Research finds use of FTAs by U.S. apparel importers in on a four-year downward trend.
U.S. imports of apparel fell more than 6 percent in 2016, and as of mid-2017 looks set for another drop.
Through May, the U.S. Commerce Department’s Office of Textiles and Apparel (OTEXA) reported a 1.3 percent drop in apparel imports by value, including a 2.9 percent drop in imports from China, a 5.5 percent drop from Bangladesh, and a 4.3 percent drop from Indonesia. Those are the first, third, and fourth largest exporters of apparel to the United States.
Only a 6.5 percent increase in imports by value year-to-date from Vietnam (the second largest exporter of apparelt to the United States) has even partially offset this decline.
But beneath this downward trend lies another issue affecting U.S. apparel imports: a more than four-year decline in the use of free trade agreements by apparel importers.
According to OTEXA, the share of U.S. apparel imports entering under FTAs has been declining since 2012, and dropped to 15.6 percent in 2016. That’s the lowest level of FTA usage for apparel importers since 2006.
“Theoretically, companies shall be interested in increasing imports from FTA regions because of the duty free treatment (i.e. trade creation effect),” Sheng Lu, a professor at the University of Delaware’s Department of Fashion & Apparel Studies, wrote in his blog earlier this year. “Particularly not paying import tariff duty can be a great cost advantage for textile and apparel companies given the fact that the average U.S. import tariff rate was still as high as 8 percent for textiles and 11.6 percent for apparel in 2016.”
The United States has FTAs with 20 markets. The government’s International Trade Administration, which oversees OTEXA, estimated that FTA partners comprised 10 percent of global GDP in 2015.
Lu finds the drop-off in apparel import FTA usage curious, given that the number of FTAs in which the United States participates has grown over the last decade.
It’s not only that U.S. apparel importers fail to import from countries covered by an FTA, they often fail to claim the benefits of an FTA even when they’ve imported from an eligible country.
It’s not only that U.S. apparel importers fail to import from countries covered by an FTA, they often fail to claim the benefits of an FTA even when they’ve imported from an eligible country.
“Sometimes companies did not claim duty free benefits of FTAs even though they imported (apparel) from the FTA region,” he wrote. “For example, in 2016 about 29.9 percent of U.S. (textile and apparel) imports from South Korea, 24.3 percent from the (Central American Free Trade Agreement and Dominican Republic), 16.3% from (the North American Free Trade Agreement) and 12.9 percent from Colombia did not enjoy the duty free treatment granted by the respective FTAs.”
What gives? Not only are apparel imports into the United States declining, but the percentage of those imports being imported duty-free is also declining as a percentage of total imports.
Trade analysts generally point to a couple factors to describe why FTA usage isn’t higher than it is.
One is the perceived cost and complexity of adhering to FTAs. Many importers believe that qualifying for FTAs is a burdensome process that outweighs the presumptive reduction in duties. They’re not entirely wrong.
FTA participation does need to be managed. It does requirement investment in people or systems (and realistically, both) to properly qualify goods and calculate the benefits. There’s also the issue of whether suppliers are willing and capable of participating in such programs. Often, suppliers don’t see tangible benefit of helping their buyers save duties on their imports.
None of these are insurmountable obstacles, though. An FTA management module from a reputable global trade management (GTM) or trade compliance software provider will create a platform to automate the data entry and calculate the benefits of such programs.
Some of those GTM software providers also provide integrated solutions that help importers manage suppliers. Those platforms can help importers get their suppliers on the same page when it comes to the data requirements of an FTA in a less burdensome way.
Importers might also want to think about how they might motivate suppliers to be more willing to participate. In some categories, the mere act of being the buyer might not be enough to compel low-margin, cashflow-poor suppliers to spend extra resources helping their customers get duty free treatment. Perhaps that motivation might mean a savings-sharing arrangement, a longer-term contract, or a commitment to share more data with the supplier.
American Shipper research into FTA usage in May found that about 70 percent of shippers were using FTAs to some degree, far and away the most used duty management program.
Aside from the perception of increased workload in managing an FTA, there is also the perception from some compliance professionals that participation in such programs increases an importer’s profile with U.S. Customs and Border Protection.
Aside from the perception of increased workload in managing an FTA, there is also the perception from some compliance professionals that participation in such programs increases an importer’s profile with U.S. Customs and Border Protection. This is not entirely wrong.
Again, this is not entirely wrong. Participation in such programs implies the proper use of those programs, according to CBP. Many importers likely forsake the duty savings on apparel imports, even from FTA-eligible sourcing regions, for this reason.
Then there’s the issue of the “yarn forward” rule, a subset of the rules of origin stipulation that requires the yarns and fabric of an apparel import must be from an FTA country in order to qualify for lowered or duty-free treatment. There’s an exception to this rule, called the “short supply list,” which allows importers to use yarns and fabrics from non-FTA regions if FTA member countries do not produce enough of a particular fabric or yarn to meet production needs and still qualify reduced or zero tariff rates.
Lu suggests that some importers are simply using this short supply list exemption in lieu of preferential treatment under an FTA.
There’s another, more political dynamic to this equation. When importers eschew the usage of FTAs, it gives anti-trade voices ammunition to question the existence of such trade deals. If the parties meant to benefit from FTAs don’t even use them, it becomes easier to make the case that FTAs aren’t as valuable as pro-trade advocates say they are.
Meanwhile, the savings to be garnered from FTA usage are not trivial, especially for large shippers heavily reliant on overseas sourcing. Those duty savings can run into the millions of dollars, easily offsetting investment in systems and people, and even the intangible costs of redrawing internal processes.
It’s always somewhat of a mystery as to why more shippers don’t use FTAs, either more fully or at all, but it’s especially curious that apparel importers seem to be turning their back on this opportunity.
