Global trade is governed by nearly 300 treaties that are "complex and confusing"

Global trade is governed by nearly 300 treaties that are "complex and confusing"

Global political frictions and economic uncertainty, coupled with a sea-change across the retail sector thanks to the rise of e-commerce, digitally-connected consumers, 'see now, buy now' expectations, fickle millennials, store closures and competition from online specialists, are all creating a perfect storm for apparel sourcing executives to try to navigate.

"I've never seen such a tectonic shift in trade policy and trade relations between countries that will fundamentally affect industries such as apparel and footwear," says Andrew Schroth, managing partner at international trade and customs law firm GDSLK LLP. 

"Protectionism, isolationism, the slowing of globalisation, the slowing of trade facilitation measures, questions about the WTO's relevance: what we're seeing is a real fatigue in trade regulation," he told delegates at last week's Prime Source Forum conference in Hong Kong.

"The Republicans argue that goods and services need to be traded more freely," he adds, citing the fact that global trade is governed by nearly 300 treaties that are "complex and confusing," with only a very small percentage of their provisions actually used.

"I think there will be a move away from additional regulation governing trade, and more open border advocacy. We're moving into a new global order that can be efficient, effective, and maybe we're not going to be so restrained by complex legal treaties and more by common sense business practices. I'm hopeful we're moving into an era of deregulation."

Ben Simpfendorfer, founder and CEO of consultancy Silk Road Associates, agrees: "Political forces will continue to complicate what is already a very complicated and fragmented global supply chain."

Against a backdrop dominated by President Donald Trump's pledges to create more manufacturing jobs in the US, plans for a Border Adjustment Tax (BAT), rewriting the North American Free Trade Agreement (NAFTA), withdrawing from the Trans-Pacific Partnership (TPP) – as well as ongoing uncertainty over the UK's exit from the European Union (EU) – he believes support for anti-trade measures "is not a short-term phenomenon and will continue to grow; it will outlive and outlast Donald Trump.

"Over the next ten years we will see more regional trade blocs, the manufacturing base will continue to fragment [and] local capability for Asia's consumer will become key."

The potential for additional power plays by countries such as China to try to build their own trade groups is another possibility going forward.

"China has a terrific opportunity to reach out to its near neighbours and negotiate very favourable trade terms," Simpfendorfer says. "China is significantly larger in scale, and could absorb greater imports and generate huge amounts of goodwill, but I'm not sure whether the appetite is there yet."

He also believes China will continue to remain the world's manufacturing hub. "Leading suppliers are getting better at what they do. In a rising environment of trade protectionism, these are the factories most likely to find a way of producing goods at the right price and in the right quality to overcome these restrictions."

As for the likelihood of a trade war breaking out, "the good news is that Donald Trump alone cannot initiate a trade war; he doesn't have the power to apply cross border duties or taxes on anybody. It has to be a Congressional act," explains Schroth.

However, Trump "does have certain powers where he can impose duties on certain types of products, through special escape-clause actions [of the Trade Act of 1974], so-called 301 actions or 201 actions – and that will generate tremendous friction."

Trump is the first political candidate to realise that trade can be a weapon of mass disruption

Schroth also believes Trump is the first political candidate to realise that "trade can be a weapon of mass disruption. The Republicans have a platform to change the geo-political dynamics through very, very aggressive trade measures. The rhetoric may become reality, but I hope not."

On the flip side of the coin, there could also be opportunities for trade to grow in these uncertain times. Partly if the current administration "were to understand the US consumer will be highly benefited by an increase in global trade," says Adrienne Braumiller, founder of international trade law firm Braumiller Law Group.

She continues: "We may have a reduction in negotiating new free trade agreements (FTAs), but there's a possibility we could take existing FTAs and allow for simplification of rules of origin and also allowing cumulation of different products within different FTAs to be married together so that global trade could actually increase that way."

Steering through the uncertainty

According to industry executives, long-term partnerships, speed to market, flexibility, and the ability to make use of agile techniques and data analytics are among the keys to success.

For manufacturers, "cost and quality are your tickets for entry now," advises Simpfendorfer. "It's the ability to navigate a more uncertain world, having the more strategic insight to be able to work around some of the potential trade tariffs, being able to introduce processes to the factory floor that help you to offset the implications of higher taxes/higher duties, the ability to make use of agile techniques, data analytics: it's the 'smart factories' who are going to succeed in this environment and capture market share."

Anne-Laure Descours, global director, development and sourcing apparel at sportswear specialist Puma, notes that as a global brand, the ability to navigate changing trade agreements and import restrictions is nothing new, and has been on its radar for a long time.

"We have a lot of local operations in different countries due to trade restrictions – such as Brazil, India, South Africa and Argentina – in order to provide goods for those markets," she explains, adding the company has also had to deal with a lot of local regulations in countries like China.

The threat of more taxes or duties being imposed on US imports from China or Mexico is a major concern since the US accounts for around 25% of Puma's business.

"We are watching, and making sure we're ready," Descours says, adding: "The world is in an uncertain mode at the moment, which requires everyone to be very agile and flexible and open."

Justin Kent, group managing director at Hong Kong-based sourcing specialist William E Connor & Associates, agrees. "The only certain thing is uncertainty; we don't yet know what's going to be imposed or implemented, or what the timeframe for any legislation will be. The bad news is US retailers will be significantly impacted when US retail is already going through phenomenal challenges given the sea-change of e-commerce, millennials and poor demand."

Other concerns include retail bankruptcies in the US, and "the misnomer that there's an excess of capacity in Asia manufacturers: there's not, because the good manufacturers are attracting the better business, so there are also more bankruptcies in Asia manufacturing than ever before.

"How do we navigate through it? What we're doing is staying nimble, we're trying to partner with makers, diversify into multiple origins, diversify into other markets – roughly 85% of our revenue is derived from North America. What we can really affect is our own supply chain, and that goes to product and people.

"One of the best ways is lean; not just lean manufacturing but being fanatical about expense across the board. Most of our retail clients want innovation but also the lowest cost, full transparency and sustainability – so the asks are massive. What can we do to meet that? Partnering with the right people, keeping all of our costs down, removing layers of management, diversifying origins.

There's a sea-change happening, and the best way to prepare is to stay sharp, stay strong, and partner with the best

"There's a sea-change happening, and the best way to prepare is to stay sharp, stay strong, and partner with the best."

Long-term partnerships

Partnerships are also critical to Sunny Huang, executive director at knitted fabric and garment manufacturer New Wide Group, which has 17,000 employees and factories in China, Lesotho, Kenya, Cambodia and now Ethiopia. "We cannot reduce risks, we can just have better solutions to face them," he explains.

"You always have to have a Plan B, a back-up plan. The best way to face the current situation is by seeking further alliances. The whole supply chain is not about one company, it's about a supply chain. New Wide started in Taiwan, expanded to China, then Southeast Asia, and now we go to Africa (Ethiopia). It's not just about free trade agreements, it's about management and cultural issues. So alliances are key, and also you have to have a very, very flexible mindset."

Descours concurs. "For a long time our industry has been moving from location to location chasing low cost labour. The winners in these difficult times are the ones who partner with the right people and commit to the partnership for the long term, and not jump from one location to another. You need to be flexible but you need to be consistent, so finding the right balance is key."

She also points out that the relocation of manufacturing closer to the consumer is also becoming a necessity to deliver on speed to market.

"The biggest challenge for countries like the US is how much manufacturing you can relocate onshore; it's not so much about garment manufacturing moving back to the US, but having the raw materials available in the US for anyone who wants to produce in the US."

Of those suppliers who have started relocating their manufacturing, "the way they're doing it is not by finding workers in the US, but looking at automation processes to ensure what they have onshore can cope with costs but speed as well."

Click on the following links to see what else sourcing executives were discussing at PSF 2017:

PSF 2017 – Unlocks for the future fashion sourcing landscape

PSF 2017 – Using digitalisation and data to disrupt supply chains