US focus on fashion nearshoring is inviting unlikely guests

Since the pandemic fashion industry talk has moved from sustainability to the nearshoring market with some remarkable consequences, writes Gherzi Textile Organization partner Robert P. Antoshak.

The drumbeat of fashion environmentalists remains loud, but the cacophony of voices comprising the green crowd has increasingly had to share the stage with the reality of the marketplace.

As we all know, the fashion market is terrible – with everyone struggling to find a way out of the abyss.

Like a bad hangover, the effects of the pandemic continue to plague the industry. Companies struggled with collapsing sales at the outbreak of the pandemic, only to be replaced with soaring demand as the world struggled to regain its footing – to find that so much inventory would remain unsold for months, if not years, after the fact. And, then, to run into the economic buzzsaw of inflation, changing consumer attitudes, and frightful global tensions.

The pandemic wrecked the industry’s traditional business model in many ways while simultaneously fueling a global flight to safety – or more precisely stated, certainty. In this sense, the pandemic underscored that decades of simply phoning in orders with little concern about fulfilment disintegrated bit by bit with each new Covid variant. For sourcing companies worldwide, the search was on to secure new sources of supply – in many cases, supply far closer to consuming markets looking for a hedge in an uncertain market.

This leaves us to sift through the remnants of the old industry model and assess what’s salvageable and what’s not. It’s a task that may take a while to sort out, and it’s only just begun. In the interim, however, the industry faces an economically depressed market. The weight of unsold goods and lacklustre consumer demand has rippled back to suppliers worldwide. Yeah, it’s a mess.

Fashion nearshoring and a return to normal?

But before we throw in the towel on the fashion industry’s prospects, let’s talk imports. Everyone bemoans declining imports. Indeed, because imports dominate the US and EU textile and apparel markets, monthly trade reports provide a good snapshot of current economic activity, so it’s natural to view declining imports as a sign of a weak market. But there’s more to the story.

Let’s take a look at the US market as an example. Aggregate textile and apparel imports into the US have plummeted in 2023 compared to the previous two years. However, compared to pre-2022 levels, current imports are returning to the historical average (2015-2019). So, when seen in a historical context, it’s not so dire after all, and 2021/22 represented an aberration, not a new benchmark. The supply chain’s pandemic-induced boom and bust cycle left the industry overbought out of fear of being caught short, as was the case earlier in the pandemic.

Annualised 2023 imports (calculated from year-to-date August) are returning to the five-year average of imports before the pandemic (2015-2019). It’s an encouraging development.

Simply put, this year’s declines indicate that imports are returning to historical trends, not a collapse, as many fear. It’s also a sign that the market may be bottoming out. A light at the end of a dark tunnel?

Fashion market dynamics – a balancing act

So, is equilibrium returning to the fashion market? Maybe, but problems remain. Although supply imbalances may be showing signs of mending, demand remains anaemic. As the Federal Reserve battles to control inflation, rising interest rates have helped to dampen demand for products like clothing.

Weak demand. Yikes. It’s hard for an industry built on ever-greater consumption to grapple with weak demand. However, if nothing else, the industry is innovative; sourcing patterns have shifted as companies search for greater certainty in an uncertain market, embracing new strategies and supplier relationships. Imports are down, but companies have revisited their sourcing strategies and made changes.

One such strategy embraces fashion nearshoring. Sure, there’s been a lot of buzz about sourcing closer to consuming markets, but it’s more than buzz. It’s real. The supply chain disruptions caused by the pandemic – whether realised in draconian lockdowns in China, port delays in Long Beach, or boom-bust consumer demand – the old model of business needed an overhaul. For instance, sole sourcing in China made the industry vulnerable to disruptions. Once stung, the industry geared up: shifts in sourcing occurred, and new tactics were adopted. The hedges were in. Sourcing from one or two countries gave way to sourcing from a broader range of countries and regions.

Fashion nearshoring and the CAFTA hedge

As companies diversify their sourcing away from China in favour of countries throughout Asia, Mexico, and the CAFTA countries, these regions have gained their share of new business. But the shift occurred with unforeseen consequences. As new business was written in the case of CAFTA, non-regional textiles have piled in. The CAFTA-DR trade agreement, or USMCA for that matter, was written not to prohibit non-regional inputs per se but to discourage using non-qualifying yarns and fabrics in apparel production. For sure, the yarn-forward rule of origin helped to encourage the use of regionally-made inputs, but now there’s a surge of textile imports originating from outside the region. What gives?

The value of yarn imported into the region rose sharply going into 2022, with imports from countries other than the US gaining market share.

Interestingly, this growth occurred without the benefit of 2022 data from Costa Rica and Honduras, which would have pushed the curve even higher if reported. When measured by weight, the US has lost market share to the rest of the world. The US has historically been the largest supplier of yarns to the region.

A similar story is the case with CAFTA imports of fabrics from 2018-2022:

When measured by US dollars, the value of fabric imports soared from 2020 to 2022 – with most growth coming from countries other than the United States. And when measured by weight, non-US sources of supply dominate the import market. As with yarn, this data does not include 2022 imports for Costa Rica and Honduras.

Fashion nearshoring with old suppliers

Two-way trade prospered under CAFTA-DR before the pandemic, but things have shifted since. Some CAFTA countries have successfully nurtured regional supply chains utilising non-regional textiles to augment domestic/regional supplies to the detriment of some US exporters of yarns and fabrics. US investment in CAFTA factories has contributed to declining regional imports from the US, particularly in yarn. Intra-CAFTA trade is also significant. Taken together, these factors have helped the region to develop even during a time of overall falling imports of finished apparel by the United States.

Who are some of the non-regional suppliers? China, Vietnam, Korea, India, and Pakistan, to name a few, are major exporters to the region. However, imports from countries outside the region would not receive the duty benefits of the CAFTA-DR agreement. On the surface, without duty benefits, it’s hard to understand why such non-regional trade would occur in the first place. It’s strange.

On second thought, maybe it’s not so strange. It’s no secret that Chinese textiles are exported worldwide. Many of these fabrics find their way into apparel exported to the US, the EU, or other importing markets made in countries outside of China. In this sense, the fact that CAFTA imports a lot of Chinese yarn and fabric shouldn’t be so shocking – but that’s before we consider duties.

Non-qualifying yarns would add duties upon duties for landed apparel made in the CAFTA of these yarns. Total costs could exceed 20%. Even so, when we consider that Chinese exports of textiles and apparel to the US are faced with the regular duty rate plus 7.5% or 25% Section 301 tariffs, non-qualifying tariffs under CAFTA-DR seem mild. It’s an interesting theory worthy of more research, but so is the possibility of transhipments, paperwork fraud, or dumping. Beyond that, there’s the possibility that Xinjiang cotton is finding its way into the US market from sources close to home. Gosh.

So, sourcing companies may have embraced fashion nearshoring – with some help from old supplier friends.

By Just Style