By Leonie Barrie | 19 September 2018

The impact of a protectionist trade policy agenda in the United States is not surprisingly ranked the top challenge for the US fashion industry in 2018 – closely followed by increasing cost pressure, which is creeping up executives' agendas again.

This is the second year in a row that protectionism in US trade policy has been ranked the top challenge for the US fashion industry, according to the '2018 Fashion Industry Benchmarking Study.'

But it could become a "new normal" for fashion firms, given ongoing high tensions between the US and its major trading partners – especially its biggest supplier China – and massive market uncertainties caused by the Trump administration's protectionist trade agenda.

Indeed, more than 60% of executives from leading textile, apparel and fashion brands, retailers, importers and wholesalers who took part in the study ranked this issue among their top five business challenges – far exceeding concerns about other issues on the list.

There are knock-on implications too. The pressure of "increasing production or sourcing cost" is returning this year, with 54% of executives ranking cost among their top five business challenges, a notable increase from 34% in 2017.

Possible explanations are that cost could be rising in absolute terms; cost pressure may be directly tied to fears about the impact of tariffs and trade wars; and the intensified trade tensions caused by the protectionist trade policy agenda may be forcing companies to switch to more expensive sourcing destinations.

Published by the United States Fashion Industry Association (USFIA), in conjunction with Dr Sheng Lu, associate professor in the University of Delaware Department of Fashion & Apparel Studies, the fifth annual survey took place between April and May this year.

Of the executives who took part, 76% have more than 1,000 employees, including 64% with more than 3,000 employees; which suggests the findings reflect the views of the most influential players in the US fashion industry.

Despite concerns about trade policy and cost, all is not bleak. Executives are more confident about the five-year outlook for the US fashion industry than they were a year ago, although confidence has not fully recovered to the level seen in 2015 and 2016.

In addition, all respondents say they plan to hire more employees in the next five years, compared with 80-85% in previous studies. But these new employees won't be working in manufacturing; instead they will be in other types of jobs across the global value chain, including market analysts, data scientists, sustainability/compliance related specialists or managers, and supply chain specialists are expected to be the most in-demand.

"'Uncertainty' is one of the most popular words for brands and retailers right now," notes USFIA president Julia Hughes. This report allows us to see quite clearly how this "trade war" could impact fashion companies, especially in terms of their sourcing practices. And we get to see just how trade policy – or at least, the rhetoric about trade policy – has a direct impact on business."

2018 Fashion Industry Benchmarking Study snapshot

For the second year in a row, "protectionist trade policy agenda in the United States" ranks the top challenge for US fashion companies in 2018.
More than 60% of respondents rank the issue among their top five business challenges this year, far exceeding other concerns. Notably, more than one-third of respondents regard the protectionist US trade policy as either their #1 or #2 challenge this year, even higher than 23% in 2017.

The survey coincided with the first tranche of punitive tariffs imposed by the US against China, with China responding with plans to increase duties on US exports, including cotton. While it is too early to know whether this will be a trade war or a temporary skirmish, US fashion brands and retailers are justifiably concerned.

The most popular sourcing strategy remains "China plus Vietnam plus Many." But more companies plan to further diversify their production in response to the changing business and trade policy environment, especially with regards to China.
"China plus Vietnam plus Many" has become an ever more popular sourcing model among respondents. And this model is evolving as companies further diversify their China production. In particular, China now typically accounts for only 11-30% of companies' total sourcing value or volume, compared with 30-50% in the past.

Although China's position as the top sourcing destination is unshakable, companies are actively seeking alternatives to "Made in China." This does not seem to be due to concerns about cost, but rather the worries about the escalating US-China trade tensions.

Benefitting from an expected decrease in sourcing from China by US fashion companies, Vietnam and Bangladesh are expected to play a bigger role as apparel suppliers for the US market.

  • This year, Vietnam remains the #2 sourcing destination among respondents, with a 96% usage rate, up from 88% in 2017. In addition, respondents appear to be more optimistic about the prospect of sourcing from Vietnam over the next two years; those expecting to increase sourcing jumped from 36% in 2017 to 70% this year, whereas those expecting no change fell from over 50% in 2017 to just 22%.

  • Nevertheless, a few respondents plan to substantially increase apparel sourcing from Vietnam over the next two years, which reflects concerns about the limits of Vietnam's production capacity. Recent studies suggest that US fashion companies may soon have to compete for orders with their counterparts in Europe and Asia, once the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Vietnam Free Trade Agreement (EVFTA) go into effect. These two agreements, likely to be implemented in late 2018 or 2019, will provide strong incentives for Vietnam to prioritise fulfilling orders for the EU and Japan because of their duty-free benefits. Further, the CPTPP and EVFTA could intensify the competition for resources (especially labour) between the apparel industry and other export-oriented sectors in Vietnam, which may also try to expand their production and exports. As a result, Vietnam's apparel industry could face labour shortages and wage hikes.

  • This year, Bangladesh is the #5 sourcing destination, with 75% usage among respondents, moving up from #7 (61% usage) in 2017. Similar to the case of Vietnam, respondents express more interest in expanding sourcing from Bangladesh in the next two years as companies are actively seeking China alternatives. In particular, nearly half of respondents expect to "somewhat increase" sourcing from Bangladesh through 2020, up from 32% in 2017; another 7% expect to "strongly increase" sourcing there, a record high since 2015.

  • "Made in Bangladesh" enjoys a prominent price advantage over many other Asian suppliers. However, respondents still regard "risk of compliance" as a notable weakness. The high level of media and public attention on social responsibility in the Bangladeshi garment industry, such as factory safety and treatment of workers, further adds to the complexity and sensitivity of the issue. Since compliance is so important to US fashion companies, concerns about the compliance risks involved in sourcing from Bangladesh could hold companies back from placing more orders in the country.

Diversification is key for many companies' sourcing strategies.

  • Most respondents continue to maintain a diverse sourcing base, with 60.7% currently sourcing from 10+ different countries or regions, up from 57.6% in 2017.

  • Reflecting the US fashion industry's growing global reach, respondents report sourcing from as many as 51 countries or regions in 2018, the same as in 2017. Asia as a whole continues to take the lead as the dominant sourcing region. Meanwhile, with the growing importance of speed-to-market and flexibility in sourcing, the Western Hemisphere is becoming an indispensable sourcing base.

  • Keeping a relatively diverse sourcing base will remain a key element of the sourcing strategies of US fashion companies. Nearly 80% of respondents plan to source from the same number of countries, or more countries, in the next two years. However, respondents are equally divided on whether to increase or decrease the number of suppliers they will work with.

As the fashion industry becomes more globalised and fast-paced, companies' sourcing decisions are increasingly about striking a balance.
Three criteria – "speed to market," "sourcing cost," and "risk of compliance" – have the most significant impacts on companies' sourcing decisions. While no sourcing destination is perfect, Vietnam, China, Mexico, and members of the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) overall are regarded as the most balanced sourcing bases, giving them competitive advantages as preferred sourcing destinations.

Rules of origin, and exceptions to the rules of origin, significantly impact whether companies use free trade agreements (FTAs) and trade preference programmes for sourcing.  
While FTAs and trade preference programmes remain largely underutilised by US fashion companies, more are using NAFTA (65%), DR-CAFTA (58%) and AGOA (50%) than in the past two years. Still, it's concerning that companies often do not claim the duty-free benefits when sourcing from countries with FTAs or preference programmes. Companies say this is primarily due to the strict rules of origin.  

Exceptions to the "yarn-forward" rules of origin, including tariff preference levels (TPLs), commercial availability/short supply lists, and cumulation, are priorities for respondents; 48% say they currently use these mechanisms for sourcing. These exceptions provide critical flexibilities that make companies more likely to use FTAs and source from FTA regions.

US fashion companies call for further reduction of trade barriers and urge trade negotiators to "do no harm" to NAFTA, the most-utilised free trade agreement by respondents.
Respondents predominantly support initiatives to eliminate trade barriers of all kinds, from high tariffs, to overcomplicated documentation requirements, to restrictive rules of origin in NAFTA and future free trade agreements.

More than half of respondents explicitly say NAFTA is important to their business – and they have grave concerns about the uncertain future of the agreement.

Overall, US fashion companies are making more commitments to sustainability and social responsibility.  
85% of respondents plan to allocate more resources for sustainability and social compliance in the next two years, in areas including providing training to suppliers and internal employees, adding more employees, and working more closely with third-party certification programmes on sustainability and social compliance. However, the availability of operational budget remains the primary hurdle for companies that want to do more.  

100% of respondents map their supply chains (i.e., keep records of name, location, and function of suppliers), up from 90% in 2017. Over 80% of respondents track not only Tier 1 suppliers (factories where the final product is assembled), but also Tier 2 suppliers (subcontractors or major component suppliers, such as fabrics). However, it's less common for companies to map Tier 3 (yarn spinners, finding and trimming suppliers) and Tier 4 suppliers (raw materials suppliers, such as cattle/pig hides, rubber, cotton, wool, goose down, minerals/metals and chemicals).  

100% of respondents audit their suppliers for issues including building safety, fire safety, and treatment of workers. The vast majority of respondents (96%) currently use third-party certification programmes to audit, with both announced and unannounced audits.

Automation technology could change the future landscape of apparel sourcing.
Respondents say automation in apparel manufacturing will bring positive changes to the existing apparel supply chain, ranging from shorter lead time, to higher productivity, to labour cost savings.  

Respondents believe automation technology may somewhat encourage reshoring, but the majority do not think it will bring back apparel manufacturing to the United States in a significant way.  

Some respondents expressed concerns about the potential negative social and economic impacts of automation technology, such as job loss in the apparel-manufacturing sector.

Tagged in this post: Sourcing Strategy

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