On November 5th, the United States Fashion Industry Association (USFIA) and the American Import Shippers Association (AISA) joined together for the 26th year to host the Textile & Apparel Importer Trade & Transportation Conference in New York, to provide an update on trade trends and the outlook for the next year.
Outlook for Transportation
The day began with a keynote by Joseph Bonney, Senior Editor of the Journal of Commerce. Bonney was the first of many speakers who talked about the impact of the West Coast labor negotiations as well as growing delays at the major ports. On July 1, 2014, the contract between the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU) expired and negotiations continue. Delays are building on the west coast, exacerbated by the chassis shortages and infrastructure issue. This means that some retailers are beginning to shift cargo to East Coast ports. Bonney warned if East Coast ports do not take the appropriate steps to prepare for this increase in volume, this may cause further shipping delays.
Joe Bonney of the Journal of Commerce (Credit: 85Photo)
“The trend toward bigger ships is irreversible,” Bonney said. His presentation focused on the impact of megaships on shipping rates and the availability of shipping services. Bonney said shippers have an incentive to build larger ships due to a likely increase in trade volumes. Between 2008-2013, shipping volumes (by container) increased by 1.1 percent annually. However, he predicts that between 2014-2018, shipping volumes will increase by 6.7 percent per year. In addition, shipping rates have been stagnant, and larger ships provide shippers away to cut costs. These ships offer improved fuel efficiency, and other benefits of economy of scale.
Bonney also discussed the impact of larger ships on shipping delays. While these ships can ship a larger volume of goods, many ports have not adjusted schedules to reflect the longer unload times that are needed. This, combined with other factors such as high turnover of truck drivers, has fueled delays at ports. Therefore, Bonney warned, even if brands and retailers do not pay higher direct shipping costs, they may still face higher costs due to the subsequent port delays. “Those of you shipping are going to have to pay more, whether in rates or delays for goods,” he concluded.
The Sourcing Journal has more on Bonney’s presentation, too.
Shifts in Sourcing Trends
Next, John Cheh, Vice Chairman and CEO of Esquel Group, discussed shifts in sourcing trends in a fascinating presentation. Cheh said there is a shift in apparel demand for both “fast fashion” and online sales. Meanwhile, there is growing concern among consumers about adherence to corporate social responsibility standards and environmental sustainability.
J.C. Penney's Ken Mangone introduces John Cheh. (Credit: 85Photo)
One of the main shifts in sourcing is that apparel factories are using technological innovations to increase their productivity. Cheh said higher productivity will allow factory management to provide higher wages. Factories, including Esquel Group’s factories, are using robotics to increase productivity and reduce the number of human workers that are required to manufacture apparel. In addition, factory management uses smartphones and ATMs to electronically pay workers, which reduces paperwork for management while providing workers with more tools to control and track their wages.
By using technology to lower the workforce required to operate textile and apparel factories, Cheh said factory management has greater flexibility to increase wages and improve working conditions for workers. And management can make these improvements without increasing the cost of the final finished goods.
Cheh also highlighted the important role of China in the apparel sector. While China has long been recognized as the world’s dominant apparel exporter, Cheh expects the Chinese economy will continue to increase domestic demand. China is the major U.S. supplier of apparel imports, but Cheh says China’s market share has peaked. Instead of trying to expand market access to the U.S. market, Chinese apparel manufacturers are able to take advantage of surging consumer demand in China, so China is not as dependent on apparel exports as it was in the past.
Impact of Shipping Alliances and AGOA Shipping
Brian Moore, Director of Apparel Sales for Maerk Line, discussed the impact of new shipping alliances on trade, as well as providing an update about the opportunities to source from Africa. Moore explained that shipping alliances are not a new phenomenon. They began in the 1970s, and were primarily alliances between European shippers. These alliances give shippers an opportunity to split demand, and help ensure that ships are not underutilized. This is a win-win situation, since these arrangements provides consumers with lower costs.
Brian Moore (second from left) with the Maersk team and AISA's Hubert Wiesenmaier. (Credit: 85Photo)
Shippers have also “acted like a retailer,” which means that shippers have closed underperforming sectors. This has helped cut costs and lower shipping rates by 2 percent per year. However, there is a limit to the amount of services shippers can cut while still being able to provide an adequate service for clients, so shippers are looking to purchase larger ships. These ships hold more cargo and are more fuel efficient, which leads to even lower shipping costs.
Moore outlined the details the Maersk-MSC alliance, which will focus on “east-to-west” trade. They will expand trade from Europe to the United States, and from Asia to the United States. The alliance will allow both companies to increase the number of weekly sailings and increase the number of ports of call available to shippers.
Finally, Moore spoke about growing opportunities based on more shippers using the African Growth & Opportunity Act (AGOA). He reported that there has been a “sudden increase” in the number of importers, retailers, forwarders, and mills contacting Maersk regarding their options to ship products to and from AGOA countries.
To meet the growing demand for AGOA products, there are two major port projects underway. Tanzania will begin construction of a major seaport by the end of 2014 to help boost trade in the country. In addition, the Lamu Port in Manda Bay in Kenya is undergoing a transportation and infrastructure expansion project. Moore said both projects will support the growth in the manufacturing sector.
What’s Next for U.S. Customs and Border Protection?
Robert Perez, Director of Field Operations for the New York Field Office of U.S. Customs and Border Protection (CBP), outlined the top priorities for the agency: 1) partnership; 2) predictability; and 3) prosperity. These values will help reducing transaction costs for traders while allowing CBP to perform its job efficiently.
Robert Perez of U.S. Customs & Border Protection (Credit: 85Photo)
One of the steps taken by CBP to meet these priorities is the hiring of 2,000 new officers. Perez said these officers will help facilitate trade at the border, reducing costs for both traders and the U.S. government. He added that these hires are a key part of strengthening the economic security of the United States, estimating that each new hire will support 33 private sector jobs through more efficient borders.
Perez spoke about the Centers of Excellence and Expertise (CEE), which are part of the strategy improve collaboration between Customs and the private sector, and help Customs identify more efficient ways to deploy resources. In addition, he highlighted progress made under the Trusted Trader program. Nine companies have been selected for the test. Customs hopes to increase the number of small- and medium-sized enterprises that participate in these programs.
Finally, Perez discussed the impact of the Single Window, noting that many of the timelines established by President Obama’s Single Window Executive Order coincide with the ACE timelines. ACE will be the “backbone” of Customs future priorities. Upon implementation, Perez believes that ACE will “dramatically” reduce costs for traders, while increasing the responsiveness of CBP.
Trends in the Retail Industry
Irina Vaysfeld, Managing Director of Trade and Customs for KPMG, USFIA’s Premier Partner for 2014, discussed trends in the retail industry. In particular, Vaysfeld focused on trends related to First Sale, highlighted by KPMG’s First Sale for Export Benchmarking Study.
Irina Vaysfeld of KPMG (Credit: 85Photo)
First Sale allows importers to declare a shipment’s value as the cost when it was first shipped from the factory, as opposed to the generally higher price in subsequent transactions before reaching the final port. Vaysfeld said companies are achieving significant savings through First Sale.And now, companies are trying to automate their First Sale practices with project management tools, data collections, and having vendors send e-documents directly to the customs broker. They also want automation of post-entry testing.
She also discussed Foreign Trade Zones (FTZ), noting that the most obvious trend is the increasing number of FTZs as well as the increase in value of products that pass through them. These FTZs expedite and encourage international trade and promote domestic activity and investment, and can affect the competiveness of U.S. companies by allowing savings through:
- duty reduction on “inverted tariff structures” (where tariffs are higher on imported components than on finished products;
- customs and inventory efficiencies; and
- duty exemption on goods exported from, or consumed, scrapped, or destroyed in, a zone.
Finally, Vaysfeld discussed automation of customs and tax processes. Both the Customs and tax authorities, despite having different objectives, are beginning to align some of their operations. This collaboration is still in the early stages, but already has strong support by the business community.
Legal News to Know, Coast to Coast
During this session, John Pellegrini, USFIA’s Customs Counsel at McGuireWoods LLP, spoke about legal issues facing the textile and apparel industry.
Pellegrini began by discussing False Claim Act (FCA) trolls. The FCA establishes penalties on persons and companies who deliberately defraud the U.S. government. Under the FCA, private individuals, also known as relators (or informally known as whistleblowers), can file a suit on behalf of the government for FCA violations. Once filed, the government is required to investigate the allegations in the complaint. If the government declines to take action following the investigation, the relator may still proceed with a private suit. In addition, the relator filing suit under the Act will receive a portion of any recovered damages.
Pellegrini said that there are a growing number of unsubstantiated suits filed by private individuals. Relators, and often the law firms supporting them, are using the FCA as a way to make money—and even if the company who the suit is filed against has committed no wrongdoing, it can still face significant court costs.
Traceability in the Fashion Industry
Gary Barraco, Vice President of Industry Development for eVision, provided an update on conflict minerals compliance and ensuring traceability in the fashion industry. Since June 2, 2014, any publicly-owned company using conflict minerals (tin, tungsten, tantalum or gold) as a necessary component in at least one of its products is required to annually disclose whether any of the minerals originated in the Democratic Republic of Congo (DRC) or adjoining countries (Angola, Burundi, Central African Republic the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia). The purpose of the rule is to end the violent conflict in the DRC, which has been partially financed by the exploitation and trade in conflict minerals.
Gary Barraco (right) and the ecVision team (Credit: 85Photo)
Barraco noted that the U.S. Securities and Exchange Commission (SEC) grossly underestimated the cost in dollars and hours that companies would need to allocate to produce the reports to show whether or not they are in compliance with the rule. High costs—as well as the incorrect assumption that textile and apparel products do not use conflict minerals—has caused many apparel and footwear brands to be unsure about what to do.
Barraco argued that since buttons, zippers, and other accessories can use conflict minerals in their production, textile and apparel brands and retailers need to ensure they are compliant with the rule. In the first reports filed with the SEC, most textile and apparel brands said the supply chains for the materials used in the accessories are “indeterminable.” But after 2015, they can no longer say this in their reports.
He also addressed new conflict minerals rules issued by the European Union, which apply to all products imported into the EU from any “conflict-affected” area. The EU definition of what is a conflict-affected or conflict-prone area is very broad. However, Barraco noted, the EU regulations are voluntary.
Barraco concluded by providing an assessment of the effectiveness of rules. He said the rules appear to be working, because they have put a spotlight on the role of conflict minerals in everyday goods, increasing consumer awareness. Yet, higher consumer awareness increases potential costs for brands and retailers if they caught sourcing conflict minerals, so it is critical to comply.
What’s Next for the CPSC?
Commissioner Ann Marie Buerkle of the Consumer Product Safety Commission (CPSC) spoke to the audience off the record about her vision for the commission.
CPSC Commissioner Ann Marie Buerkle (Credit: 85Photo)
Investing in Socially Responsible Sourcing
Dr. James Gifford, Senior Strategic Advisor for Tau Investment Management, spoke about his firm’s efforts to invest in socially responsible supply chains. Tau Investment Management is a private equity firm whose mission is to upgrade global supply chains.
Gifford began by saying there are a lot of problems facing textile and apparel supply chains–dangerous factories, child labor, and lack of worker rights–but there are huge opportunities for improvement, such as improving the number of workers with management skills and technical skills, increasing the number of women in management positions, and reducing high worker turnover rates. Gifford argued that by investing in solutions to these problems, not only would supply chains be more socially responsible, but they would also be more productive. Lower output means that there is less revenue to invest in the workers through wages and training programs. The high worker turnover, which is a result of the poor working conditions, reduces the incentive of factory owners to invest in people. So instead, workers are trained to do one task, with no hope of moving up.
Dr. James Gifford of Tau Investment Management (Credit: 85Photo)
Gifford argued that relatively cheap factory upgrades can dramatically improve working conditions and retain workers. Improvements such as installing LED lighting or opening windows to allow more natural light into the factory create a better work environment and raise worker morale. In addition, increasing compensation for workers does not only have to be in the form of higher wages; employers can provide non-cash benefits, such as health care plans, maternity leave, life insurance, and child care.
Gifford added that wage increases should be merit based and tied to absenteeism. This will increase productivity, which allows for greater revenue, and greater work opportunities for workers. In addition, factory management should make sure they meet basic standards, such as making payments on time.
Gifford believes there is a chance to end this cyclical problem. As first generation factory owners in South Asia are retiring, their children are now running the factories with values that more closely reflect Western standards. And they want their factories to be viewed as “world-class” companies.
In addition, Gifford said there is also greater consumer awareness, with more consumers aware of labor challenges in the apparel industry. He expects the consumer side to become more important in helping shape the discourse of socially responsible sourcing. There is also a greater transparency within the supply chains, through tech and smartphones, which make it impossible for major tragedies and revelations of abuse and pollution to remain in the dark. This leads to more pressure by the public, and subsequently governments.
Investing in Cotton Sustainability
J. Berrye Worsham, President & CEO of Cotton Incorporated, spoke about Cotton Incorporated's efforts to improve cotton sustainability through the Cotton LEADS program and other initiatives. To learn more, register for our webinar on November 20th.
J. Berrye Worsham of Cotton Incorporated (Credit: 85Photo)
The Obama Administration’s Trade Policy Agenda
The audience heard from Josh Teitelbaum, Commerce’s new Deputy Assistant Secretary for Textiles, Consumer Goods, and Materials. This was his first public appearance in front of the industry since he took over the role in October, and he provided a high-level overview of the Obama Administration’s trade policy agenda moving forward.
Josh Teitelbaum of the U.S. Department of Commerce (Credit: 85Photo)
Completion of the Trans-Pacific Partnership (TPP) and the Transatlantic Trade & Investment Partnership (TTIP) remain key priorities for the Obama Administration. Teitelbaum said both agreements will expand U.S. exports and grow the U.S. economy.
Teitelbaum also spoke about the ongoing TPP negotiations. The U.S. is still seeking elimination of apparel duties under the TPP. He said this will not only save U.S. companies money, but will also help U.S. consumers.
The Obama Administration held bilateral discussions with TPP members during the TPP Ministerial in Australia last month. Teitelbaum said the Obama Administration “made forward progress” in the discussions involving textiles and apparel, adding that high-level talks between the U.S. and other TPP members will continue during the upcoming APEC Summit. Both President Obama and U.S. Trade Representative (USTR) Michael Froman will attend the summit.
After the Midterms: What’s Next for Trade Policy
The final topic of the day examined the impact of the November 4, 2014 midterm elections on U.S. trade policy. Jon Fee, Partner at Alston & Bird, and David Spooner, USFIA Washington Counsel and Partner at Barnes & Thornburg, got into a friendly debate.
Jon Fee & David Spooner (Credit: 85Photo)
Fee started the discussion with a recap of the elections. Republicans made significant gains in both the House of Representatives and the Senate. As of November 5th, Republicans held a 52-43 majority in the Senate, with three races still too close to call, and two races held by Independents. In addition, Republicans expanded their hold in the House to control 243 seats.
There are a few changes to Congressional trade leadership. With Republicans in control the Senate, current Senate Finance Committee Ranking Member Orrin Hatch (R-UT) will take over as chairman in January 2015. Senator Ron Wyden (D-OR) is the current chairman. House Ways & Means Committee Chairman David Camp (R-MI) is retiring, opening up the chairmanship of the committee Fee expects Paul Ryan (R-WI) to be the next chair.
Spooner then discussed the expected impact of the election on trade policy in the coming months. He said it will be interesting to see how the election of Dan Sullivan (R-AK) to the Senate, and the defeat of Senator Kay Hagan (D-NC), will play out in the Senate over the next Congress. Sullivan has a reputation of being “pro-free trade,” while Hagan has been very active in trade policy, especially policy involving textiles and apparel.
In addition, Spooner said that it was still too early to tell how the election would impact the timeframe for consideration of trade legislation such as Trade Promotion Authority (TPA), Generalized System of Preferences (GSP), the Miscellaneous Tariff Bill (MTB), or renewal of the Nicaragua TPL and renewal of AGOA. However, he said both the staffs of Wyden and Camp have been in contact to discuss passing TPA legislation during the lame duck session. Spooner added that some of the non-controversial trade legislation, such as GSP or MTB, could also be attached to the TPA bill.
Thanks to International Development Systems for providing the recap.