea. Footwear executives should be aware of this hot spot as conflict will have major implications for U.S. footwear companies and brands in the form of increased transit costs and supply chain disruptions.”

The study discussed South Asia’s political instability as an “increasingly frightening situation.” At the core of the problem is the fact that “popular nationalism inside China has steadily increased as China has grown into an economic power.” While China is the kiln within which such nationalistic sentiment is originally forged, there are troubling signs that it has begun to spread to other countries in the region. “Such ‘geopolitik nationalism’ is not just seen in China but in Vietnam, Japan, Indonesia, and other states in Southeast Asia. This nationalistic fervor can push states to act irrationally; rather than a focus on economic growth, disputes become a zero-sum game based on security and survival.”

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Speaking exclusively to the Sourcing Journal, FDRA President Matt Priest said, “From experience I know that companies have a good idea about labor, capacity and supply chain issues inside Asian countries, but they often lack insight on regional politics and how that can impact sourcing and their supply chains. To help fill some knowledge gaps we produced a special report on how rising tensions in the South China Sea, where the majority of footwear is produced, could cause sourcing disruptions and speed to market challenges for our industry. CEOs and sourcing executives have given our report rave reviews, saying it provided them a critical look at previously unseen issues. Many will now start to incorporate these potential challenges in their sourcing risk management calculations, which was the intent of the report.”

Report author FDRA Vice President Andy Polk added, “Our report also opened some eyes to the fact that the spike in nationalism and rising tensions in Asia are greater than previous thought.” And, “While trade can often help ease tensions among nations, nationalism is quickly diminishing Asia’s interdependency gains. The result is an area that is becoming more volatile and militaristic. Our report does not seek to raise fears but help ease them by helping businesses sourcing and trading in Asia to be better prepared rather than blindsided by potential conflict there.”

Problematically, the international organizations in the region tasked with brokering peaceful resolutions have consistently proven ineffective, failing to stop the rising tide of  a new arms race. “International bodies like the U.N. and ASEAN have held forums to discuss and resolve territorial disputes peacefully but have not slowed displays of military force in the Sea. In fact, a new naval arms race has begun with smaller countries in the region building new combat ships and subs, and purchasing defense weapons, equipment, and military platforms from European defense firms eager to export to new customers.”

What makes the simmering conflict so worrisome for the footwear industry is that global footwear manufacturing relies on unimpeded transit through the South China Sea. “Considering more than 95% of all footwear shipped to the U.S. flows through the South China Sea, continued tensions and small skirmishes in the South China Sea have major implications for the footwear industry in terms of speed to market and transit costs.” The report notes that speed-to-market for footwear could be significantly affected if the region were to fall into further disarray. “Furthermore, conflict in the Sea could have major effects on speed to market for footwear. Footwear from southern China would have less trouble with ocean bound shipping considering it has no direct land barriers to the open Pacific. However, if shipping lanes are impacted in the southern areas of the South China Sea it couldimpact China’s ability to obtain the oil cargo ships needed. Even slight scarcity of oil could cause disruptions.”

For countries like Vietnam, which dominate global footwear production, the prospect of war could be economically catastrophic. “For nations like Vietnam and other surrounding countries that produce footwear and ship through the Sea to get to the Pacific, it means a great deal. War would prevent ships from transiting the Sea altogether, but, absent war, hostilities could still do harm. Though China could never attempt a naval blockade with U.S. presence, should relations reach all time lows, it could harass ships from Vietnam and other nations trying to reach the Pacific in an effort to harm these nations economically. Such an act — boarding ships to ask for papers or holding up ships and making them port — would significantly decrease transit times. Likewise, trying to sail alternative routes to avoid such harassment, such as through the Sundra Strait, would also increase transit time.”

The good news is that, at least for the time being, the potential for all-out war remain reasonably small. “The prospects of a full-fledged war in the next 5 years are low. However, what is more likely is that regional conflict will reveal itself as a “lukewarm” war – one part standoffs, and one part heated but physical engagement between vessels, and use of combat ships and subs as a display of force to intimidate. Such conflict can be managed, but only for so long; small skirmishes can harm national prides and often lead to war when it is least expected.” Also, the market has not yet made significant adjustments in fear of  a full scale military engagement. “For now, insurance costs for sea-bound cargo have not seen dramatic increases thanks to America’s increased presence in the Sea, ensuring a balance of power.”

Especially given outstanding trade negotiations that could turn out historically significant like the Transatlantic Trade and Investment Partnership (T-TIP) and the Trans-Pacific Partnership (TPP), this is a crucial period for the footwear industry. “This is a critical time in the history of global footwear production and sourcing. China continues to dominate as the number one supplier of footwear to the U.S. market at 84 percent of overall imports. Even with such dominance, both Vietnam and Indonesia are dramatically increasing their exports to the U.S. at pace of 21 and 29 percent respectively. With the continued reshuffling of footwear sourcing throughout the region, conflict in the Sea, both large and small, could have a substantial impact on costs, delivery, and quality.”

Established in 1944, the FDRA is an organization that provides its members with a wide array of services, support and information intended to promote the success of the footwear industry. More than 80 percent of the industry’s distributors and retailers belong to the FDRA.