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SEPTEMBER ISSUE: FASHION & TRADE IN A SHIFTING GLOBAL LANDSCAPE

fashion

SEPTEMBER ISSUE: FASHION & TRADE IN A SHIFTING GLOBAL LANDSCAPE

As any devoted reader of Vogue knows, September is usually the time for a wardrobe refresh. This year, the new season may not be looking so good for the fashion industry which faces tariffs, changing consumer demand, and of course, fallout from the pandemic.

Going into 2020, fashion’s global leaders were already apprehensive about a difficult year ahead. They feared external economic shocks and were feeling pressure to adapt quickly to digitization and embrace the push for sustainability. Then, the COVID-19 pandemic upended their industry, cutting demand and disrupting supply chains. Meanwhile, escalating global tensions including the U.S.-China trade war added to the burden of trade barriers.

Though fashion can be seen as a luxury or even a hobby, the apparel industry is one of the largest in the world. Disruptions to this trillion dollar industry have meaningful impacts across the globe for the millions involved in making the world look good while clothing it.

The Big Players in the Global Fashion Trade

Fashion is a global business with global supply chains so tariffs, trade disputes, and transportation disruptions all play an important role in determining what we can buy and how much we pay for it. The global apparel market is valued at over one trillion U.S. dollars. The United States is currently the world’s biggest market for imports of apparel and footwear, importing around $85 billion worth of clothing, accessories and footwear in 2018.

“Knit apparel” is defined as any clothing made from the weaving of fibres. It’s the largest single apparel designation. The United States buys 18.95 percent of total knit apparel imports, twice that of the second-largest importer, Germany. Other top destinations for knit apparel around the globe include European countries such as Spain, the UK and France, and fashion-conscious Asian powerhouses like Japan and Hong Kong.

China remains at the top when it comes to exports of apparel. In 2018, China’s exports of knit apparel made up just shy of 31 percent of total world exports. Bangladesh and Vietnam take the number two and three spots, but with market shares of 7.52 and 5.66 percent respectively.

Top Ten Knit Apparel

A look at longer term trends reveals that China’s market share has been slipping. In 2012, China commanded 41 percent of total knit apparel exports, meaning in the past six years it has lost ten percent of its market share. The below graph shows this decline, as well as the increasing share claimed by rising South and Southeast Asian competitors Bangladesh, Vietnam, and Cambodia. This can be explained partially by the escalating trade war between the United States and China, prompting businesses to shift all or part of their production away from China and to neighboring Asian countries to avoid the Made in China label and the tariffs that come with it.

Asian country share of knit apparel exports v China (1)

An Industry at the Whims of International Policy – and Trends

Even before the pandemic hit, the industry was expecting a shake-up as both global relations and trends were shifting. Global value chains are morphing and new industrializing markets emerging. At the same time, e-commerce continues to accelerate; and expectations for brands to be sustainable and socially conscious are growing. The global pandemic, social movements and international relations of 2020 have forced the fashion industry to be more innovative than ever before to stay in business.

Trade Disputes & Barriers

The fashion industry has long suffered from tariffs — global average import tariff rates for clothing products stood at 17 percent in 2018, about twice as much as that for all other manufactured goods.

In the United States, tariffs are as high as 32 percent for clothing and 65 percent for footwear. In fact, around 75 percent of the total tariff burden on American households comes from apparel products. U.S. tariffs generally vary widely, but those on clothing tend to be higher than in almost any other category and affect a larger portion of U.S. imports, translating into higher prices paid by U.S. consumers.

Given China’s textile and apparel export dominance, it is unsurprising that tariffs on clothing originating in China have been significantly affected by the U.S.-China trade war. The United States levied tariffs ranging from 7 to 25 percent on knitted and non-knitted apparel; textiles including silk and cotton; fabrics such as lace and embroidery; and a whole host of other inputs the fashion industry relies on (like rubberized textiles). China retaliated with its own list of tariffs against American products, including U.S.-produced apparel. The existence of these tariffs, and the constant threat of more, make China a less appealing location for production. If they can find the right mix of cheap-but-skilled labor, manufacturers are likely to relocate factories. Those Made in China labels may instead read Made in VietnamBangladesh or Turkey.

COVID 19: Decreased Demand & Shaky Supply Chains

The COVID-19 pandemic dealt a major blow to the fashion industry worldwide. The one-two punch of disrupted supply chains and a global population reining in luxury expenses hit designers, manufacturers and retailers of clothing and footwear particularly hard.

While people self-quarantined at home, retailers who rely on sales at their brick-and-mortar stores were impacted immediately. During the first six months of 2020, the sales of clothing and accessories at stores in the United States were close to 40 percent lower than one year prior. Department store Nordstrom has suffered a 53 percent dip in sales, and many retailers, including household names like Brooks Brothers, JC Penney and Neiman Marcus, have filed for bankruptcy. Tangentially, a whole population staying home did not demand the same types of clothes as before. No vacation meant no new summer wardrobe. No special events cut down on the need for fancy outfits, causing demand to fall even further.

Resilient and nimble supply chains are vital to any fashion house, as they must be able to react quickly to changing trends and draw on skills and resources spread throughout the world. This resilience was put to the test during the coronavirus pandemic as major production and transportation faltered. The clothing retailers that seem to be weathering the storm best are online-focused stores in a position to pivot quickly to the stay-at-home demand for comfy clothes and “athleisure” wear.

For Some Countries, Fashion Means Everything

Fashion houses and retailers are obviously struggling. Unraveling the threads of trade in fashion reveals the much larger number of people involved in the global fashion industry who have been impacted worldwide. They include millions of people employed as manufacturers of apparel and footwear, as well as producers of textiles and other materials, and farmers who produce raw materials, as well as myriad designers, creators and marketers who are part of the innovative “orange economy”.

Many countries are involved in apparel production, but for some South and Southeast Asian countries it forms a significant part, even the vast majority, of their total revenue. For example, 44 percent of national export revenue in Sri Lanka comes from apparel. That number is even higher for Cambodia, at 58.45 percent. Apparel is also Vietnam’s third-largest export sector, bringing in over $36 billion annually and accounting for 16 percent of GDP.

And nowhere is the apparel industry more important than Bangladesh, where 83 percent of total export revenue comes from the garment industry. The apparel industry, and more specifically the ability to trade the clothing and accessories manufactured in Bangladesh, has been a huge driver of economic development in the country and has given many the opportunity to earn a living beyond subsistence farming. About 80 percent of jobs are held by women, providing not only employment but autonomy and education to one of the world’s poorest and most vulnerable populations.

However, this specialization comes at a cost. Although trade in apparel has brought much needed revenue into the country, the heavy reliance on a single industry has also been a source of concern. For example, worldwide orders dried up at the height of the coronavirus pandemic, risking millions of Bangladeshi jobs and even prompting fears of starvation.

Bangladesh Garment Sector (1)

Trends in Fashion and Trends in Trade – Where Next?

Trends rule in the world of fashion. In this especially uncertain time, who knows what will win out as new autumn fashion appears on our shelves (and in our feeds)?

Will the growing shift to more sustainable and ethical fashion continue with a slow down of “fast fashion” in favor of investing in long-lasting pieces with a low environmental footprint? If so, we might expect a shift away from clothing produced in far-flung destinations to cut down on carbon footprints or to trace the origin of clothing made with free and fair practices. Or, as the world opens up post-COVID will the return of traveling and social events spur a worldwide shopping-spree and a desire for more clothing, more quickly? In that case, suppliers who can utilize large and diverse – yet agile – supply chains will come out on top.

Two things are certain: fashion will continue to be a global industry and trade will continue to play a vital role in shaping what we wear.

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Alice Calder

Alice Calder received her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.

consumers

Will Consumers be in a Better Place by the End of 2020?

The pandemic unleashed a staggering one-two punch on the economy – double-digit unemployment and drastically reduced revenues for many businesses. As states reopen with varying restrictions, what the future holds in the next six to 12 months is anybody’s guess.

But while the economic downturn will continue to impact consumers and businesses indefinitely, it could have been even worse, says Ron Oertell, Chief Financial Officer at LendingUSA, LLC.

“Given the high unemployment rate, there was a very strong concern out there as to what short-term effect the pandemic would have on the consumer,” Oertell says. “The surprise has been that consumers have been relatively stable in paying their bills. That has been driven in part by public policy decisions such as the stimulus payment plans and the government stepping up in a strong way.

“In past crises, the government has walked solutions into the crisis. This time they have run to fix the problem from many different aspects. From a consumer finance side, deferments and defaults are lower than some of the initial estimates. However, there is a strong concern that we’re not out of the woods yet. We still have a very high unemployment rate. And nobody knows how long it’s going to take for the true economy to recover and for the marketplace to drive strong consumer performance.”

Oertell gives his outlook on key issues facing consumers as the nation tries to get back to work during the pandemic:

Tightening lending. With unemployment remaining high, many people seeking loans or credit may find both harder to secure. “I do believe it will be a challenge for many people to obtain credit,” Oertell says. “There will be an undersupply of credit and bank-backed funding for individuals who are unemployed. When the economy was strong, credit was relatively easy to obtain, but now lenders are cutting credit limits on some current customers and making new credit more difficult to get. The country went from its lowest unemployment rate in many decades to its highest in 90 years, and banks are showing they are nervous.”

Government support. If more consumers are denied credit or loans, where will they turn? “Much will depend on the actions of federal and state governments,” Oertell says. “If governments and lenders continue to provide unprecedented support to individuals through payments and/or expense relief measures, such as mortgage payment moratoriums or the halting of eviction proceedings, then I do not see personal bankruptcies rising significantly. The speed of the recovery will be critical in determining the effect of the high unemployment rate on the number of bankruptcies. “A theme many have recently expressed is the confidence in the government to continue forms of consumer support through the election period. However, such governmental actions cannot continue indefinitely. When consumers are denied traditional lower-cost credit, many will turn to higher APR lenders or non-traditional forms such as title loans to cover unexpected or emergency life events.”

Consumer debt. Recent reports have indicated consumer debt is down as a result of the pandemic and people drastically reducing their shopping. What impact could that have on people getting credit? “A reduction in shopping could reduce an individual’s request for credit as well as reduce outstanding balances on credit cards,” Oertell says. “Traditionally, both factors would increase availability based upon standard underwriting metrics. However, many lenders have placed hard cut-off rules based on employment status and other factors, which would more than offset any benefit from the reduction in shopping. Over the next few months, lenders will continue to deal with the uncertainty of future credit-worthiness when traditional indicators of payment behavior are distorted and capacity to pay in is highly uncertain.”

“Consumers are facing very challenging economic times, but the long-term impact of the pandemic on the credit markets isn’t close to clear,” Oertell says. “How many businesses are fully functioning, and whether the unemployment rate is substantially lowered, will be the key things to watch in the next few months.”

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Ron Oertell is Chief Financial Officer at LendingUSA, LLC, a consumer lending company focused on physical point-of-sale locations. He has more than 25 years of experience as an attorney, investment banker, investment fund manager and CFO, and has completed over $9 billion in capital transactions.

global supply

THE PANDEMIC DISRUPTED GLOBAL SUPPLY CHAINS BUT WERE THEY ALREADY MORPHING?

COVID-19 is disrupting the operation of global supply chains, causing many businesses (and countries) to rethink where they source their products. Is the pandemic accelerating trends already underway? Were trade policies – both liberalizing and protectionist – inducing some degree of “nearshoring” to avoid tariffs or to focus on regional trade made easier and less costly through free trade agreements?

In the case of the United States at least, the answer may be yes.

How Global Supply Chains Stretched

Supply chains encompass all the people, technology and resources that go into producing a final product or service. Supply “chain” is an oversimplified term as they are not linear; they are more like interconnected networks.

Historically, supply chains were extremely short – you, or maybe your village, were the entire chain. As economies grew more complex, so did supply chains, enabling more firms to specialize. Companies are now able to source from a wide variety of suppliers to reduce costs and improve efficiency.

Advances in communication technologies and transportation made it both inexpensive for products to cross national borders multiple times and easier to coordinate complex activities at a distance. Resources, labor and technological expertise in multiple countries are leveraged as value is added throughout global supply chains. International production strengthened many companies’ competitiveness. Many multinational companies also invested in production overseas as part of their supply chain strategies.

Stretched and Strained

As supply chains stretched, imports became increasingly important in the U.S. American manufacturers rely heavily on imports for the inputs into their American-made goods whether those goods are consumed domestically or ultimately exported.

For many years China has been the go-to for much of this intermediary production, with companies attracted to its large supply of low-wage workers and China’s specialization in certain manufacturing. The concentration of manufacturing in China has led to mounting concern over whether China is competing unfairly through subsidization, market access restrictions, technology transfer and localization requirements. These and other policies have attracted more manufacturing to China and away from both advanced economies like the United States and other low-cost producers in Asia, a trend that may be now reversing.

The COVID-19 pandemic brought this concern into sharp relief, sparking policy discussions over whether U.S. innovators and producers have become over-reliant on China for resources, inputs and final production. But even before the pandemic, the subtext of the U.S.-China trade war was U.S. pressure on companies to reexamine and “rebalance” the structure of their supply and production networks as incentivized by mounting tariffs.

And even before the tariff war heated up, businesses were seeking ways to shorten their global supply chains to reduce their vulnerability to external disruptions such as changes to trade rules, natural disasters, or other crises, according to a 2017 report by The Economist Intelligence Unit and Standard Chartered.

Has Global Value Chain Participation Peaked?

So now that COVID-19 has caused severe disruption to supply chains, the question on everyone’s minds is: will it cause a retreat in participation in global value chains? Or, was participation in global value chains already peaking before the pandemic and if so, will the pandemic hasten the decline?

We can calculate trends in global value chain (GVC) participation using the UNCTAD-Eora Global Value Chain (GVC) Database. Though supply chains and value chains are not exactly analogous, both show the spread of supply networks across countries. A country’s global value chain participation index can be calculated by summing the foreign value added (FVA) and the indirect value added (DVX) content of its exports, and dividing this by its gross exports.

The chart below shows participation in GVCs generally flattened out from around 2010-2012 after dipping in 2008. It does not show a retreat from global supply chain involvement (though India shows a slight decline). COVID-19 renders the future trajectory unpredictable.

Another measure of trends in global value chains is global foreign direct investment (FDI). In this respect, the trends are far clearer. The data show a significant and sharp decrease in FDI since 2008. This may be a reflection of the decreasing rate of return on FDI, as the initial returns to scale for large multinational corporations start to diminish and new local competitors come online.

The expansion of the digital economy is also likely a big factor in shifts away from FDI commitments, as improvements and diffusion of technology allows businesses to provide services without foreign direct investment in a location. A reduction in FDI may therefore show a complete removal of international involvement, or may just represent a shift in the distance and nature of involvement and investments in foreign markets.

Diversification and Regionalization, Not De-globalization

The expansion of global value chains does appear to have slowed from the heady pre-recession era, and direct on-the-ground investment has plummeted. But, just as with globalization in general, it is too early to say whether supply chains as a whole are shrinking, shifting or something else. Companies could be mitigating risk by diversifying supplier relationships and regionalizing supply chains in response to a proliferation of regional trade agreements that removed barriers.

Looking at the United States specifically, there is evidence of both shifts.

As seen in the chart below, the share of total U.S. imports from China have sharply declined. As we might expect, 2017 marks the beginning of a downturn in the share of imports coming from China. The particularly sharp drop after 2018 shows the effects of the U.S.-China trade war, reflecting the increased costs imposed by tariffs. The sustained political risk combined with trade policies prompted businesses to reduce reliance on exports from China in favor of sourcing elsewhere in the world.

Over the same time period, low-cost Asian producers such as Thailand and Vietnam saw an uptick in share of U.S. imports. U.S. companies may be diversifying production relationships away from China and toward other countries in the region, or at least taking advantage of excess production capacity in facilities elsewhere. The increases are significant but not massive in real monetary terms for a single country, suggesting a “don’t put all your eggs in one basket” mentality.

Even the United States’ largest tech companies like Apple, Microsoft and Google have been reportedly exploring similar moves. In their recent re-shoring report, Kearney found evidence that low-cost producers in Asia have been the beneficiaries over the last five years of efforts from U.S. companies to diversify their supplier networks.

There is also evidence that companies are doubling down on natural geographic trading partners through regionalization of supply networks. Mexico’s share of U.S. imports has increased steadily over the last few years, with a particularly sharp increase in 2019 in tandem with the U.S.-China tariff war.

Regional economic integration is not a new policy strategy. Many of the earliest free trade agreements were regional in nature. Under NAFTA, U.S. firms leveraged the complementary assets of our neighbors to the north and south to strengthen the global competitiveness of regionally-made products. As the Bush Institute Global Competitiveness Scorecard shows, the United States, Canada and Mexico are more competitive as a North American region than any other region in the world. The implementation of the U.S.-Mexico-Canada Agreement will provide incentive to reinforce these relationships as U.S. companies think about “rebalancing” their supply networks.

What to Look For

It is still too early to see the real effects of the COVID-19 pandemic or even the US-China trade war in the data on imports and global value chains, predictions notwithstanding.

Global value chains may be expected to remain complex, but could shift to cross borders that are closer geographically as trade increases among regional partners within Europe, North America and Pacific Rim countries. A key indicator for this will be changes in shipping trends. Expert Martin Stopford predicts a decrease in demand for large container ships and an uptick in demand for smaller shipping vessels that are more economical for shorter routes.

Before the pandemic, global supply chain expansion was not increasing at the speed it once was, but reports of its demise are premature. Instead, companies are thinking about diversification for improved resilience without sacrificing the benefits of a global and interconnected system of international trade.

Meanwhile, hopes for American reshoring may be equally overblown. The United States has obstacles to overcome, including a shortage of skilled labor and high production costs. Nonetheless, companies will have to assess whether a cost-above-all-else approach to manufacturing and sourcing is sustainable in a post-pandemic global economy.

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Alice Calder received her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.