Fashion Intel & Analysis

As discussed during last week’s webinar, How to Fight the Trade War: Triage your Supply Chain, Mexico could be one of the big winners in the trade war.

If companies can move some or all of their production from China to Mexico and create a new product, they can successfully work around the new Section 301 tariffs.

However, companies must keep in mind that the imported components must be “substantially transformed” into a new article of commerce. This is a product-specific analysis and involves a review of components and production steps. U.S. Customs seems to have bright lines on specific-production steps that can confer origin. Last year, the Court of International Trade ruled that mere assembly of foreign component parts does not constitute substantial transformation. (Energizer Battery Inc. v. United States, 190 F. Supp. 3d 1308 (Ct. Intl. Trade 2016). The decision noted that, “whether there has been a substantial transformation depends on whether there has been a change in the name or use of the components.” The court focused not on whether “the components as imported have the form and function of the final product” but rather, “whether the components have a pre-determined end-use at the time of importation.” The court suggested that the imported parts would need to undergo “further work” beyond mere assembly to be considered substantially transformed.

It is worth noting that U.S. Customs cited the Energizer action in its recently released ruling, HQ H300226, in which the importer argued that the electric motors should be considered country of origin Mexico where the Chinese components are imported to Mexico and assembled into the electric motors. CBP ruled that, based on the NAFTA tariff shift rules, the product qualified as a product of Mexico, for marking purposes; however, in accordance with Energizer, the production process performed in Mexico is “mere simple assembly and the foreign subassemblies are not substantially transformed.” Accordingly, for origin purposes, the country of origin is China.

HQ H300226 is significant as it is the first ruling issued post enactment of the Section 301 duties which makes the distinction between country of origin for marking vs. origin purposes. Remember that for textiles and apparel, the rules of origin are written into the statute, so this is not an issue as it might be for other types of products.  CBP makes it clear that when “considering a product that may be subject to antidumping, countervailing, or other safeguard measures, the substantial transformation analysis is applied to determine the country of origin.” Once the product is a country of origin China, the importer will be assessed the additional Section 301 duties of 10-25 percent. (By Laura Rabinowitz, Special Counsel, Kelley Drye & Warren LLP)

PwC to Host Seminars on U.S.-China Trade War

USFIA Premier Partner PwC will host seminars on the U.S.-China trade war on the following dates:

Guangzhou – Monday, October 29, 2018 – 2:00 PM to 3:30 PM

Hong Kong – Wednesday, October 31, 2018 - 2:00 PM to 3:30 PM

Shenzhen – Monday, November 5, 2018 – 2:00 PM to 3:30 PM

Click here to download the flier in English.

Click here to download the flier in Chinese.

Brookings Finds Trade Retaliation Targets Trump Voters

A new Brookings Institution report answers the question, Which US communities are most affected by Chinese, EU, and NAFTA retaliatory tariffs? The report analyzes the exposure local communities in the United States have to recent trade policy changes around the world in response to President Trump’s new tariffs.

Brookings finds that just 6.1 percent of U.S. exports are currently affected by retaliatory tariffs; they are primarily exports to China, accounting for $101.4 billion of $121 billion of exports.

In addition, Brookings estimates 650,000 jobs will be affected by the tariffs, though they do not necessarily represent job losses:

[W]e estimate that the tariffs may affect about 294,000 direct export jobs. But those jobs support an additional 354,000 jobs, which means the tariffs implicate a little less than 650,000 jobs overall. These jobs estimates seek to isolate those jobs that depend on exports to the countries that have introduced retaliatory tariffs; they are not estimates of anticipated job losses.

While larger cities and metropolitan areas represent the larger share of impacted industries, smaller and rural communities are impacted more because they have less resiliency. In addition, Brookings finds the tariffs disproportionately affect localities that voted for President Trump in the 2016 president election, which may have been by design.

The full report is available on the Brookings website.

Report on U.S. Defense Manufacturing & Industrial Base Finds “Surprising” Dependency on Foreign Countries

A new U.S. Department of Defense report makes the case that the United States is too dependent on foreign manufacturing to support the defense industrial base. In response to one of President Trump’s executive orders, the report, Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States, assesses risk, identifies impacts, and proposes recommendations in support of a healthy manufacturing and defense industrial base.

The major findings include:

  • Macro forces have led to impacts primarily in the sub-tiers of the defense supply chain;
  • A surprising level of foreign dependence on competitor nations exists;
  • Workforce challenges face employers across all sectors; and
  • Many sectors continue to move critical capabilities offshore in pursuit of competitive pricing and access to foreign markets.

Clothing, footwear, and textiles are identified in the report as belonging to the “soldier systems sector,” which includes an array of industries that support U.S. soldiers and include elements such as tents, night vision goggles, and other articles. The report states:

The soldier systems sector is composed of twelve subsectors; most have significant commercial overlap. The subsectors are vast – a recent Department of Commerce survey, exclusively studying the domestic clothing, textiles, and footwear industries, reported that 499 companies operate 764 domestic textile and/or apparel manufacturing sites and 44 companies operate 65 U.S. footwear manufacturing facilities.

The report includes a case study that looks at the domestic textile manufacturing industry and how the reduced domestic capacity affects the defense industrial complex. Titled “Erosion of the U.S. Textiles Industry,” the case study says that between 1995 and 2009, the domestic textile industry “suffered a historic contraction” with China and other Asian suppliers now dominating the supply of textiles. The report notes that the greatest competitive disadvantages in the domestic clothing and textile subsector are related to workforce and raw material cost and availability. For example:

As an example of recent domestic erosion, the single qualified domestic source for high-tenacity polyester fiber used in many DoD tent systems dissolved their business due to inability to compete in an increasingly competitive global market. Currently, there is no U.S. manufacturing capability for high-tenacity polyester fiber at specific deniers (e.g., that allow for military specification qualification) and significant impact to multiple tent and fabric systems is anticipated. If risk in the clothing and textiles sub-sector is unacceptable, the industry recovery momentum must be sustained and the U.S. must undertake decisive efforts to modernize and revitalize the domestic fiber and textiles industry, including the workforce.

The full report is available here.

After a trilateral meeting in New York last week, Canada has agreed to join the United States and Mexico in a new trade agreement, which will replace the North American Free Trade Agreement (NAFTA). The new agreement will be called the United States-Mexico-Canada Agreement (USMCA). “USMCA will give our workers, farmers, ranchers and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region.  It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home,” said the trade negotiators of the three countries in a statement.

According to a longer joint statement, the three nations discussed issues including non-market-oriented policies and practices of third countries, industrial subsidies and state-owned enterprises, forced technology transfer and practices of third countries, World Trade Organization (WTO) reform, and digital trade and e-commerce, among other issues.

According to reports, A U.S. official also pointed to the prospect of enforcing the agreement, calling it “one of the most enforceable trade agreements we've ever had.”

As a reminder, USFIA and Associate Member Akin Gump will hold a webinar with a full update on the status of the NAFTA negotiations on Wednesday, October 3rd. This webinar is free for USFIA members and affiliates, so we encourage you to register to learn the latest news on the agreement. Click here for details and registration.

Lenzing, the innovative Austrian-based cellulosic fiber company, announced this week that it plans to “temporarily mothball” its plans to expand Tencel production in Mobile, Alabama, citing the “rising likelihood of increasing trade tariffs, paired with the potential surge in construction costs due to the buoyant U.S. labor market” for increasing the risk profile of this project. Lenzing will put all its effort to readjust the execution of its growth plan to meet strong market demand of its lyocell fibers. This includes an increased focus on the lyocell expansion project in Prachinburi (Thailand). Lenzing will reassess this decision on a regular basis but no substantial additional lyocell volumes, over and above the successful 25.000 tons expansion in Heiligenkreuz (Austria), will be added to the market in 2019 and 2020 by Lenzing. The press release is available on the Lenzing website.

This week, the United States, Australia, Canada, New Zealand, and the United Kingdom announced the Principles to Guide Government Action to Combat Human Trafficking in Global Supply Chains, a framework on which all countries can build a strategy to take effective action to prevent human trafficking in public and private sector supply chains, one of the key themes of last year’s “Call to Action.” The Principles highlight the critical role of governments and acknowledge the necessity of strategic cooperation with civil society, survivors, and the business community. The U.S. Department of State will invest $75 million in the Program to End Modern Slavery. The Principles are available here. More information is available on the State Department blog.

Meanwhile, the U.S. Department of Labor released two reports that shine a spotlight on child labor and forced labor in nations around the world: the eighth edition of the List of Goods Produced by Child Labor or Forced Labor and the 17th annual edition of the Findings on the Worst Forms of Child Labor. These reports, prepared by the Department's Bureau of International Labor Affairs (ILAB), highlight specific sectors in which child labor or forced labor persists in foreign nations, and describe the progress some countries have made in upholding their international commitments to eliminate these practices. The List of Goods Produced by Child Labor or Forced Labor notably removed cotton from both Paraguay and Uzbekistan that had been produced by child labor previously; the Cotton Campaign has opposed the removal of Uzbekistan from the list. In addition, two key apparel sourcing countries—Colombia and India—met the new criteria for "Significant Advancement" in the Findings on the Worst Forms of Child Labor, which this year requires specific legal and policy labor standards to be met. The reports are available on the Labor Department website.

The United States Fashion Industry Association (USFIA) joined with Americans for Free Trade in sending a letter to U.S. Trade Representative Robert Lighthizer requesting an exclusion process for the most recent wave of tariffs on $200 billion in goods. While an exclusion process was provided to American businesses for the nearly $50 billion in previously announced tariffs (Lists 1 and 2), the administration has said that no similar process will be provided on the most recent tariffs on $200 billion (List 3) in goods that went into effect Monday. The letter is available here.