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Policy Primer: What Lies in the Balance?

Legislation—both active and pending—has had a profound impact on the sourcing landscape.

Four years after the implementation of punitive tariffs on China-made goods, many U.S. brands and retailers are still seeking to offset the impact the duties have had on their bottom lines. And after a pandemic threw the global supply chain into upheaval, apparel, footwear and textile companies have been forced to reevaluate the soundness of their sourcing strategies.

Sourcing Journal has taken a look back at the trade agreements and governmental actions that have impacted the sector most over the course of 2022. We’ve also spoken to industry experts about whether fashion can expect to see legislative progress in 2023.

Section 301 investigation of “China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property and Innovation”

First implemented in 2018, the Trump-era punitive tariffs on Chinese goods were designed to address the country’s anti-competitive trade practices and rampant intellectual property theft. The trade action, which has now survived two administrations, has sustained consistent blowback from business leaders across industries and legislators questioning its efficacy. U.S. Customs and Border Protection (CBP) data indicates that U.S. companies have now paid upward of $150 billion in added duties due to the Section 301 investigation.

As inflationary pressures compounded over the summer of 2022, President Joe Biden reportedly considered strategies for staving off price increases at retail, including removing the added duties on certain goods. But amid rising aggression toward Taiwan, the Commander in Chief appeared to prioritize maintaining a tough-on-China stance.

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The United States Trade Representative (USTR) began a customary four-year tariff review this spring, and in September, decided that it would not allow the duties on China-made goods to expire. Ambassador Katherine Tai characterized the tariffs as “a significant piece of leverage” against the country—and one of the key tools for controlling its impact on the global market.

In early December, the USTR announced a nine-month extension for 352 product exclusions that were set to expire at the end of the year, including men’s, women’s and children’s apparel, home textile products, fabrics and yarns. USTR said the extension “will help align further consideration of these exclusions with the ongoing comprehensive four-year review.” It also asked interested parties to submit comments on the tariff headings containing the exclusions by Jan. 17, 2023 as a part of the review process.

While the fashion industry accounts for just 6 percent of all product imports, it pays 25 percent of all tariffs collected by the U.S. government, amounting to “a huge hidden tax on American families for the clothes and shoes they must buy,” according to American Apparel and Footwear Association (AAFA) president and CEO Steve Lamar.

Proponents and detractors alike now believe that the Section 301 duties are likely to remain in place for the foreseeable future. National Retail Federation (NRF) vice president of supply chain and customs policy Jonathan Gold now hopes for a “realignment” of tariff policy that will offer a more “strategic” path forward.

“From the outset, we never agreed with the tariffs as the means to get something done, and I think most would agree that the policy has not worked,” he said, noting that China has not made the changes that they had agreed to as part of the Phase One trade deal. “We haven’t addressed the intellectual property rights (IPR) and the forced technology transfers. Hitting consumer goods was not the right way to do that.”

Footwear Distributors and Retailers of America (FDRA) president and CEO Matt Priest said the group is currently gathering comments from its members to submit to the administration before its Jan. 17 deadline, but he noted “there’s no requirement” that requests for tariff relief are met or even addressed. “We’re just sitting, waiting and hoping that they finally get their wits about them and at least take down list 4A,” which adds a 7.5 percent tax to the duties already assessed for consumer goods. “If you’re looking for optimism around robust trade policy that helps footwear companies, it’s going to be hard to find.”

Miscellaneous Tariff Bill (MTB), Generalized System of Preferences (GSP)

Instituted as a part of the 1974 Trade Act, the GSP is the oldest and widest-reaching trade preference program, covering 119 countries and territories and 3,500 products, including travel goods and handbags. It removes tariff barriers on commodities from developing economies like Thailand, Indonesia, Brazil, Cambodia and the Philippines to build up industries and create jobs, offering an alternative to China. Meanwhile, the MTB creates a system for suspending import tariffs on particular products or components made overseas.

The catch? Both of these programs—which have enjoyed longstanding bipartisan support—lapsed in December 2020, and have yet to be renewed despite intermittent rumblings on The Hill about their reinstatement.

“The MTB and GSP have been renewed by Congress repeatedly over the past several decades—and always with nearly unanimous, bipartisan votes. This shouldn’t be hard,” U.S. Chamber of Commerce senior vice president for international policy John G. Murphy wrote in November. The group estimates that U.S. businesses have incurred $2 billion in extra tariffs over the 22 months since the programs lapsed.

“AAFA members crave predictability, particularly after they emerge from the multiple supply chain disruptions caused by Covid,” AAFA’s Lamar said. The trade group leader believes that the legislative lapse has cost companies the opportunity to develop and prioritize sourcing relationships with countries outside of China, because they’re not sure whether those markets will receive preferential trade status in the future. “Sadly, U.S. trade policy does not provide a clear path forward,” he added.

In September, House lawmakers proposed the Generalized System of Preferences (GSP) “Refund-Only” Bill, which would return more than $700 million in tariffs paid by U.S. companies that have imported luggage, handbags, backpacks, cases, wallets and other travel gear and accessories since the trade program lapsed on Dec. 31, 2020.

“If you’re a pro-trade organization, it’s a highly frustrating place to be right now,” according to FDRA’s Priest. Congress and the Biden administration have demonstrated a lack of focus on pushing for renewals or new policy that could impact American brands and businesses, he said. “They’re not moving any trade bills that are important to us,” including the MTB. The group has authored a number requests for tariff reduction or suspension on footwear products, “but it doesn’t look like they’re going anywhere.”

“U.S. textile and apparel manufacturers have been operating without the benefits of the MTB since the end of 2020, which has impacted various aspects of domestic production,” added Kim Glas, president and CEO of the National Council of Textile Organizations (NCTO). The measure’s temporary elimination of tariffs on imported components would help domestic manufacturers produce more stateside.  “Congress failed to renew MTB again in December, and it is imperative that lawmakers push it across the finish line early in the new year,” she said. “It’s an easy lift that will bolster the American manufacturing base.”

Africa Growth and Opportunities Act (AGOA)

Established in 2000, AGOA currently provides 36 sub-Saharan countries including Angola, Benin, Botswana, Burkina Faso, Chad, the Democratic Republic of Congo, Ghana, Madagascar, Nigeria, Rwanda, Senegal and Sierra Leone with duty-free access to the U.S. market on more than 1,800 products including apparel, yarns and fabrics. As of now, AGOA is set to expire in 2025, much to the chagrin of companies looking to the region as an alternative to China sourcing amid continued tariff pressure.

“Even though the AGOA expiration date is less than three years away, U.S. investment in the region is already facing significant uncertainty,” AAFA’s Lamar wrote in a letter to President Biden in December, following the U.S.-Africa Leaders Summit in Washington, D.C. Now that companies are increasingly diversifying away from China, “Africa is a logical place for many of them,” but suppliers that have invested in African sourcing aren’t likely to continue without the assurance partner nations can retain their duty-free privileges.

Lamar noted that the “on-again, off-again nature of the program prior to the 10-year renewal in 2015 was extremely disruptive, not allowing the industry to take full advantage of the first 15 years of the program in the manner intended.” The group hoped to see AGOA’s renewal solidified during the Summit, where it was a focus of discussion throughout the week amongst administration officials, USTR and state leaders from African nations.

That didn’t happen. But Riva Levinson, founder and president of KRL International, a D.C.-based consultancy with a focus on sub-Saharan African nations and business, believes the event will spur a “deliberate focus” by USTR and the White House to make sure that an extension makes its way through Congress. Levinson said discussions at the Summit indicated that there will likely be modifications to the existing legislation, perhaps adding distinctions between different countries and their market access. “I don’t think anyone’s going to debate the need of the extension,” in order to “give the exporters, the importers, the people who are investing the certainty now to be able to make those investments.”

Following the Summit, U.S. Secretary of State Antony Blinken said AGOA has yielded “tremendously positive results in the time that it’s been in force, and we are discussing now with all of the different stakeholders—the partner countries, the private sector, our Congress—and listening to them, learning from them about how AGOA can be as effective as possible.”

Dominican Republic-Central America Free Trade Agreement (CAFTA-DR)

Signed into law in 2004, CAFTA-DR was the first free trade agreement between the U.S. and Central American neighbors Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. Like other global trade agreements, it has garnered more interest in recent years as companies look to diversify sourcing and turn to nearshoring as a means of circumventing logistics slowdowns and transportation costs.

“We have seen a significant increase in two-way trade between the U.S. and Western Hemisphere, including the CAFTA-DR region, as onshoring and nearshoring trends continue to build momentum in the wake of broken global supply chains,” NCTO’s Glas said. “Continued government support of textile and apparel investment in the CAFTA-DR region, which totaled $1 billion this year alone, and this vital co-production chain supporting more than 1 million workers collectively, is critical” going into the new year, she added.

Glas said that CAFTA-DR has helped brands and retailers “hedge their risks and manage their exposure during a global supply chain crisis that has forced companies to shift production out of Asia and closer to home.”

Industry groups that represent companies selling finished goods are intent on seeing the agreement’s yarn-forward rule of origin revisited, though Glas disagrees. The provision dictates that only apparel using yarn and fabric from the U.S. and the countries included in the agreement qualifies for duty-free benefits, and some believe that the rule of origin law should allow for the sourcing of certain inputs from other markets.

“CAFTA-DR continues to struggle as tough rules of origin combined with insufficient capacity,” which has caused underutilization, according to AAFA’s Lamar.

“Obviously, there seem to be challenges with using CAFTA-DR, and we would love to see some simple rule-of-origin changes to make it easier for folks to be able to use it,” NRF’s Gold said. “I think we’ve got to take a look at these free trade agreements that have been in place for over 20 years, and we’ve got to see how the global economy has shifted,” he added. “We’ve got to make sure that the rules of origin meet what the needs are, and what the capabilities are.”

Jennifer Knight, Deputy Assistant Secretary for Textiles, Consumer Goods, and Materials for the U.S. Department of Commerce in August indicated that that’s unlikely to happen. Knight said there’s “definite momentum” to the nearshoring movement, “but this administration does not have the appetite to open up the trade agreement.” The Department of Commerce is focused on encouraging companies to “maximize” their use of CAFTA-DR provisions in their current form, including petitioning to add inputs to a short-supply list if they’re unable to be sourced within the region. Petitions are drastically underutilized, she said, noting that the current list contains just over 150 products.

Uyghur Forced Labor Prevention Act (UFLPA)

Signed into law last December, the UFLPA, colloquially known as the Uyghur Act, prohibits products made in part or in full in China’s Xinjiang province from entering the U.S. market unless importers can provide evidence that forced labor was not involved in their mining or manufacturing.

The law took effect on June 21, 2022, subjecting American companies to new responsibilities and liabilities when it comes to China sourcing. Customs and Border Protection (CBP) recommended that importers adopt more stringent supply chain mapping measures and trace their goods back to the raw material level. For the apparel industry, cotton is an especially high-risk commodity, as the United States Department of Agriculture estimated in December that up to 90 percent of China’s crops are grown in Xinjiang. “Only about 20 percent of the cotton used by Chinese textile manufacturers is imported,” the agency wrote. “That means most Chinese cotton products contain cotton that was produced in Xinjiang and are thus subject to the ban.”

Under the law, importers must be able to provide CBP with detailed descriptions of how products are made and by whom, including in-house manufacturers, sub-assembly operations and contractors. When raw materials and inputs from different suppliers are brought together, enterprises should have an auditable process for demonstrating their provenance.

“It’s a significant change,” NRF’s Gold said of the UFLPA. “I think companies are doing what they can to get a better understanding within their supply chains, but many don’t have visibility all the way back to where the cotton comes from, or where other pieces come from.”

Some NRF members are looking to adopt mapping technologies, “but for small-to-medium-sized businesses, it can be a challenge” to afford new tools. “I think part of this is trying to get better understanding from Customs on how the law is being implemented,” Gold said—like identifying high-risk products and best practices. When shipments are stopped under Withhold Release Orders due to a determination that there’s an issue in the supply chain, Gold said he hopes CBP will offer companies information that allows them to “understand and respond accordingly.”

NCTO’s Glas said that the Section 321 de minimis waiver—which allows for the duty-free shipment of up to $800-worth of goods by one person on one day—has created “a gaping legal loophole in U.S. trade law” that is “being aggressively used by e-commerce companies and mass marketers” to import goods from overseas sourcing locales. “U.S. officials estimate an astonishing 2.7 million de minimis packages enter the U.S. market each day that would otherwise be subject to tariffs, penalty tariffs, taxes and customs inspection,” Glas said. CBP reported 771.5 million in de minimis entries in 2021, a 21-percent increase from the prior year, with a total value of $40 billion.

The NCTO lead believes the de minimis waiver has given companies an avenue to circumvent the UFLPA, in addition to Section 301 penalty tariffs on finished goods. “The measure is being used to facilitate Xinjiang forced labor apparel into our closets,” she said. NCTO supports legislation introduced by Rep. Earl Blumenauer (D-OR) in the last session of Congress that would prohibit non-market economies from accessing the waiver, along with countries on the USTR Priority Watch List. It would also explicitly prohibit goods that are subject to enforcement actions like Section 301 from using de minimis, and prevent companies from using offshore distribution centers to process shipments to the U.S.

The Homeland Procurement Reform (HOPR) Act and the Make PPE in America Act

December saw the Senate vote in favor of the Fiscal Year 2023 National Defense Authorization Act (NDAA), a $858 billion defense-spending bill that raises pay for troops, supports Taiwan in the face of China’s growing aggression, and aids Ukraine’s fight against Russia. The bill also contains a key provision that will enhance government procurement of essential products produced domestically, including textiles.

The Homeland Procurement Reform (HOPR) Act will require that, to the extent possible, at least one-third of funds allocated to buying uniforms and protective equipment be used to purchase goods made by U.S. small businesses. The legislation aims to establish steady domestic demand for these goods to encourage investment in reshoring domestic manufacturing for critical supplies.

“The importance of the domestic textile industry and warm industrial base was heightened during the pandemic when the industry pivoted overnight to retool production lines to address severe shortages of lifesaving products,” NCTO’s Glas said. “It is imperative we build and expand a permanent domestic manufacturing base and provide a demand signal to our domestic manufacturing industry for expanded government procurement.”

The Integrity, Notification and Fairness in Online Retail Marketplaces for Consumers (INFORM) Act

Legislation isn’t just needed to regulate sourcing relationships with foreign nations, but to protect consumers from online sellers everywhere, trade groups say. Introduced in March 2021 following an uptick in looting and organized retail crime, the INFORM Consumers Act would modernize consumer protection laws and require web marketplaces to collect and verify basic business information from sellers before they are permitted to sell online. It would also compel high-volume sellers to provide contact information to shoppers. Removing anonymity and boosting accountability would help protect consumers from purchasing counterfeit products and make it more difficult for bad actors to profit off of stolen merchandise, AAFA’s Lamar believes.

The legislation has been incorporated into the end-of-year omnibus spending bill, which was heading toward passage during the last week of December. “AAFA is pleased that the 2023 omnibus spending package has incorporated critical consumer protections by way of including the INFORM Consumers Act,” Lamar said.

A companion measure—the Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce (SHOP SAFE) Act—would incentivize platforms to follow best practices for screening and vetting sellers and products, force them to address repeat counterfeit sellers, and require them to ensure that consumers have relevant information available to them when they make purchases online. The bill also makes an e-commerce platform liable for infringement of a registered trademark by a third-party seller when goods threaten health and safety.

The SHOP SAFE Act “is also a must as it includes proactive measures to prevent illicit and counterfeit goods from initially being listed,” Lamar said. “Furthermore, it will hold platforms accountable if a series of best practices are not followed. The current status quo is mostly reactionary and insufficient to protect consumers, brands, and workers.”

AAFA earlier this year released the results of a study conducted with quality assurance provider Intertek, which tested counterfeit products for a range of hazardous chemicals and heavy metals. The study found that 36.2 percent of the products tested failed to comply with U.S. product safety standards, including dangerous levels of arsenic, cadmium, phthalates, lead, and more that have been shown to cause adverse health outcomes.