When five retailers succumb to bankruptcy in a week’s time, it’s clear that fashion is facing a crisis of, in many cases, unmanageable proportions.
And while a 90-day duty deferral may offer a sliver of relief, President Trump’s threat to slap new tariffs on China in recompense for its role in the pandemic, plus talk of the administration “turbo-charging” efforts to keep U.S. companies from sourcing there, has many in the apparel business feeling at a loss.
One answer to the sector’s ills, some experts say, could lie in expanding the U.S. Generalized System of Preferences (GSP) program to designate apparel and footwear as eligible for the duty-free trade benefits it provides for designated developing countries.
“If the administration wanted importers to emigrate out of China, then that would give them an incentive to do so,” said Vincent Iacopella, executive vice president of growth and strategy at customs brokerage firm Alba Wheels Up International Inc. “You compound the liquidity crisis, the cash-flow problem, the tariffs, and on top of that you add COVID-19, and now you even have a better argument to do it, because now cash is crucial.”
As it stands, the GSP program—which is set to expire at the end of this year and won’t continue uninterrupted if legislation to renew it isn’t enacted in a timely manner—covers certain products from key sourcing countries like Cambodia, Pakistan, Sri Lanka, Indonesia and Ethiopia. Because the program at its inception in 1974 was intended to extend to products for which there’s little or no U.S.-based manufacturing, apparel and footwear have largely been left out of the mix.
Amid fashion’s multiplying pressures, however, many are trying to change the conversation.
“There’s been a lot of interest in removing the statutory exclusion for apparel and footwear,” Steve Lamar, president and CEO of the American Apparel & Footwear Association (AAFA), said. “People have seen how removing the statutory exclusion for certain travel goods lines was beneficial.”
In 2019, according to the AAFA, having travel goods included in the GSP program saved U.S. companies $297 million in duties.
The likelihood of seeing the same for apparel and footwear, however, remains up for debate. For context, when Congress passed legislation in 2015 that would allow travel goods to benefit from the trade concessions, it was the first time any goods had been added to the GSP program in more than 40 years. And while the conversations began in 2014, the duty breaks weren’t extended to all of the eligible travel goods until 2017. That means, even if apparel and footwear exclusions were lifted from the GSP program in time for the next renewal, fashion players couldn’t count on realizing any short-term benefits.
“That process would probably take a while. Maybe even into 2022 before there is a designation,” Lamar said.
Is there enough appetite?
With much of the U.S. economy upended amid a struggle that’s far from over, and Congress otherwise occupied, getting an amendment into GSP prior to renewing it may not be high enough on the priority list. Even without modifications, procedural hang-ups kept the program from being renewed promptly the last time it expired.
“We’d love to see this passed, but we don’t want to see it happen in a way that might slow down reauthorization of the existing program,” said Dan Anthony, vice president of consultancy The Trade Partnership and executive director of the Coalition for GSP, a collective aimed at seeing GSP renewed. “It’s not really a good time to be imposing new costs on companies.”
In that vein, Lamar said Congress may simply not have the appetite for changes to GSP in the midst of the COVID-19 crisis.
“Maybe the policy makers will decide they don’t have time to do the larger reform and just continue with it as is,” he said. “They may, in effect, kick the can down the road a couple of years, extend the program’s date one, two, three years.”
Beyond the logistics of expanding GSP—which includes reviewing petitions for product inclusions, considering any domestic opposition, various public hearings, a report from the International Trade Commission and a ruling, before anyone broaches doling out the benefits—apparel and footwear have long been causes for contention. The Trump administration, as well as the U.S. manufacturing base, wants to see the local industry rekindled, and anything that makes importing apparel and footwear from other countries easier, will be viewed as thwarting the effort. Others with interests in Latin America, for example, will be concerned that giving duty breaks to developing countries further afield, where labor rates are often lower, would compete with the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).
“The range of products produced in Asian countries is much wider than in CAFTA countries, so it’s a discussion that needs to be had, but one that shouldn’t prevent Asian countries from being considered,” said Iacopella, who believes ending the prohibition on apparel and footwear in GSP would yield more diversified supply chains throughout Asia and, namely, outside of China, which isn’t eligible for GSP. “I don’t believe CAFTA can manufacture the wide range of apparel products that Asian GSP countries can.”
Expanding the GSP program to incorporate apparel and footwear for imports from other leading sourcing countries could help U.S. fashion players scale back on manufacturing in China, which will be of particular importance as the coronavirus crisis had further exposed most companies’ over-reliance on the country, its manufacturing prowess and its raw materials.
“If you want a more diverse manufacturing base…then let’s put apparel and footwear in GSP,” Iacopella said. “That would free up more capital for U.S. companies, who could then transfer savings to the consumer.”
But potential upsides aside, domestic opposition could prove damaging to any plans for expansion.
“There’s a lot of anxiety about it,” Lamar said. “You’ve got folks that look at it as a threat to other supply chains either that come through Central America or Africa, some of these other countries where we already have free trade programs…and then there are folks that are looking to say this is going to interfere with production in the United States of those same products.”
There will be pushback from the domestic industry, Iacopella agreed, but questioned, “How many of these products are we producing anyway? Who’s really doing knits here?”
Any discussion about removing the statutory exclusions on apparel and footwear for GSP, Lamar said, will have to be balanced. Trade policy makers will have to factor any costs to domestic production and what guardrails they’d put around the program to both protect what’s being made stateside and allow for U.S. importers to maintain diversified sourcing at costs that are manageable to sustain their business in the future.
“Ultimately, it’s a political decision at the end of it as to what gets added to the program and what doesn’t,” Anthony said.
Whichever way the GSP renewal shakes out, brands and retailers hoping for tariff relief in 2021 may have to put their eggs back in the basket of a trade deal between the U.S. and China—though expecting tariff breaks even if the phase one agreement progresses or a phase two deal materializes, appears increasingly less likely by the day.
“I think the jury is still out on whether it’s possible or not,” Lamar said. “But there’s a lot of interest in getting it done.”