Potential trade pacts have huge implications for apparel sourcing

Potential trade pacts have huge implications for apparel sourcing

The explosion in proposed trade agreements will probably stimulate major changes over the next decade in how apparel buyers organise their supply chains. But as Mike Flanagan explains, they never deliver what - or when - their lobbyists say they will.

It's rare to see a prediction I feel confident in dismissing as 100% wrong. But here's one.

Arumugam Sakthivel, whose many roles include the chairmanship of India's Apparel Export Promotion Council (AEPC), has reportedly claimed that if the proposed Free Trade Agreement (FTA) between India and the EU is signed in April or May of this year, India's clothing exports will grow by 25% in the 2013/14 fiscal year which runs from April 2013 to March 2014.

Now there isn't going to be any deal signed in April or May this year. On Monday (15 April) a "make or break" meeting about the FTA between Indian and EU officials concluded there was "a renewed momentum" to bring forward negotiations - which have already been going on for six years.

Translated into English that means "we're still miles from agreeing what day it is but we're not going to give up", and merely means the two sides won't walk away from talks any time this year.

But even if they'd agreed everything, Sakthivel's prediction characterises three mistakes shared by almost everyone - from presidents of major countries to factory managers - looking at the enormous raft of trade agreements currently under negotiation.

On paper at least they have extraordinary potential to transform our industry:

  • The US is leading talks to create the Trans-Pacific Partnership (TPP): a "deal for the 21st century" that includes Brunei, Chile, Singapore and New Zealand, the United States, Australia, Peru, Vietnam, Malaysia, Canada, Mexico and Japan. TPP enthusiasts expect a first draft by October this year.
  • The EU so far this year has added one-to-one negotiations on deals with the US, Japan, Thailand and Morocco to existing negotiations with Canada, India, Vietnam and Malaysia. They're on top of:
  • The deals the EU has agreed but is waiting to get ratified with Singapore, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Colombia and Ukraine;
  • The deals with South America's Mercosur group (Argentina, Brazil, Paraguay, Uruguay and Venezuela), the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE), Georgia, Armenia and Moldova that are theoretically still under discussion but seem to have lost most negotiators' interest.
  • The EU's rule change for its duty free GSP+ programme so Pakistan, the Philippines and Ukraine are now among countries with substantial garment -making capacity eligible to be considered for membership from 2014.
  • China has now started talks on a free trade area with Korea and Japan.
  • The Association of South East Asian Nations (Indonesia, Malaysia, the Philippines, Singapore and Thailand, Brunei, Burma, Cambodia, Laos and Vietnam) is due to implement the ASEAN Economic Community (AEC) in 2015 - in principle making the cross-border movement of goods as easy and duty-free within South East Asia as it is in the EU today. ASEAN has FTAs with China, Japan, Korea, India, Australia and New Zealand - and believes the AEC will be part of a massive free trade grouping (to be called the Regional Comprehensive Economic Partnership) covering roughly half the world's population.

Taken together, these negotiations, if they materialise, have the potential for far wider impact on our industry than the cheaper sourcing from low-wage economies created by trade deals over the past 20 years.

  • They would, of course, reduce apparel costs for some important trading partnerships, such as US businesses sourcing from Vietnam, Japanese businesses sourcing from China, and European businesses sourcing from India, Thailand and Ukraine.
  • They would also simplify multinational retailers' sourcing complexity: allowing, for example, Gap to sell Mexican-made garments in Japan as easily as it can in the US today; and Inditex, H&M and Topshop to sell Romanian garments in the US, Canada and Japan as easily as they sell them in Europe.
  • They also wave the prospect, for all of us, of easier e-commerce, with the possibility that goods ordered on the web from businesses throughout Europe, North America and Japan can go straight to customers from a single warehouse, at a consistent price and without the need to pay local import duty or sales tax separately.
  • Possibly most important of all: they will offer buyers more flexible access to the world's resources. Yarn, fabric and trim can be moved faster and more cheaply across borders to the most efficient factory.
  • There's also the prospect of more uniform regulation on chemical composition and labelling throughout Europe, North America and Japan - and if China and Korea ever get to a free trade area, throughout practically all major markets.

Sakthivel's enthusiasm for the potential in a deal between India and the EU is understandable, well-founded and shared with many others. It's the timing, impact and relevance of the effects that's confused.

Trade deal timetables
Look back at that list of EU negotiations. There's a huge list signed, but not yet ratified - and that's because in most serious democracies, treaties come into effect only after a lengthy process of ratification.

India is the big exception, which is probably why Sakthivel thinks an agreement comes into effect once it gets signed. Under Indian law, what is effectively a Prime Ministerial decree is all that is required for an international trade agreement to come into effect.

In the EU, it takes at least a year to turn an agreement into legally binding texts in all the Union's 22 working languages, get the required approvals from its Council of Ministers and European Parliament, then create detailed instructions for all traders and officials involved in its implementation. Even if a deal had been agreed by negotiators on 15 April, there's not the slightest possibility of duty-free garments from India in European shops before summer 2014.

In the US, the average time between finishing trade negotiations and implementation has also grown dramatically over the past 30 years. In 2011, more than five years elapsed between negotiators signing the US-Colombia FTA and its Congressional approval - and it took a further six months before the FTA got implemented.

These deals are taking longer to ratify because they're controversial. Even the most enthusiastic supporters accept they can hurt almost as many people as they benefit.

American advocates of the TPP say delays like those affecting the Colombia FTA could be prevented by a device called Trade Promotion Authority, which the US has used in the past (though not since 2007) and speeds the process through Congress. But this assertion is seriously flawed:

  • It assumes only the US Congress allows controversy to delay trade agreements. But agreements like TPP are controversial in all the countries negotiating it - and America's current trade agreement with Australia, for example, which came into force in 2005, was a lot tougher to get through the Australian parliament than through the US Congress.
  • To agree Trade Promotion Authority, there has to be a majority in both houses of the US Congress in favour of new trade agreements. It's not at all clear that there is.
  • It's not just American procedural rules that impose delays on turning an agreement into action. Japan cannot even join the TPP negotiations without the approval of the US Congress and the other TPP partners' legislatures. Congress hasn't yet been asked to approve Japan's involvement, and at least 90 days have to be allowed for Congress to discuss Japan's participation. So with Japan unlikely to be able to start negotiating until July at the earliest, the likelihood of draft agreement in 2013 is looking very optimistic.

Trade deal impact
Expectations have recently been unrealistic among both those arguing for trade deals and those arguing against. Sakthivel's claim is an extreme piece of excessive enthusiasm - but not that different from some of the other over-claims made for trade deals.

In 2011, according to the UN's Comtrade, 43% of India's clothing exports, by value, went to the EU. So if India's total garment exports were to grow 25% because of a trade deal with the EU, the country's exports to Europe would have to grow an extraordinary 58% in a year.

India got duty free access to Japan on 1 August 2011. In the five months to the end of 2011, India's apparel exports to Japan (measured in square metres of fabric) grew just 12% over the same five months of 2010 (and have fallen back slightly since).

Bangladesh's grew 76% during the same period, Indonesia's more than doubled and Cambodia's grew 46% - because Japanese buyers were determined to move production out of China, and were aggressively seeking new sources.

Even under the best possible circumstances for increasing exports to Japan, India's garment factories came nowhere near the 58% growth they'd need to have the effect Sakthivel is claiming. There were (and always will be) other things influencing countries' competitiveness than one change in import duty.

Meanwhile, American consultancy Moongate Associates has claimed that calling a product assembled outside the US "imported" is a "simplistic judgment" that's "usually outdated and inaccurate" - and making garments abroad creates jobs at home.

Commissioned by the TPP Apparel Consortium - a group lobbying for the TPP - Moongate calculates that about 70% of the price Americans pay for an average imported garment represents costs actually incurred in the US. Moongate's study includes an enticing graphic showing how much the US-based designers, software developers, sales managers and "retail legal workers" with a finger in that garment's pie all earn.

The numbers are broadly accurate, and reflect work we did a year ago at Clothesource on the World Trade Organization's World Input-Output Database. Most of the retail price of an imported garment does indeed consist of rich-country government taxes and the costs associated with maintaining a retail workforce in expensive city-centre real estate. 

It's the conclusion that's wrong. A garment requires the same number of designers, software developers, sales managers and lawyers (and minimum-wage shop assistants and warehouse staff) whether it's made in China or the US.

Moongate's litany of posh jobs allegedly "supported" in America by offshore manufacture is uncannily similar to the list produced by British TV presenter Mary Portas in spring 2012 of jobs "supported" in the UK by onshore production.

Both equally misguided. The Moongate study does nothing to change the fact that manufacturing garments and textiles employed 2.5m Americans in 1970, and just one-fifth of that by 2011.

Yes, of course some of those jobs were lost because of greater efficiency, and yes there have been jobs created in selling garments - because growing affluence has meant more clothes being bought.

But it's downright dishonest to present a snapshot of the costs involved in paying tax and getting garments into customer's bags and try to pretend that somehow negates the collapse of two million jobs.

Trade deal detail: the sting in the tail
Sakthivel's belief a FTA with Europe will increase his exports by a quarter sits badly with a similar claim he recently made that Indian garment exports would also grow 25% if it was cheaper for Indian garment makers to import foreign yarn, especially man-made fibres. 

Indian garment makers would export more clothes if they were less dependent on Indian cotton. At Clothesource we find the narrow range of fabrics available competitively in India is a bigger barrier for Indian exporters to developed countries than price.

But it's almost certain that the benefits of any EU-India FTA will be limited to garments made from Indian yarn - or at any rate from yarn spun in India or its immediate South Asian neighbours. Neither Indian nor European negotiators are going to get excited about duty-free access to the EU for "Indian" garments made from Chinese or Indonesian yarn

However strong the case for the India-EU FTA, or the TPP, or the mega RCEP, the detail of the deals finally signed is rarely what trade lobbies are seeking.

Rules of origin, the mechanics of border inspection, health and safety rules: they're all there today because there's a powerful lobby in each country arguing they're essential for each country's security and prosperity. ASEAN's free trade deals with India, China and Australia won't allow Thai garments to use fabric made in China to get duty-free access to Australia without far more detailed negotiation than is possible over the next 18 months.

However hopeful negotiators might be, the political and logistical practicalities of implementing EU-style free movement of goods always take longer than first meets the eye. Twenty years after the NAFTA treaty came into force, there are still lengthy queues for trucks to cross the US border from Canada and Mexico.

Planning for the future
What matters in trade deals is what will happen, not what lobbyists want to see.

The explosion in proposed trade agreements will probably stimulate major changes over the next decade in how buyers organise their supply chains.

But Sakthivel's claims aren't a serious prediction; he's just lobbying the Indian government to put garment makers' interests ahead of Indian car makers, dairy companies, pharmaceutical firms and others with serious reservations about the India-EU FTA.

Likewise, Moongate's claims are part of a campaign for the US government to put US retailers' and brands' interests before those of yarn spinners and fabric weavers. They're really not meant to help buyers plan their future.

Which is why the new 'Clothesource Guide to Apparel Trade Regulations, 2014' reviews all the proposed new deals and tries to predict both a realistic timescale for their implementation and their effect on buyers. And why anyone buying it now gets a free second edition in autumn 2013, as we begin to see the first fruits of their negotiations. Click here for more details.