With the Trans-Pacific Partnership (TPP) “hanging on a limb” at the tail-end of a two-year congressional session amid a US presidential election, it is not a good day for the world of international trade. Rick Helfenbein, President and CEO of the American Apparel & Footwear Association (AAFA), shares with AmCham his perspectives drawing upon his Washington, DC perch and his insights into the current political world which will define the commercial realities for those in the industry
By Kenny Lau
The landscape of the global supply chain and international trade is about to undergo a drastic shift of momentum. That is largely because of the US elections in November and subsequently a change of US administration promising to revamp the current national policies on global trade. At the time of writing, it remains unknown which direction US policy is likely headed; what’s clear is how campaign rhetoric has already “hurt” trade.
For those engaged in the business of sourcing and manufacturing of textile, apparel and footwear for the US market, “it’s best for you to pick up the pieces, not expect any new legislation, and figure out how you can best utilize what the USA already has in place,” suggests Rick Helfenbein, President and CEO, American Apparel & Footwear Association (AAFA), speaking in a recent AmCham luncheon two weeks before the US election day.
“This is an unusual election,” he says. “I actually know Donald Trump and I actually know Hillary Clinton. “The Trump you see on TV is the same Trump you meet in person; there is no difference. The Hillary you see on TV is not the same Hillary you meet in person. Hillary is warm and friendly. When she gets on TV, she needs to be tougher and act more like a man, and a lot of people don’t like that. Her TV persona, and because she is a woman, makes it more difficult to make her likable.”
The political environment
The question is why trade has suddenly become such an important part of an election cycle. “Essentially, we’ve got a lot of empty buildings and a lot of people looking for jobs in the US,” Helfenbein explains, noting China has been a target of presidential campaign rhetoric over and over in the past months. “Everybody has been led to believe that the word ‘trade’ is synonymous with the words ‘job loss’ in America. That bodes well in campaign rhetoric because people see it with their own eyes.”
“But that’s not what’s happening in America,” he points out. “Essentially, an economy matures and gets industrialized, and then it goes onto the next stage. America is at level three right now, and we have become a services-based economy. The fact is that jobs have left and have been replaced by different jobs. Unemployment is below five percent, and that is not so bad. But many are led to believe it is bad, and it has gotten a lot of attention from people.”
The Trans-Pacific Partnership (TPP) is a free trade agreement among 12 countries along the Pacific Rim and is by far the most comprehensive on international trade to date. It is an agreement pending Congressional approval – something President Barack Obama has been pushing for several years. Were Secretary Clinton elected, she would most likely continue to work with environmental and labor groups on the issue of TPP, Helfenbein notes.
“The whole point is, she is going to be tougher on trade and will take a trade time-out. What she’s saying is, let’s slow down and see if trade deals are being enforced.” he explains. “That’s because we have a lot of trade deals but sometimes lack enforcement. Hillary wants a trade prosecutor to look at the trade deals if there are violations, and she wants to make sure that rules are enforced.”
“Trade deals aren’t perfect; they are never perfect,” he stresses. “But at least you can make them work. That’s what Hillary is saying. She talks about being a smart trader who wants fair trade, and she’s got a pro-fair trade voting record. Particularly on TPP, she says it must create jobs for America and raise wages for Americans.”
On the other hand, if Donald Trump were elected, it would mean “trade deals are going into the garbage can,” Helfenbein believes. “He talks about fair trade, but he has never been in office; he says TPP is simply a horrible deal, and he says we are going to stop this. These are words that would not help the world of trade.”
“Trump also likes to talk about things like the North American Free Trade Agreement (NAFTA), and that it was the worst thing that happened in America,” he adds. “What happened under NAFTA was: trade between the US, Canada and Mexico quadrupled in 23 years, and US exports tripled. Yes, we lost jobs; but we also gained as many jobs as we lost.”
The significance of TPP
AAFA has been a strong supporter for the congressional ratification of TPP. That’s because it would provide “significant benefits” to American families every year by reducing the costs of buying necessities for items as simple as clothes and shoes. From a business standpoint, it would mean much lower tariffs for the US footwear, apparel, and travel goods industry in what proponents say is a “once-in-a-generation opportunity to reduce costs and open new markets for US brands and retailers.”
Comprising 12 economies – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam – TPP would mean a single regional trade area of 800 million consumers and more than 40 percent of the world’s GDP. According to AAFA, duty savings from reduced tariffs for the US apparel and footwear industry would be more than US$1 billion in the first year alone, and there would be even more savings over time as more TPP provisions are gradually phased-in.
On the consumer side, it would mean savings from “price breaks” following a deduction of more than US$2.8 billion of duties that are currently levied on US imports of footwear, apparel, and travel goods; for more than four million American workers in the industry, it would mean a much broader market and increased US competitiveness on a more level playing field – which could lead to more US jobs throughout the supply chains of all US brands in the forms of “distribution centers, design houses, retail stores, as well as company and regional headquarters.”
An important aspect of TPP is the protection of the rights of workers in signatory countries. That is to “ensure the safety and empowerment of workers who make the products, and to source products in a sustainable manner.” These are provisions of TPP strongly supported by AAFA, because they are good for the environment and for the welfare of laborers. More importantly, they are aligned with the values of sustainability as well as corporate social responsibility many brands have made a core part of their business models.
So, what are the chances of ratification of TPP in the lame duck session of the 114th Congress? The short answer is, not very likely. It is now a piece of proposed legislation “hanging on a limb” at the tail-end of a two-year congressional period. “Each congress lasts two years, and everything gets erased and you start all over again,” Helfenbein points out. “Lame duck sessions come really fast, and they have thousands of things that they have to do, including financing the government.”
“If TPP doesn’t have everything lined up and all the controversies solved, you can’t ram it down the throat in a four-week period; it is just not going to happen. It is a whole world of realization that there are unsolved issues and that there isn’t a lot of time to get it done,” he says. “Would you say it is impossible? It is possible, but there will be major deal-making. And keep in mind that some candidates running for Congress will have lost, and it will not be easy to get something done.”
In terms of source countries from which apparel is destined for the US market, China remains on the top (37%) while Vietnam is second (11%); together they make up nearly half of the US market share. Others include India (6.5%), Bangladesh (5%), Indonesia (4.6%), Mexico (4.1%), Honduras (2.4%), Cambodia (2.3%), Sri Lanka (1.8%). In other words, almost 80 percent of all apparel in retail stores across America come from 10 countries.
“China and Vietnam will remain as major exporters of apparel to the US market, although the makeup between the two will adjust. The difference TPP will make is a further shift from China to Vietnam,” Helfenbein suggests. “The question is, when you can get everything you need from China and Vietnam, why would you want to source from all over the world? China and Vietnam have had the market to the US, and it has changed in the last five years.”
The key to the value chain, he explains, is productivity, and it is a critical reason that China has been dominant in the world of apparel and footwear manufacturing. is the word productivity. “We source from different countries around the world and often chase the lowest costs possible to see who’s cheaper. But ‘cheaper’ doesn’t matter anymore. As you are dealing globally, it is not just where you sell but, very importantly, how you sell.”
“Let’s suppose that in China you are paying a worker 28 dollars a day, and if I go to Bangladesh, I can make it 6 dollars a day. The worker in China, however, can make 40 pieces of garment a day; the worker in Bangladesh can only make 10 pieces. And your lead time is two months in China vs four months in Bangladesh. That is simple math, and that is what some people don’t understand. Cheaper is not always better, and that’s why China is so powerful.”
Another major issue in the global apparel industry is the protection of intellectual property (IP) rights. “Counterfeit goods cost our industry billions of dollars every year,” Helfenbein says, noting a new report from the Organization for Economic Cooperation and Development (OECD) that the manufacture and sale of counterfeit goods today is almost a half-trillion-dollar industry.
Footwear, apparel, and fashion accessories are also among the most seized counterfeit goods in the world. According to a recent report by the US Customs and Border Protection (CBP), clothing, footwear, and travel goods made up 22 percent, 10 percent, and seven percent, respectively, of all of CBP’s seizures of counterfeit products in the fiscal year of 2015.
“Counterfeit product hurts sales and counterfeit products made in questionable working conditions can damage a brand’s reputation, putting both consumers and workers at risk,” Helfenbein emphasizes. That’s because “facilities that make knock off shoes, clothes, and accessories do not typically meet the high standards or comply with the regulations upon which [reputable brands] insist to ensure product safety, worker safety, and workers’ rights.”
“It is not a good day for retail if lots of products are counterfeit,” he stresses. “We understand the whole thing about America losing jobs to China as highlighted in campaign rhetoric, but if you are trying to steal our IP, you are going to have a big fight, and we are not going to sit down and let that go easily.”