For all the fuss about free trade agreements (FTAs) and duty-free concessions, in 2014 they had a peculiarly patchy effect on where buyers chose to source.
The European Union had, as always, a pretty mixed experience with its duty-free programs in 2014 (17 percent of 2013 global apparel retail expenditure, according to Clothesource Tradetrak).
The biggest beneficiary of the E.U.’s 11 percent apparel import growth, measured in square meters of apparel, was China, which accounted for one third of it without the help of any duty-free concessions.
European buyers’ apparent loyalty to Bangladesh, in spite of stability and reliability problems, is partly the result of the value for money Bangladesh’s duty-free access to the E.U. offers. That also applies to Cambodia, where a 40 percent growth in the volume of exports to the E.U. contrasted with its 4 percent decline in exports to the United States.
Pakistan’s 19 percent volume increase in apparel exports to the E.U. (to the U.S. they grew 4.2%) since getting duty-free access at the beginning of 2014 is a slightly different story, though. Pakistan is cursed with chronic power supply problems and there seems to be some evidence that apparel exports to Europe came at the expense of switching power off for other users.
The E.U.’s neighbors in Central Europe and the Mediterranean coast accounted for 5 percent of the growth. The rest of the growth came from Indonesia, India, Sri Lanka and Vietnam, which together accounted for a further 20 percent of the E.U.’s extra 2014 imports. They do get, as developing countries, a small import duty reduction — which reduces what their garments would otherwise cost by just 2.4%. Their strong 2014 growth came the old-fashioned way — by more efficient production.
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Africa showed practically no growth in garment exports to the E.U. in 2014, as did the dozens of other countries, from Colombia to Mongolia, with duty-free access.
The U.S. (15 percent of the world apparel retail market) saw apparel imports grow 3 percent in volume — and near-shore duty-free countries, those benefiting from CAFTA-DR, NAFTA or HOPE, accounted for 11 percent of that growth. AGOA-eligible African countries got just 2.3% of its growth, while Egypt and Jordan accounted for 4 percent. The big sources of growth were South East Asia, where no one but Singapore gets duty free access to the U.S.), which accounted for 33 percent of America’s import growth, and China – which accounted for 55 percent.
So what are all those garment factories doing that we’re forever being told have relocated from China? Are they so busy going to conferences to tell the rest of us about it that they’ve got no time to make clothes, perhaps?
As for China, with 12 percent of the world apparel market? If you listen to politicians throughout Asia, selling to the Chinese is the great hope for garment factories in developing countries fed up with having their prices negotiated down by North American and European buyers.
The Free Trade Area between China and the 10 members of ASEAN is the world’s largest, by population: it covers almost twice the number of people in NAFTA and the E.U. combined. Yet China’s apparel imports from it in 2014 were just 2 percent of ASEAN’s apparel exports (mostly to the U.S., E.U. and China) — and China exported several times more apparel to the region than it imported from it — less, though in 2014, than in 2013. China’s free trade treaty with Pakistan has been equally unproductive as far as encouraging apparel exports from its partner is concerned.
Where duty-free deals really come into play, though, is in Japan, which accounts for 4 percent of the world apparel market. China’s share of Japan’s apparel imports has been falling since 2008, when China made 92 percent of all Japan’s clothing. By 2014, that share was down to 78 percent.
Nearly all the Japan import volume moving out of China went to just seven countries: Bangladesh, India, Thailand, Burma, Cambodia, Vietnam and Indonesia. All have either an FTA with Japan, or get unreciprocated duty-free access because they are such poor countries. By contrast, other developing nations in the region, like Sri Lanka and Pakistan, have seen no significant growth in sales to Japan: indeed in mid-February, the Japanese ambassador to Pakistan said the lack of an FTA was a major reason for Pakistan’s poor performance.
It’s probably fair to say that none of this will shock most Sourcing Journal readers: FTAs and duty-free deals are no substitute for efficient factories, decent transport infrastructure, reliable power supplies, well-motivated workforces and a secure environment for business and citizens.
But it’s difficult to follow our industry in many manufacturing countries without gaining the impression that for far too many factory owners — and their governments — FTA’s and duty free deals are a magic bullet that will cure all.
The E.U. and U.S. experience in 2014 seems to show that’s far from the truth. Japanese experience, though, says something more subtle: under some circumstances such deals are essential.
Generalizing about our industry is never a good idea.
Mike Flanagan, CEO Clothesource. Clothesource offers consultancy on the world garment industry using the wide resources of The Clothesource Knowledge Base – the most comprehensive collection of information anywhere about sourcing for the apparel industry. He can be contacted at Flanagan@clothesource.net.