FOB prices from cheap labour countries such as Bangladesh are rising at an accelerating rate

FOB prices from cheap labour countries such as Bangladesh are rising at an accelerating rate

There is a common belief that low-labour-rate countries are forever being victimised by their customers, who force the factories to accept unacceptably low FOB (free on board) prices. This has never made sense, less so now than ever before, writes David Birnbaum.

Start with the basics: Price – what the customer pays for a product – is based on value. In this regard, there is no relationship between price and cost – what the supplier pays (materials and manufacturing). Whether you are buying toothpaste or an automobile you do not care what Colgate or BMW paid to make the stuff. You care only that the thing is worth the price. What is true of one tube of toothpaste or an automobile is equally true of 50,000 woven cotton shirts and jeans. Customers pay for value.

If importers pay less to factories in DR-CAFTA (the Dominican Republic-Central America Free Trade Agreement), Bangladesh, India and Cambodia, it is because as far as the importers are concerned, in today's world the products from these countries are worth less.

About 20 years ago, the relationship between the customer and its supplier changed. Where once factories were considered to be simple product suppliers, they have now become service providers. In this new environment, if you want your factory to be paid higher FOB prices, you have to provide greater services. To put it in the simplest terms: if all you can provide is cheap labour you must accept that the customer will negotiate hard for the lowest FOB price.

However, things are changing. FOB prices from the cheap labour countries have been rising and that increase is accelerating. Consider the latest US trade data as of July 2019. In the first seven months of 2019, average FOB prices of all US garment imports rose by 1.7% – but at the same time, FOB price increases from the four major cheap labour countries were far greater.

US garment imports: FOB prices

YTD 07-18YTD 07-09% +/-

Regrettably, these increases are not the result of any efforts on the part of the industries in these countries, but rather changes that have been taking place everywhere. Starting in 2011, average garment FOB prices from all supplying countries fell every year reaching a trough in 2017, at which point the trend reversed with prices rising at an accelerated rate.

US garment imports: FOB prices

While we cannot be sure why FOB prices are rising, it would appear that this trend will continue in the foreseeable future. Prices will continue to rise, with the cheap-labour countries leading the way.

This new trend may well have a serious impact on the economies of garment importing countries, particularly the United States. The continuing rise in FOB prices will be further exacerbated by the US-China trade war. If customers were unable to keep down the price they paid before the imposition of the tariff premium on made-in-China garments, what chance will they have to push down FOB prices once costs rise 15%? US garment importers are faced with two equally unpalatable alternatives:

  • Keep their orders in China and pay the 15% tariff premium;
  • Move their orders out of China to other garment exporting countries and see FOB prices rising.

US brands and retailers may talk about forcing their suppliers to reduce FOB prices by threatening to move production elsewhere. This is nonsense, just a case of trying to stop the invulnerable tide.

US garment imports: China unit market share

The reality is that for the past ten years China unit market share has remained little changed at 40%-42%. How much can they move? Where can they move? And how much more will they have to pay wherever they move?

Earlier this month David Birnbaum took another look at the impact of President Trump's trade policies, pointing out: "Due to his efforts, we are about to move to a sellers' market, where FOB prices will rise everywhere, including China": The Trump trade war moves from reality to fantasy.