In February, SOURCING at MAGIC brought the fashion industry to Las Vegas, including manufacturers of apparel, shoes, and accessories from around the world, trend experts and service providers, and sourcing executives from global retailers and start-up brands. In between visits to the show floor and slot machines, we discussed the big issues, from what’s really happening with “Made in the USA,” to tech innovations changing the way we source and shop, to how businesses can take advantage of Free Trade Agreements and other duty-free opportunities.
During the U.S. Fashion Industry Association (USFIA) seminar on duty-free opportunities, we discussed one trade preference program in particular that not only supplies more than $850 million in textile and apparel imports to the United States, but also contributes to peace in the Middle East. The Qualifying Industrial Zone (QIZ) allows Egypt to export fashion products to the United States duty free as long as they contain inputs from Israel — and this year, we celebrate the program’s tenth anniversary, which demonstrates how trade has a positive impact on committed trading partners.
I was pleased to welcome my friends Mohamed Kassem of Egypt’s apparel industry, Gabby Bar of Israel’s Ministry of the Economy, and Yaron Harel, CEO of Hamma, an Israeli manufacturer, to appear together on the stage to talk about these sourcing opportunities. (Assistant U.S. Trade Representative for Textiles Gail Strickler and Target sourcing executive Pete Hagen kicked off the discussion about duty-free sourcing.) Even during the most tense times between Egypt and Israel, the QIZ leadership and industry continued to meet and share information — not only because they are economically dependent upon one another, but also because they have built a true friendship and trust. That friendship was on display during a lovely dinner after the seminar that brought together U.S. brands and retailers with manufacturers and officials from Egypt and Israel. It’s a rare opportunity for businesses to make such a significant impact and contribute to peace simply by our sourcing decisions.
While Egypt supplies only 1 percent of U.S. apparel imports (by value) — and doesn’t come close to the $29.5 billion of apparel we import from China or the $9 billion from Vietnam — brands and retailers of all sizes say they are inclined to utilize the QIZ because the program has a clear and simple Rule of Origin and no expiration date. Even when there were shipment delays due to the political situation, the QIZ provided more certainty than, say, the African Growth & Opportunity Act (AGOA) or the Nicaragua Tariff Preference Level, which had expiration dates. (In fact, the Nicaragua TPL has already expired with no action to renew it yet, and AGOA is expiring in less than seven months.)
But, if we look at the data, most U.S. trade agreements do not boast a similar success story. The top four suppliers of apparel, with 59 percent market share — China, Vietnam, Bangladesh and Indonesia — do not have any trade preferences with the U.S.
And in our 2014 benchmarking study of fashion brands, retailers, importers and wholesalers, we found most FTAs and preference programs are utilized by fewer than 20 percent of the respondents. Were we reading this right? After all, we’ve spent countless hours lobbying for these trade agreements, and companies overwhelmingly say rising cost is their biggest business concern, so why aren’t they taking advantage of opportunities to save money?
Reasons why companies don’t use these programs vary, but it ultimately comes down to the cost of compliance. In this era of global value chains, it can often be cheaper and easier to source from the trusted factories you know and ship your inputs and finished products all over the world, rather than try to find new factories and deal with the compliance issues created when companies try to use the duty savings offered by FTAs and preference programs.
“When I took the broker exam, the general notes to the HTS were just 35 pages. Today, the general notes are 425 pages, and predominantly all stipulations of the FTAs and preference programs,” explained one executive.
“When companies utilize FTAs and preference programs, they now expect to get an origin review by U.S. Customs at some point, resulting in an ‘overseas paper chase’ that’s not a high priority for the supplier,” said another executive.
And in some cases, companies are sourcing from countries with trade preferences but don’t even take advantage of the programs. “We have a small amount of production in NAFTA countries, but we don’t even claim the duty-free treatment because the requirements to qualify and the burden of proof on the company is simply too onerous,” another executive explained.
As the Trans-Pacific Partnership (TPP) negotiations are seemingly coming to a close, we’re launching our 2015 benchmarking study with a special focus on FTA and preference program usage along with industry views on TPP and AGOA. While we’re collecting the data, we hope the trade negotiators are paying attention. TPP represents an opportunity to change the status quo with a simple, flexible, 21st Century rules that reflect the way the industry is doing business today — and encourage trade. If we encourage trade among the partners, perhaps we’ll see a strengthened relationship like we see between Egypt, Israel, and the U.S. — which will not only provide opportunities for economic growth, but perhaps also opportunities to change the world, one piece of clothing at a time.