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Apparel Imports Outlook: Expect More Flight From China and a Search for New Sourcing Standouts

Apparel’s flight from China to dodge stiflingly high tariffs is in high gear with no end to the exodus in sight. As trade talks sputter on in fits and starts, fashion companies realize diversifying their sourcing can be the way to curtail costs and reduce risks.

U.S. apparel imports from China dropped 35 percent in October to a value of $2.03 billion compared to $3.12 billion a year earlier, according to the latest data from the Commerce Department’s Office of Textiles & Apparel (OTEXA). In volume, apparel imports from China fell 30 percent to 926.03 million square meter equivalents (SME) from 1.33 billion SME in October 2018.

Experts believe the steep drop, while part of a pattern, was likely exacerbated by companies bringing goods in early ahead of the Sept. 1 imposition of 15 percent tariffs on Chinese apparel entering the U.S., as noticeable plunges were all posted in September.

Tariff impact

“Everyone has been focused on what they could do about the tariffs and the data continues to show that,” Julia Hughes, president of the U.S. Fashion Industry Association, said. “People tried to lock on and get their product in early this year.”

G-III has been accelerating inventory receipts ahead of the last round of tariffs implemented in September, making the impact of tariffs in the third quarter “somewhat negligible,” chairman and CEO Morris Goldfarb. However, tariffs will dampen fourth-quarter results, he added, and if they continue, “there will be a way of life for the future,” and there will be a greater impact next year “as we deplete our low-cost inventory.”

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Many companies are trying to executive legal workarounds to the tariffs, Laura Siegel Rabinowitz, a shareholder in the international trade practice at Greenberg Traurig, said. This includes so-called “first sale,” which allows importers to declare goods to Customs as between the manufacturer/factory and the vendor, rather than the vendor and the importer, thereby excluding the vendor’s markup and lowering the customs value of the goods and the amount of duties payable.

“Apparel has always had high duties, now these are additional onerous high duties, and even smaller companies…are looking at the first sale option,” Rabinowitz said. “Companies are also looking at sharing the burden of the duties with the factories. Companies are also applying for exclusions to the tariffs, although I haven’t seen any be successful yet.”

An exclusion petition needs to demonstrate that products can’t be found in the U.S. market or in a third country or that the tariffs are inflicting economic harm.

The China factor also impacted overall apparel imports in the month that’s normally vital to the flow of merchandise for fourth quarter holiday selling. U.S. apparel imports from the world declined 15.99 percent to 2.4 billion SME in October from a year earlier, with all Top 10 suppliers posting lower volume except Bangladesh and Pakistan.

Tariffs not only add costs to finished goods but disrupt the entire supply chain end to end, Dr. Rafay Ishfaq, associate professor of supply chain management at the Raymond J. Harbert College of Business at Auburn University, said.

“Apparel is one of the fastest-changing supply chains,” Dr. Ishfaq said. “It faces challenges in speed to market and cost efficiencies because there’s such a wide range of products.”

While the cycle of fashion seasons are getting shorter, the production leads times are not, Dr. Ishfaq said, noting that digital and omnichannel “have shifted the goal posts and made them even closer.”

“So the tariffs are hurting the profitability side because it raises the cost of goods, but the China issue is broader than just tariffs,” Ishfaq said. “China is investing in modernizing its manufacturing base that makes costs higher. The labor market has also shifted upward and that has also eroded the cost advantage that attracted retailers and brands from the U.S. to go there in the first place.

“So tariffs,” he said, “become a tipping point.”

China syndrome

His point is evident in looking at the larger picture for Chinese shipments. For the year to date though October, apparel imports from China declined 5.62 percent to $22.13 billion in value compared to the year-ago period. In the 12-month period, shipments from China were down 4.56 percent to $26.05 billion.

China’s market share now stands at 30.75 percent, down from 32.26 percent in August ahead of the new tariff regime and from around 36 percent three years ago, according to OTEXA.

Major gainers for the first 10 months of the year included Vietnam, Bangladesh, Cambodia and Honduras. Imports from Vietnam increased 10.88 percent in the period to a value of $11.67 billion, shipments from Bangladesh were up 9.98 percent to $5.09 billion, Cambodia’s rose 10.84 percent to $2.29 billion, and 10.34 percent more goods arrived Honduras for a value of $2.33 billion.

Also posting increases were India, with a gain of 6.9 percent to $3.55 billion, and Pakistan, with shipments up 7.42 percent to $1.23 billion.

Mexico has also seen major declines in apparel imports this year, although its core denim production has remained strong. Overall apparel shipments to its northern neighbor fell 5.55 percent in the period to $2.69 million. Top 10 suppliers Indonesia, down 0.59 percent to $3.82 billion, and El Salvador, declining 1.89 percent to $1.57 billion, saw smaller declines.

Sourcing patterns

As companies look to diversify their sourcing and seek alternative production spots, several countries and regions continue to make steady ground.

Apparel imports from the Western Hemisphere rose 2.03 percent to $12.12 billion for the year to date through October. In addition to Honduras, suppliers on the upswing included Nicaragua, Haiti and Peru.

The Western Hemisphere is also a key source for U.S. textile exports. “The administration’s actions against China could ultimately help lead to sourcing shifts to the Western Hemisphere, which is the U.S. textile industry’s largest export market,” Kim Glas, president and CEO of the National Council of Textile Organizations, said.

U.S. textile mill product exports to the Western Hemisphere declined 2.5 percent for the year-to-date as well as for the year ending Oct. 31, Glas said. However, there were bright spots in the data, she said, citing apparel imports from the region that largely incorporate U.S. textile inputs.

“Early indications in the trade data show that sourcing is shifting,” Glas added. “Apparel imports from the Western Hemisphere that largely incorporate U.S. textile inputs increased modestly and if it continues, this is a trend that will have positive implications for the U.S. textile industry.”

Imports from Sub-Saharan Africa operating under the free trade African Growth and Opportunity Act (AGOA) registered a 17.59 percent increase in the 10 months to a value of $1.2 billion. Kenya, Madagascar, Ethiopia and Tanzania were key gainers from that region. Other suppliers from Africa that also receive free or preferential trade treatment and are seeing increases include Jordan, Egypt, Morocco and Tunisia.

The Jordan and Egypt numbers are “really amazing, as well as Ethiopia and Myanmar, and are “living proof,” Hughes said, with the exception of Myanmar, “of the shifts going on and how the duty-fee options really make a difference.”

As production migrates out of China, many countries and regions such as Vietnam and Central America run are likely to encounter capacity problems, Hughes said.

“We’re going to keep seeing the flight from China because the imports that are coming in now were placed as the exodus was underway,” Hughes said. “But not everything is going to leave China. You hear from companies that, even if they wanted to, there are certain types of production that are remaining in China. Then you have the big issue of ‘how do we manage our production in everywhere that not China?’”

These concerns include labor and civil unrest from Bangladesh and Cambodia to Hong Kong and Central America.