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Are U.S. Retailers Failing to Take Advantage of FTAs?

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When it comes to free trade agreements the U.S. isn’t lacking in strategic partnerships, but retailers are often not taking advantage of those duty free allowances.

In a Sourcing at MAGIC panel titled, “The Ins and Outs of Current Trade Negotiations: From TPP to AGOA” moderated by Julia Hughes, president of the United States Fashion Industry Association (USFIA), experts discussed how FTAs are both underused and, sometimes, just not beneficial. And, of course, the panelists touched on what the Trans-Pacific Partnership (TPP) could mean for the industry.

Steve DiBlasi, VP of sourcing for Lanier Clothes and Stefanie Rotta, Urban Outfitters’ senior director of global sourcing operations spoke on the panel and Juan J. Del Real, the textiles and apparel executive representative for Proexport Colombia talked briefly about manufacturing opportunities in the South American nation, one of the U.S.’s free trade partners.

In terms of square meter equivalents (SME), the top ten countries supplying apparel to the U.S. in 2013 were China, Vietnam, Bangladesh, Indonesia and Honduras, Cambodia, Mexico, India, El Salvador and Pakistan, Hughes noted. Of those ten, only three have FTAs with the U.S.

“There are lots of duty free opportunities for the U.S., but clearly those are not being used,” Hughes said.

In terms of value, 36 percent of apparel imports to the U.S. come from China, followed by the ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Myanmar, Cambodia, Laos and Vietnam) with 22 percent, South Asia with 14 percent and then 10 percent from CAFTA countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and NAFTA (Canada, Mexico) with 5 percent.

Only 14 percent of the apparel imports that come into the U.S. are duty free, Hughes said.

“These are really high duties that we’re paying, so if we can use the FTAs, it would be good for everyone,” Hughes said.

Steve DiBlasi said FTAs may just not work for some brands and retailers, and he outlined what to consider when thinking about where to source.

It’s about really learning the elements of agreements with each country, looking at your business model, finding the advantages and getting a good balanced global sourcing mix, like making goods in both low-wage and NAFTA countries, DiBlasi said.

“While there are all these great agreements, it’s almost like a steeple chase and if you can meet all the hurdles, you’re in great shape,” DiBlasi said, but if not, there could be little or no benefit.

And duty free often doesn’t mean lower costs. With regard to Lanier, DiBlasi said, “Sometimes we can make a garment cheaper in Vietnam than in Mexico where it’s duty free.”

But on the other hand, “It’s easier to put boots on the ground in Mexico vs. Vietnam,” he noted, something critical to building successful relationships with suppliers.

So it’s a matter of what is going to work best for your business.

Today’s declining market has forced retailers to be more price competitive, DiBlasi said, and he joked that with increasingly excessive retail promotions, if stores don’t stay price competitive, they’ll soon be offering buy one get seven free discounts to consumers and becoming non-profit more quickly than they planned to.

“Clothing in general has become a commodity item that the consumer just doesn’t want to pay more for,” DiBlasi said. “And retailers are just reacting to that.”

Stefanie Rotta admitted that Urban Outfitters is also guilty of underutilizing FTAs. And that’s mostly due to the difficulty and cost involved in getting a new factory set up and getting the product right.

“We love FTAs but it isn’t the first thing we look to,” Rotta said. “It’s so much more than that cost alone.”

DiBlasi agreed saying, “Building a brand should not be just about the lowest cost but the intrinsic value that brand has to the consumer.”

And in building that brand, working with a factory long-term, even if their costs may be more up front, could be more beneficial as they might be more likely to deliver product on time, willing to produce smaller runs and all-around more understanding of your brand, DiBlasi said.

Juan J. Del Real from Proexport urged executives in the audience to consider Colombia as a viable sourcing destination, noting that the country has 45-60 day lead times, 3-16 day transit times, factories with vertical integration, low wages and hard workers.

The talk turned to the much-debated Trans-Pacific Partnership (TPP) which now includes Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, and whether, if it ever gets settled, it will be a value to the industry.

With regard to TPP, “There’s a lot of moving parts and a lot of pitfalls,” DiBlasi said.

Right now, the short-supply list is a big issue in TPP, DiBlasi said.

The U.S. has proposed negotiations of a pre-approved list of short supply goods where the government will agree to shorts supply lists of fibers, yarns, and fabrics that can be sourced from outside the region for qualifying products. The lists will be part of the TPP agreement when implemented.

With short supply, manufacturers are struggling to find certain fabrics that just aren’t available, so it becomes very restrictive to require brands to buy fabrics from certain countries, DiBlasi said.

“We would love a generous short supply list and a reevaluation of the yarn-forward rule,” Rotta said, because with partners already in Vietnam, where TPP is expected to offer the most benefit, the agreement could prove beneficial.

The U.S.-proposed yarn forward rule stipulates that any garment must be made of either fabric or yarn supplied by the U.S. or any signatory TPP nation to be eligible for duty-free benefits when shipped back to the U.S. Many importers have objected to the rule, but American textile producers insist it is necessary for them to be competitive.

DiBlasi said, “Unless we change something about yarn forward or short supply, we’re not going to have the homerun we thought with TPP. It might be a bunt single.”

Despite another round of negotiations taking place in Singapore this week, Hughes said she was very skeptical that TPP is going to close this month. “We’re just not ready yet for Congress to vote.”

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