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5 Things to Know for Smarter Sourcing in 2022

Even though China and other Asian countries were under strict Covid restrictions in the past two years and shipping was difficult and expensive, U.S. companies continued to make China and Vietnam their predominant sourcing locations.

In 2019, these two countries accounted for 54.2 percent of all apparel coming into the country. In 2021, it was 52.7 percent.

With the U.S. government getting tough on China, U.S. companies are strategizing how to diversify out of China and focus on other areas. “Companies are setting up war rooms to figure out diverse sourcing programs,” said Rick Helfenbein, the former chief executive and president of the American Apparel & Footwear Association and the former USA President of Luen Thai, a sourcing company based in Hong Kong.

Helfenbein was speaking at a Feb. 14 seminar on free trade during the Sourcing at Magic trade show in Las Vegas . He shared the stage with Ron Sorini, a former textile negotiator in the U.S. Trade Representative’s office and co-founder of Washington, D.C.-based Sorini, Samet & Associates.

The two outlined a number of laws and regulations that could affect trade coming from different parts of the world.

De minimis to be minimized

In 2016, the U.S. government said any goods under $800 brought into the country would be tariff free. Originally, that duty-free exception called de minimis was used mostly by U.S. tourists coming back from foreign vacations, but a boom in e-commerce has a lot of foreign companies shipping items to individuals and avoiding duties.

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“In 2016, the U.S. government was thinking about tourists coming off ships in Miami carrying Rolex watches and the $200 duty-free exemption wasn’t enough,” Helfenbein said. “China was more than happy to stand behind it. If you bring in a container into a port and it carries Chinese cotton [harvested with forced labor], customs will look at it. But if you are shipping something in an envelope to a consumer, no one is looking at you. The government started to go, ‘Oh, oh. We made a mistake.’ ”

Shein, a Chinese company that sells extremely cheap clothing, is one company using this system to ship a plethora of parcels packed with apparel, lingerie, swimwear and other goods to the United States without paying tariffs. Shein now makes up about 28 percent of the fast-fashion market in the United States, Helfenbein said.

But that may change. In January, U.S. Rep. Earl Blumenauer (D-Ore.), chairman of the House Ways and Means Trade Subcommittee, unveiled legislation that would strengthen U.S. import laws to stop non-market economies from exploiting the loophole in this import regulation.

Action on that regulation could be taken in the next two or three months. “Right now, de minimis is in the middle of a guillotine,” Helfenbein said.

Helping poorer countries with GSP

The Generalized System of Preferences was established in 1974 to help poorer countries improve their economies. Thousands of goods coming from those countries were exempt from paying duties. Unfortunately, apparel, textiles, footwear, handbags and backpacks were not among the tariff-free goods.

But in 2015, apparel and textile importers changed that. “We were successful in convincing Congress that travel goods [which include handbags and backpacks] should be eligible for GSP,” Sorini said, noting the 20 percent tariff on those goods. The result was that $5 billion in handbag and backpack production left China and went to developing countries including Cambodia, Indonesia and the Philippines.

That GSP bill expired at the end of 2020, but industry lobbyists are trying to get it renewed this year and make it retroactive to Jan. 1, 2021. They also want to add footwear to the tariff-free list. “If we are successful, we will see more footwear migrate out of China,” Sorini said.

Look towards India

India used to be a classified as a developing country that could benefit from GSP. But former President Trump took the powerhouse producer of apparel and textiles out of the program because he felt that India did not provide free and equitable access for U.S. products.

“Those problems have almost been solved,” Sorini said. “I think when Congress authorizes GSP, India will be back in the equation as the U.S. government focuses on the industry diversifying their supply chain and moving out of China.”

There is also talk that within the next two years, the United States could start negotiating a free trade agreement with India.

Curbing China and forced labor

The Uyghur Forced Labor Prevention Act taking effect June 21 means that any items with Chinese cotton in it will be under heightened inspection at the U.S. borders to ensure it was not made with forced labor in Xinjiang. “We are here to warn you this is coming down the pike,” Helfenbein said.

U.S. Customs and Border Protection have been adding staff to increase inspections and scrutinize documents to make sure cotton harvested in Xinjiang doesn’t make its way into the United States. “That bill will have a profound effect on sourcing apparel and textiles for the next two years,” Sorini said.

Looking at Central America

The United States has had a free trade agreement with Central America since 2005. Known as the Dominican Republic-Central American Free Trade Agreement, it has fostered more production of synthetic fabrics, T-shirts, underwear and other items in countries including Guatemala, El Salvador, Nicaragua, Honduras and the Dominican Republic.

But the U.S. government is not too happy with the re-election last year of Daniel Ortega, now in his fourth term as the left-of-center president of Nicaragua. “This free trade agreement has been reasonably successful, and it has helped the countries and region hold its own,” Sorini said. “But there is a concern about the politics in several countries, particularly in Nicaragua.”

Recently, U.S. Sen. Bob Menendez, (D-N.J.), introduced legislation to ask the Senate to review Nicaragua’s eligibility to be a member of DR-CAFTA.

For U.S. labels making goods in Nicaragua, this could pile on more costs for doing business in that country.