Why have US FTA apparel imports fallen to a record low?
In the past ten years the number of free trade agreements (FTAs) implemented in the United States has almost doubled. So why have US apparel imports entering under free trade agreements fallen to a record low? Dr Sheng Lu, assistant professor in the Department of Fashion and Apparel Studies at the University of Delaware, investigates.
Theoretically, free trade agreements (FTAs) should significantly boost trade flows between members, as well as help companies save import tariff duties.
But statistics from the US Department of Commerce's Office of Textiles and Apparel (OTEXA) show the opposite: the share of US apparel imports entering under FTAs has been declining since 2013, and dropped to just 15.4% in 2015. This figure was not only lower than the 16.2% recorded in 2014, but was also the lowest since 2006.
Even the absolute value of US apparel imports entering under FTAs has been declining in recent years. While the total value of US apparel imports increased 9.5% from $80.26bn to $87.89bn from 2011 to 2015, the value of apparel imports entering under FTAs decreased by 1.7% from $13.80bn to $13.56bn.
As a result of fewer apparel imports taking advantage of preferential import duties provided by FTAs, US companies and consumers are paying more taxes on imported clothing.
According to the latest estimates from the American Apparel and Footwear Association (AAFA), the average effective US apparel import duty reached 13.54% in 2014, which is even higher than the 11.97% seen in 2001. In comparison, over the same period the average US import duty on all products dropped from 1.64% to 1.40% (Source: ApparelStat2015).
So why have US apparel imports entering under FTAs fallen both in relative and absolute terms despite the increased number of enacted agreements? Three factors may have contributed to this "strange" phenomenon.
First, US apparel companies continue to diversity their sourcing bases, especially from countries not covered by existing FTAs.
Statistics from OTEXA show that from 2010 to 2015, US apparel imports from non-FTA regions consistently enjoyed a much higher growth rate than imports from FTA regions. Indeed, China and Vietnam, the two largest suppliers to the US market, contributed a large share of the increased apparel imports from non-FTA countries.
But US companies are not simply putting all their sourcing eggs into these two baskets. Indeed, US apparel imports from non-FTA countries other than China and Vietnam have been growing faster than imports from the FTA regions since 2013.
|From non-FTA regions (including China and Vietnam)||13.30%||7.90%||-1.20%||5.00%||2.80%||4.90%|
|From non-FTA regions (excluding China and Vietnam)||8.70%||10.90%||-2.30%||3.00%||2.00%||3.10%|
|From FTA regions||11.10%||13.20%||-0.50%||-1.90%||1.60%||-0.90%|
The growing popularity of sourcing diversification strategies among US apparel companies is also indicated by the 2015 US Fashion Industry Benchmarking Study released by the US Fashion Industry Association (USFIA). More than 53% of US apparel brands and retailers surveyed for the study reported sourcing from more than 10 countries in 2015, up from from 41% in 2014. Additionally, 56% of respondents expected their sourcing bases would become even more diversified in the next two years.
Similarly, according to the annual reports released by some leading US apparel companies, sourcing diversification has been commonly adopted as a way to balance companies' sourcing cost, supply chain risk, speed to market, need for business expansion and flexibility in today's highly competitive and turbulent market environment.
Second, the expiration of some important provisions in FTAs has negatively affected US apparel imports under these programmes.
One example is the Tariff Preference Level (TPL) for Nicaragua, which allows a certain amount of Nicaraguan-made apparel to enter the United States duty-free without regard to the source of the fabrics. From 2006 to 2014, TPL contributed about half of the US apparel imports from Nicaragua entering under the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). Since the TPL provision expired at the end of 2014, the value of US apparel imports from Nicaragua entering under DR-CAFTA saw a substantia drop of 28.3% in 2015.
In a similar case, affected by the upcoming expiration of the TPL provision in the US-Morocco Free Trade Agreement on 1 January 2016, US apparel imports from Morocco entering under the agreement dropped by 9.7% in 2015.
Also at stake is the TPL programme in the US-Bahrain FTA, which will expire at the end of July this year. In 2015, the TPL programme accounted for more than 97% of total US apparel imports from Bahrain. Should the TPL provision not be renewed soon, it is likely that US companies will lose interest in using the US-Bahrain FTA and will instead switch to source apparel from elsewhere.
Third, the utilisation rate of some major FTAs fell in 2015, suggesting it is increasingly common for US companies to give up the duty-saving benefits even when they source apparel from these FTA regions.
The utilisation rate of an FTA reflects the share of imports from a particular FTA region that actually claimed the preferential duty benefits provided by the trade agreement. As shown in the figure below, the utilisation rate of US FTAs with Peru, Columbia, Oman and Morocco, as well as NAFTA and DR-CAFTA, showed varying declines from 0.5 to 11.4 percentage points in 2015 compared with a year earlier. Particularly, since 2010, the unitisation of NAFTA and DR-CAFTA has declined by 2.3 and 9.5 percentage points respectively.
This downward trend deserves special attention because NAFTA and DR-CAFTA together accounted for 76.3% of total US apparel imports entering under FTAs in 2015.
The lower utilisation rate of FTAs could be the result of a mix of factors, but the strict, complicated Rule of Origin and heavy documentation requirements for FTAs are often the main reasons. According to the 2015 US Fashion Industry Benchmarking Study, many surveyed US fashion brands and apparel companies feel it is not worth the duty savings given the time and resources needed to comply with the FTAs and obtain the required documents from their suppliers.
Statistics show that it took 19 months on average to reach a FTA in the United States, while the recently concluded Trans-Pacific Partnership (TPP) took as long as 58 months! So the record low level of US apparel imports entering under FTAs is a reminder that in order to make the great efforts of reaching trade deals worthwhile, more should be done to encourage companies to actually use these hard-won FTAs.
Help test our new apparel sourcing tool.
- China leads US apparel sources with falling prices
- Hard hit Turkish industry is not knocked out
- "Power of the many" drives change at Otto Group
- Vietnam grows share of US apparel imports in 2016
- US apparel sector braces for potential cost hikes
- US Q4 in brief – Foot Locker, Nordstrom, Carter's
- Bangladesh crackdown has cost garment sector $100m
- Adidas and Burberry recognised for sustainability
- Inditex and H&M boycott Dhaka Apparel Summit
- Macy's will "do the right thing", says Lundgren
- When Things Go Wrong - A Practical Guide to Managing Common Problems in Apparel Sourcing
- Outdoor performance apparel 2016: A broader perspective
- Technical textile markets: product developments and innovations, December 2016
- Southeast Asia strategic sourcing review – a focus on Cambodia, Vietnam and Myanmar
- Global market review of lingerie – forecasts to 2022