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  • 1. The Future of the Apparel and Textile Industries:Prospects and Choices for Public and PrivateActorsFrederick H. Abernathy, Anthony Volpe, and David WeilHarvard Center for Textile and Apparel ResearchVersion: December 22, 2005Affiliations: • Abernathy, Division of Engineering and Applied Sciences, Harvard University and Harvard Center for Textile and Apparel Research, Pierce Hall, 29 Oxford Street, Cambridge, MA 02138, USA fha@deas.harvard.edu • Volpe, Division of Engineering and Applied Sciences, Harvard University and Harvard Center for Textile and Apparel Research, Pierce Hall, 29 Oxford Street, Cambridge, MA 02138, USA avolpe@fas.harvard.edu • Weil, School of Management, Boston University, 595 Commonwealth Avenue, Room 520A, Boston, MA 02215 and Harvard Center for Textile and Apparel Research, davweil@bu.eduCorresponding Author: David Weil
  • 2. The Future of the Apparel and Textile Industries: Prospects and Choices for Publicand Private Actors ABSTRACT The expectation that Chinese apparel and textile exports will swamp the U.S. andEU retail markets now that international quotas on those products have been eliminatedhas fueled much of the discussion of the future of these industries. Although importsfrom China have surged since the elimination of quotas on January 1, 2005, thisconventional wisdom masks important choices that remain for public and private policiesover time. In particular, two factors will continue to have major effects on the location ofapparel and textile production going forward. First, public policy choices will continueto influence sourcing location, in particular as they relate to tariffs and regional tradepolices as well as policies affecting the linkages between countries. Second, the leanretailing model that now prevails requires apparel suppliers to replenish basic and fashionbasic products on a weekly basis. As that retailing model became dominant in the 1990s,so too did the advantage of sourcing these apparel items closer to the U.S. market so thatproducts could be manufactured and delivered more rapidly from a smaller finishedgoods inventory. Even though costs remain a driving factor, we show that proximityadvantages for certain classes of products will continue in a post-quota world as retailersraise the bar ever higher on the responsiveness and flexibility required of their suppliers.Version: December 22, 2005 1
  • 3. The Future of the Apparel and Textile Industries:Prospects and Choices for Public and Private ActorsI. Introduction On January 1, 2005, the quota system that restricted textile and apparel importsinto the United States and other nations ended for all member countries of the WorldTrade Organization (WTO). Not surprisingly, there has been widespread speculationabout the long-term impact of this monumental liberalization of international trade. Abrief survey of both the relevant academic literature and popular press reveals aprevailing notion among scholars, industry groups, government agents, and industryanalysts: exports from low wage countries in general, and China in particular, will growrapidly, virtually wiping out the textile and apparel sectors of the U.S. and many otherestablished suppliers (Applebaum 2005; Gereffi 2003; Knappe 2003; Nordas 2004;). TheUnited State Trade Commission released its own report in January 2004 on theAssessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Marketconcluding: China is expected to become the “supplier of choice” for most U.S. importers (the large apparel companies and retailers) because of its ability to make almost any type of textile and apparel product at any quality level at a competitive price… Although many countries may see their share of the U.S. market decline, a large number of countries likely will become second-tier suppliers to U.S. apparel companies and retailers in niche goods and service. Trade data from the first few months following the end of quotas seems toconfirm this view of the post-2005 world: U.S. Apparel imports from China surged in thefirst eight months of 2005, growing overall by 85% and in some categories like cottonVersion: December 22, 2005 2
  • 4. shirts by over 250% over levels in 2004.1 Similar increases in the rate of growth ofChinese imports into the European Union were reported in early 2005. Prospects formany of the countries that have developed apparel and textile sectors under the formersystem seem bleak. The conventional wisdom rooted in the above forecasts and interpretation of thefirst few months of post quota trade data hinge on basic economic principles ofinternational trade: factor prices, exchange rates, shipping costs and tariff rates. Whensourcing decisions faced by global retailers and manufacturers are made strictly based onthese traditional forces, it becomes obvious why so many producers are left wonderinghow to protect their present share of the huge U.S. or EU markets. In particular, garmentworkers, their families, and communities within the U.S. and other developed countriesappear most vulnerable to products made in developing nations, with lower labor cost, nolonger constrained by quotas. The reality of modern sourcing strategy for retail goods may not be sostraightforward. Our research suggests that factors driving textile and apparel sourcingdecisions are much more nuanced than is suggested by these dire forecasts. Traditionaldecision factors alone cannot explain the existence of certain phenomena within theindustry, like the survival of relatively high-cost, quick-turn-around apparel sectors inNew York and Southern California, or Bangladesh’s domination of the European importmarket for T-Shirts, but not the U.S. market. The continued survival of apparel manufacturing in Los Angeles and New Yorkraises the critical importance of supplier characteristics that go beyond the traditional costand quality components that have gained significance in retail strategy and deserveattention in the post-2005 debate. These “modern” factors, which include inventory risk,product diversity, replenishment and service, will remain influential for the private retaildecision-makers even after quotas are lifted. By responding to these additionalconsiderations, apparel and textile producers have some control over their fate. 1 Data here and analyzed in most of this article are from the U.S. Department of Commerce’sOffice of Textile and Apparel (OTEXA) website, compiled by HCTAR. Changes reported here reflect thevalue of MFA apparel imports in January-August, 2005 versus January-August, 2004.Version: December 22, 2005 3
  • 5. This article considers the impact of quota removal in light of the new marketforces cited above, particularly changes in the relation of retail-apparel-textile supplychains, and the continuing role of public policies affecting trade flows. In doing so, weargue that the volitional choices of private and public actors remain important in the post-quota era. These choices will affect future market share for apparel suppliers in closeproximity to the U.S. (e.g. Mexico, Caribbean, and Central American nations) and EU(e.g. Eastern Europe, northern Africa, and Mediterranean nations) markets, as well asemployment within the U.S. and EU textile and apparel sectors. These choices will alsoimpact the fate of other developed and developing nations hoping to sustain or improvetheir nation’s competitive positions in a quota-less world.II. BackgroundThe Rise of the Global Market Since the production of mechanical sewing machines in the 1850’s, sewingapparel products has always been and remains a labor-intensive activity with smallcapital investment requirements. As a result, developing countries have seen the exportof apparel products as a major pathway of economic growth. After WWII, internationaltrade in apparel began to expand with more reliable shipping and better communications.More clothing sold in the U.S. was made offshore, continuing the long-standing trend ofmanufacturers seeking out the low-cost supplier. This shift, however, was limited byvarious international agreements capping textile and apparel imports into the U.S. and theEU. These agreements allowed product specific import quotas for each country to existwhile allowing yearly increases in the quota quantities. In 1995 a World TradeOrganization (WTO) Agreement on Textiles and Clothing (ATC) was signed creating aten-year plan phasing out quotas in four discrete steps, the last step to be taken onJanuary 1, 2005 with the elimination of all quotas among WTO member nations. Thislast step was by far the most important and potentially disruptive since nearly 50 percentof the volume of U.S. apparel imports were still under quota restrictions in December2004.Version: December 22, 2005 4
  • 6. One of the clear intentions of the ATC was to cushion and delay the major impactof quota elimination. Besides the disproportionate near-50% of volume protected prior tothe fourth and final phase, the impact of that final stage was exaggerated becauseimporting nations were careful through the first ten years to remove quotas largely on thelower value products, thus protecting their own value-added clothing industries. Thus,prior to 2005, each producing nation had yet to witness the brunt of quota removal on anymajor product groups vital to its domestic industry. For the U.S., this meant everynotable category, including cotton pants, shirts, and T-shirts did not lose quota protectionuntil this final stage took effect on January 1, 2005. (Abernathy, Volpe and Weil, 2004)Tariffs and Regional Trade Agreements Although quotas ended on December 31, 2004 under terms of the ATC, tariffsestablished within the ornate system of bilateral apparel and textile agreements betweencountries will remain for a long time. Tariff agreements are then overlaid by an equallycomplex set of regional trade agreements that provide participants with full or partialrelief from their partners’ standard tariff rates on certain products under certainconditions. (Chiron 2004). As a result, particular supplier nations with duty free benefitsmay enjoy a substantial competitive advantage over competitors excluded from similararrangements. For the U.S., the North American Free Trade Agreement (NAFTA) is the mostwidely known regional treaty. Signed in 1994, NAFTA has eliminated quotas and tariffson most apparel moving between member countries, provided the products wereassembled from fabric whose yarn originating in a member country. On August 2, 2005,President Bush signed the CAFTA-DR agreement that allowed apparel produced in theCentral American nations and the Dominican Republic, under a U.S. yarn forward rule,to enter the U.S. duty free. Besides these and other regional treaties, the U.S. hasengaged in separate bi-lateral agreements with Israel, Jordan and others that ultimatelyprovided some combination of duty or quota relief to producers in these partner nations. The EU, for its part, has its own complex web of trade agreements. Like the U.S.the greatest benefits seem reserved for nations in close proximity to the European marketand the world’s under-developed regions. Three arrangements illustrating this all provideVersion: December 22, 2005 5
  • 7. duty free and quota free access to the EU apparel market: the Euro-MediterraneanPartnership, which involves twelve Mediterranean and Middle Eastern nations; theStabilization and Association Agreement, which includes free trade terms for fivewestern Balkan nations; and the 2001 Everything but Arms Initiative, benefiting the 50Least Developed Countries.The Special Case of China When China sought to become a WTO member in the late 1990s, one of the majorissues in contention in the “accession” agreement was apparel and textiles. Under aseparate Memorandum of Understanding between the U.S. and China, a bilateralconsultation mechanism remains in affect for four additional years beyond the end ofquotas for WTO countries (through December 31, 2008). This safeguard mechanismallows the U.S. to seek to extend quotas with China for specific goods where theelimination of such restrictions would result in “…market disruption, threatening toimpede the orderly development of trade between the two countries…” (USITC 1999: 8-12). These safeguard provisions have already been invoked a number of times: in 2004 inregard to an alleged “surge” of imports of bras, and more recently on November 8, 2005, tore-establish quotas on 34 individual quota categories including cotton pants and shirts.Similar disputes have also arisen between China and the EU over sweaters, bras, and manyother items of apparel. Some 75 million items of apparel from China currently remainembargoed on ships seeking to enter European ports. EU/China trade representativesreached agreement in September 2005 to release of the items this year into the EU withthe remainder counting against next year’s safeguard imposed quota. All 25 EU membercountries have not yet (December 2005) ratified the agreement.III. The Structure of Global SourcingThe Textile and Apparel Industry Today From 1989 to 2004, apparel imports to the U.S. rose from $21B to $65B, nowrepresenting over 60% of all apparel sold in the U.S. Figure 1 chronicles U.S. apparelconsumption over the last sixteen years from both foreign and domestic producers. ItVersion: December 22, 2005 6
  • 8. should be noted that an additional $4.6 billion of apparel was produced domestically in2004 but exported to countries throughout the world (Office of Textile and Apparel2004). Figure 2 presents the national sources of the nearly $65 billion worth of apparelimported to the U.S. in 2004. The drivers for sourcing will be discussed below, but it isworth pointing out here both the national diversity of import sources, and also theconcentration in certain areas, particularly Mexico, so-called Caribbean Basin nations (agrouping that also includes Central America) and China and Asian sources. Not surprisingly, the growth in apparel imports has been accompanied by a steadyreduction in both U.S. employment and output within the apparel and textile sectors.From the period 1989-2002, textile production in real dollar output terms declined by anaverage of 3.3% per year and apparel production by about 3.4%. Employment declinedeven more rapidly during those periods for both textile and apparel, reflecting both shiftstowards domestic production of higher value products and increases in productivity,particularly for the textile industry (Bureau of Labor Statistics, Employment andEarnings, various years). Despite these declines, a large number of workers remainemployed in both industries.Sourcing Decision Makers Discussion of the future of apparel and textile industries often focuses at thisnational level of trade flows. But these flows reflect decisions of private actors alongsupply chains (retailers, and producers of textiles and apparel) that operate within therestrictions of national and international trade and other public policies. One mustunderstand how private decisions lead to observed flows of garments in order to forecastthe post-2005 market only now taking shape.2 Making sourcing decisions in the global apparel market is a daunting task. Due tofactors including language and custom barriers, communications hurdles, and the sheer2 A study from 1993 by the U.S. Customs Service analyzing the top 100 apparel importers found that 48percent of top importers were retailers; 22 percent designers; and about 20 percent U.S. basedmanufacturers. The remaining group were made up of wholesalers and other intermediaries not involved ineither design, marketing, or production decisions (Feenstra 1998; Gereffi 1999). Wholesale intermediariesdeclined further as a group in the supply chains with the rise of lean retailing (Abernathy et. al. 1999).Version: December 22, 2005 7
  • 9. number of producers scattered across the world, U.S. retailers have had to change theway they approach the world market. Some large retailers have established their ownbuying offices overseas to administer the outsourcing of their private label products.Others work with large and sophisticated independent sourcing agents to handle thisintricate task. Most American manufactures of branded or private label apparel products havedeveloped contacts in apparel exporting countries. Some U.S. companies have openedplants offshore that they own jointly with local owners. Most often they seek indigenouscut and sew contractors, or they go to organizations that provide completed apparelproducts, the so-called full package providers. There are currently very few othernations’ branded apparel products that are exported into the U.S. market. For everyGiorgio Armani one might think of there are more brands such as Levi, Lee, Wrangler,and private labels such as Brooks Brothers, Lands’ End and L.L.Bean. It is tempting tothink of clothing from any of the last six as American, and apparel with the Armani tag asItalian. However, although the design and merchandising of the product is likely to beAmerican or Italian, the actual garments are often sewn outside of the U.S. and Italy. The evolution of one of the foremost sourcing firms illustrates changes in theunderlying drivers of sourcing patterns. Li & Fung (Trading) Ltd. of Hong Kong is oneof the largest international sourcing agents, acting as the link between its customer base(major retailers and apparel companies) and an international supply network (Loveman,and O’Connell 1996; Fung 1998; Tanner 1999; Hagel and Brown 2001. Li & Fung wasfounded in 1906, originally as an exporting agent of porcelain and silk from China.Following World War II, it began to focus on export of garments, toys, and othermanufactured goods. As an important element of its garment exporting business, thecompany gained expertise in buying and selling quotas from Asian markets for shipmentinto the U.S. in the 1970s and 1980s. As a buying agent and broker in quotas, itestablished relationships with more than 2000 Asian suppliers and links forward in thesupply chain to manufacturers and retailers. In the late 1980s and 1990s, the companytook advantage of its network of Asian suppliers and its growing facility with logisticmanagement to offer U.S. retailers an efficient means of sourcing products in Asiannations through the auspices of Li & Fung (Fung 1998). With the growth of newVersion: December 22, 2005 8
  • 10. methods of retailing (see below) and greater pressure from other competitors(intermediaries as well as retailers establishing their own sourcing footholds), its logisticscapacity became a central element of the company’s business, and evinced by its 2003annual report which describes its core business as “…managing the supply chain for highvolume, time sensitive goods.”. By 2001 the company had an estimated 7500 suppliers in about 40 countriesaround the world. In recent years as more and more U.S. manufacturers have turned tofull package providers to help them with sourcing problems, Li & Fung and othersourcing agents have moved into an even-more expanded list of services including:product development, raw material sourcing, production planning, factory sourcing,manufacturing control, quality assurance, export documentation, and shippingconsolidation. Perhaps indicative of the next step of evolution, the company recentlyentered a licensing agreement with Levi Strauss & Co. in which they will design,manufacture and market men’s tops for the U.S. market under various Levi’s® labels,including Levi Strauss Signature™ branded jeans to U.S. mass marketers. Sourcing choices arise from the drivers of profitability: cost considerations relatedto acquiring factors of production balanced against factors affecting revenue, includingpricing, marketing, and distribution. In large part, these lead private actors to weighfamiliar issues of labor, material, and shipping costs as well as costs related to tariffs andthe presence of quotas in selecting sources. However, as will be demonstrated, modernsupply chain dynamics are adding factors to this traditional list, primarily to address thedamaging effects of inventory risk.Labor, Material and Shipping Costs Because apparel manufacturing is labor intensive, wage rates are clearly a majorfactor in sourcing decisions. This gives an immediate competitive advantage toproducers in developing countries, including China and India. This advantage, however,is not reserved for Asian countries alone, as Table 1 demonstrates. Many Africannations, including Madagascar and Kenya, have among the world’s cheapest work forces,but are not major competitors in exporting apparel to the U.S. Mexican labor, in contrast,is much more expensive, yet retains a very prominent place in this market.Version: December 22, 2005 9
  • 11. Given the fact that not all apparel products require the same amount of labor, thebenefit arising from low wages is magnified on labor-intensive products. This can beseen in comparing labor costs across different types of garments and sources ofproduction. Table 2 compares the factor costs associated with producing two types ofgarments: a single pair of men’s jeans and a cotton rung spun T-shirt. We compare thecost of production in Mexico, the Caribbean, and Coastal China for each case. Allowing for differences across the producers in terms of wages and productivity(labor cost per garment), China’s low wage rate still leads it to have the lowest costassociated with cutting, assembling and finishing the garment relative to the other twocases. Of course, labor costs alone do not determine the total cost of an apparel productlanding on U.S. shelves. A second factor cost highlighted in Table 2 is the price ofprocuring fabric. In fact, this expenditure may be even more responsible for variationamong different supply sources than labor, as it is for jeans. Clearly, producers in closeproximity to cotton textile manufacturers have an advantage over those far away. Forexample, it is more costly to utilize American denim in Colombian jeans factories than inMexican shops. Furthermore, proximity to inexpensive textiles is an even greateradvantage. China, for example, which has a growing cotton textile industry of its own, isable to secure lower cost fabric than its competitors using U.S. fabric. Shipping cost is the final major factor cost associated with apparel imports.Proximity to retail markets in the U.S. or EU matters in this elementary regard, at thevery least. (Later it will be shown how it matters even more for other reasons.) Althoughthe $.05 per garment difference between shipping a pair of jeans from Mexico rather thanChina may at first seem insignificant, it may not always be so, especially in the case ofinexpensive products where the difference represents a meaningful percentage of theproduct’s overall cost. So after considering the labor, material, and freight, it is easy to suggest thatcountries like India, China and their neighbors could grow to dominate the U.S. marketnow that quotas no longer restrict them. This seems even more plausible for productssuch as dresses, where the cost variation is especially large. Despite the distance fromVersion: December 22, 2005 10
  • 12. the U.S., any shipping cost disadvantage is quickly erased for these producers through thecombination of low wages and inexpensive fabric from local textile makers.Direct Policy Costs The total cost for a pair of jeans landing on U.S. soil does not end with thecomponents listed in Table 2. In fact, the policy costs enumerated in Table 3 can oftencomprise the largest cost differentials among producers. In the jeans example, duty andquota charges accounted for 46% of the total landed cost of a coastal Chinese producer in2003. The first policy cost illustrated in Table 3 arises from quotas. Under the formersystem, each nation determined the method for distributing the quotas it has availablegiven its bilateral agreements with trading partners (Krishna and Hui Tan 1998). For lowwage countries with excess capacity, quota volume into the lucrative U.S. or EU marketsbecame a source of revenue as well as opportunity to attract additional companiesseeking sourcing opportunities. As a result, global manufacturers seeking to fill U.S.retailer orders from a producer in China paid substantial fees for acquiring quota. As aresult, prior to 2005, Mexico and Nicaragua were lower cost suppliers of jeans relative toChina due to their preferential treatment under regional trade agreements (Table 3). Although quota-related costs initially dropped out of the equation after January 1,2005, the newly active U.S. safeguards will likely re-introduce such costs. It is alsoworth reiterating that tariffs have and will remain in place. Table 3 makes it clear that thissecond policy-driven expense can also be influential, as duty rates on U.S.-bound apparelcan reach as high as 30%. This can provide a considerable advantage to countries coveredby regional trade agreements like those discussed earlier which reduce or eliminate thisexpense. In the case of jeans presented here, even without quota costs, Mexico pulls towithin 1% of China because of its membership in NAFTA. For T-Shirts, the $0.29 dutythat applies to Chinese imports dramatically changes the analysis. This same patternwould be recognized in the total cost supplier comparisons for a significant number ofapparel products. Furthermore, because most of the countries partnered in U.S. tradeagreements come from the Western Hemisphere, the net effect of the current U.S. tariffstructure is a shift in market share toward Mexico, the Caribbean Basin and SouthVersion: December 22, 2005 11
  • 13. America for the many products fitting this cost profile. Likewise, European imports ofthese same products will likely originate in neighboring Mediterranean countries or least-developed nations such as Bangladesh. Again, this factor did not disappear on January 1,insuring that many products will continue to be supplied according to pre-2005 trends,and that products from more proximate sources will remain competitive.Lean Retailing and Replenishment The factor costs and policy costs described thus far once may have been the onlyforces driving international retailers’ and manufacturers’ sourcing decisions. As the roleof manufacturers in the supply chain has changed, though, so too has their objectives.Many of these changes have been customer driven; that is to say, retailers are undergoingrevolutionary changes of their own, and in turn, demanding more from their suppliers. Modern retailers no longer have warehouses full of apparel products ready for theselling floor. Rather they have become “lean retailers” owning just the products on theselling floor. As a result, suppliers’ warehouses and distribution centers act in manyways as virtual warehouses and distribution centers for the retailers. At least once aweek, most often on Sunday evening after the weekend sales are known, retailers havetheir computer inventory system order replenishment products from their suppliers.Products are ordered at the stock keeping unit (SKU) level. For example, an order will beplaced with a manufacturer for a specific number of their men’s jeans of a given style,color, fabric weight and finishing treatment, waist size and inseam length. The ordergoes to the manufacturer’s computer and is generally received on that Sunday evening.The retail order requires that the jeans be placed in identified cartons for each of theretailer’s stores, and the order is to be delivered to the appropriate retailer’s distributioncenter by Wednesday of the same week. The cartons must be identified with theappropriate bar codes identifying the specific store to which it is to go. The jeans must befloor-ready, that is, they must be ready to be placed on the retailer’s floor withappropriate price marked as they are taken from the packing carton. In all likelihood thejeans will not be touched from the time they are placed in the shipping container at themanufacturer’s distribution center until they arrive at the store ready to be placed on atable for sale on Thursday morning. In fact, the outside of the carton will be touchedVersion: December 22, 2005 12
  • 14. only when truck trailers are loaded and unloaded. The sorting from supplier’s trailer totrailer destined for specific stores is fully automatic. The processes and the paperwork associated with the products must be completelyunderstood by the manufacturer and the retailers and conform to well known industrialstandards. These added services place significant new costs on suppliers, in essenceshifting risk from retailers backwards onto their suppliers (Abernathy et. al. 1999). For the supplier, this evolving role in the supply chain has led to an increasedfocus on inventory carrying costs and risks, and manufacturers making global sourcingdecisions have begun to account for these expenses (Abernathy et. al. 2000). Table 4carries forward the ongoing jeans and T-shirt examples by including these supply chain-related factors (and uses total landed cost less quota cost as the basis of comparison sincewe are concerned about the post-2005 period). First, consider men’s jeans, where thetypical Mexican, Caribbean and Coastal Chinese supplier will have lead times of three,five, and eleven weeks, respectively. Assuming shipments arrive at the manufacturer’sdistribution center from all three candidates with the same or nearly the same frequency,the variation in cycle time will surface in three important operating metrics. The most obvious of these is the work-in-process inventory (WIP), whichincreases with the lead time on a direct basis. WIP costs are carried by the supplier andrepresent capital tied up in the production process itself. Given the low capitalization ofmany apparel suppliers, the consequences of large amounts of WIP can be substantial,and born increasingly by companies upstream of retailers and branded apparel producers.As a result, the associated WIP carrying costs for sourcing the Chinese producer will benearly three times those incurred when using the Mexican producer ($.11 per garment forMexico versus $.30 for China). Next, when planning safety stocks necessary for insuring against inevitablefluctuations in demand, a longer cycle time translates into larger finished-goodsinventories (FGI). To illustrate this, consider the branded jeans manufacturer supplyingproducts to a number of retail outlets, where from week to week, demand may vary fromexpected volumes. Depending on the producer’s lead time, special orders aimed atreplenishing a particularly popular SKU may or may not arrive in time for themanufacturer to achieve the negotiated fill rates with the retailer. So to assure highVersion: December 22, 2005 13
  • 15. service levels, the manufacturer is forced to hold FGI in amounts adequate to servicethese fluctuations. In other words, longer cycle times equate to delayed responsiveness tothe market, which ultimately necessitates higher safety stocks. Hence, a decision tocontract the Chinese producer in Table 4 means keeping two or three additional weeksworth of FGI than if the western suppliers were chosen. Inventory-at-risk is the final operating metric to reflect the variance in cycletimes. Unlike WIP cost and FGI cost, it does not easily translate to the total cost buildupin Table 4 (see also Abernathy et al. 2000; Bouhia and Abernathy 2004). But thepotential costs represented by inventory at risk are considerable, perhaps larger thanmany of the more direct costs. This is because the possibilities of unanticipated productobsolescence or cancellation at any time during a product life-cycle means that thecurrent inventory, or some part of it, must be sold at a deeply discounted level or, in theworst case, may never be sold at all. A sudden drop in the demand for a line of goodsmeans that a supplier faces liquidating 15 or more weeks of product, simply because itcannot “turn off the tap” of supply instantaneously. For the decision-makingmanufacturer who stands to lose in this situation, lower inventory-at-risk is an addedincentive to choose the shorter-cycle producers in Mexico or Nicaragua. In the comparative analysis in Table 4, the value at risk for a supplier of jeans issubstantial. For example, if a retailer’s weekly order of 10,000 units of a specific line ofjeans is abruptly terminated, the manufacturer is left holding $650,000 of inventory thatmust be liquidated if sourced from Mexico versus $1.42 million if sourced from China. For a manufacturer or sourcing agent seeking producers of jeans bound for theU.S., the sourcing decision may seem ambiguous when looking only at factor costs. Asthe example suggests, the preferred producer for this product does not surface until theimpact of proximity is taken into account by determining the work-in-process andfinished-goods inventory costs, as well as the inventory at risk. What may have goneunnoticed, though, are the specific characteristics of jeans that played such a vital role inthis result. The above discussion highlights the importance of taking product characteristicsinto account when projecting future sourcing patterns. More specifically, a product’sfashion content, which is highly correlated with its level of replenishment, is a veryVersion: December 22, 2005 14
  • 16. influential factor in manufacturers’ production decisions. For fashion products like thedress, the decision will lean more heavily on factor and policy costs. This means lowwage nations, and especially those with access to inexpensive textiles, have the potentialfor major market gains as quotas are removed. On the other hand, for replenishmentproducts, it would seem that producers in close proximity to the world’s major marketsremain on solid footing even without the lowest wage rates. Not surprisingly, thesetrends are already being reflected in current international sourcing patterns.IV. Implications for post-2005 sourcing patternsApparel The forgoing argument implies that the prospects for apparel sourcing into theU.S. and EU markets will be driven by two sets of forces. For products with singleseasons and limited prospect for replenishment such as dresses, women’s blouses, andfashion sensitive clothing in general, traditional cost factors, and the continuing cost oftariffs will frame sourcing decisions. For these goods, future competitiveness will changedramatically for those countries whose garment industry depended on quota-drivenadvantages (for example as a low-cost portal for quota-constrained suppliers), or whosecost advantages were only somewhat above the costs of purchasing quotas. For thesecountries, the end of quotas implies the kind of head-to-head competition implied by theconventional wisdom, albeit along a broader set of factors than just labor costs. Forexample, quota-constrained producer nations like India, already successful in the marketdue to lower combined manufacturing and policy costs, stand to expand market share(Tewari 2005). For products where retailers and suppliers seek ongoing replenishment—eitherthroughout the year (men’s jeans) or within a season, direct costs related to labor, textileinputs, shipping, and tariffs are balanced against the costs associated with lead times,inventory, and their attendant risks. As such, proximity of suppliers matters too, andpost-2005 sourcing decisions may shift less—or in different ways—than predicted by theconventional wisdom.Version: December 22, 2005 15
  • 17. Of course, there are other factors affecting sourcing decisions. These includequality of the basic fabric (e.g. cashmere), specialization in production and design (e.g.Italian suits), and certain highly skilled sewing details (e.g. complex stitching patterns).These characteristics tend to arise from historic specialization not easily replicated. Wefocus here on more generic factors. The clothing produced in U.S. and EU markets are composed of a mix ofreplenishable and non-replenishable products. Although the level of replenishmentrequired by retailers varies across segments (mass merchants demand a higher level ofreplenishment, albeit for a more narrow product mix than department stores for example)Figure 3 provides an indication of the extent and variety of replenishment products fordifferent types of apparel for a major U.S. department store. A comparison of the replenishment content of all garment products shipped formajor sources of production provides evidence consistent with the importance ofreplenishment products for sources of production more proximate to the U.S. and E.Umarkets. The lists of top twenty sources of men’s jeans into the U.S. and the EU for 2003both have high concentrations of supplier-nations proximate to the respective market.(Tables 5(a) and 5(b)). As predicted, the U.S. market was lead by Mexico, which enjoys abeneficial policy position through NAFTA (no tariffs) and the closest proximity.Additionally, a number of regional CBPTA countries were high-volume partners. Chinawas well down the list, and its focus for the category was on more fashionable styles asevidenced by its higher unit cost ($ per dozen). Bangladesh topped the EU list ofsuppliers, parlaying its very low wage rate with its preferential tariff treatment as a leastdeveloped nation. Yet a high number of Mediterranean nations also made the list. Thevery different composition of apparel sources for jeans into the U.S. and EU market istelling, implying that the decisions leading to current sourcing patterns are balancing amuch wider set of factors than lowest manufacturing costs. Since quotas were lifted to begin 2005, it is clear from Table 5(c) that China hasmade considerable gains in the U.S. import market for jeans. In the same way,Bangladesh, absent from the 2003 list of top suppliers, now appears on the current list.However, the volume derived from these two distant supplier-nations is very low relativeto the volume coming from Mexico and the Caribbean nations. For example, fromVersion: December 22, 2005 16
  • 18. January to August 2005, jeans from Mexico constituted 48 percent of all imports in thatcategory versus 5 percent from China. This pattern is likely to continue in the market formen’s jeans. A similar story can be seen for the sourcing of T-shirts into the U.S. and EUmarkets (Tables 6(a) and 6(b)). For 2003, the top 4 sources of T-shirts into the U.S.market, comprising 60 percent of all imports of that category, were neighboring countries(Honduras, Mexico, El Salvador and Dominican Republic). A number of nations withcomparable or lower unit prices for T-shirts (Bangladesh, Egypt, Thailand) fell low in thelist of sources even though they were not quota constrained for that product category.The EU list was comprised of both Asian sources of production (particularly Bangladeshwhich has preferential tariff treatment) as well as regional producers like Turkey, andMorocco. The 2005 year-to-date data (Table 6(C)) reflects a quota-free market, and yet,Western nations are still responsible for more than 80% of the T-shirts imported into theU.S. In contrast, consider sourcing for dresses. Fashion items, which are expensive toproduce and not typically replenished, would presumably have similar supply patternsinto both the U.S. and EU. This is due to the fact that factor costs play a large role and theinventory and risk considerations are non-discriminating. Tables 7(a) and 7(b) supportthis assertion. For the U.S., none of the proximate nations that dominate the men’s jeanslist appear in the top 10 of sources for cotton dresses, and many countries that do noteven appear in Table 5(a) appear near the top of 7(a) (e.g. India and Sri Lanka). Thenational sources of cotton dresses into the EU look more similar to those supplying jeans.The overlap between U.S. and EU sources is far greater here, reflecting the dominance ofmore traditional drivers. Furthermore, Table 7(c) shows that the U.S. supply base thusfar in 2005 looks much the same as it did two years earlier. It will become increasinglydifficult for suppliers in the Caribbean to compete in fashion markets. Figure 4 incorporates our measures of product-level replenishment into estimatingthe total value of 2003 U.S. imports of replenishable apparel from various regions. Aswe would predict, Mexico and the CBI provide a far higher amount of replenishableproducts (over $4 billion) than China ($1.3 billion) or other low cost Asian producers.Similarly, while about 22 percent of all apparel sources from Mexico and CBI nations isVersion: December 22, 2005 17
  • 19. replenishable, less than 10 percent of products sourced in China or other Asian nationshave this characteristic. Since these factors will still prove important after quotas arelifted, rapid shifts in sourcing to Asian and other low wage but distant nations areunlikely. As lean retailing practices take greater hold in Europe, the benefits fromreplenishment will also tend to favor products sourced in the low wage regions on thecontinent and from countries in the Euro-Mediterranean Partnership – countries primarilybordering the Mediterranean Sea.Textiles The fate of the textile industry is closely tied to apparel.3 Concern over the effectsof lifting quotas has as much or more to do with the vulnerability of the U.S. textileindustry as it does apparel. For the portion of the U.S. textile industry that supplies apparel, the shift towardsMexico and the CBI has been very beneficial. This can be seen in the trade figures ontextile exports from the U.S. to Mexico and Caribbean nations versus U.S. textile exportsto countries in Asia such as China and Bangladesh. Figure 5 compares U.S. textileexports as a percentage of apparel imports from a variety of countries. For Mexico andthe CBI, this percentage is high (over 40 percent for Mexico and close to 30 percent forCBI countries like Honduras and Dominican Republic). In contrast, U.S. textile exportsto China are less than 2 percent of the value of imported apparel items sourced there andBangladesh even lower. The economic benefit to the U.S.-based textile sector arisingfrom a garment imported from Mexico or Honduras is therefore far greater than ifsourced in China (see Feenstra 1998 for further discussion of this issue). The use of U.S. textiles by suppliers working out of Mexico, Central America,and the Caribbean reflects as we have argued throughout the choices of private actors 3 It is not, however, as directly linked today as it once was. Textile products are inputs for threevery distinct industries: apparel, home furnishing, and industrial uses, each using roughly one-third ofannual textile production. Home furnishing industry includes sheets, towels, carpets, and related products.Industrial applications represent a varied set of uses from biotechnology applications (cardiac stents) toautomotive interiors to large scale construction applications such as the tent-like structures used as roofingfor the Denver International Airport. See Abernathy et. al. 1999, chapter 11 for a complete discussion.Version: December 22, 2005 18
  • 20. operating within the bounds of public policies and institutions. It is reflective of publicpolicies such as the terms of the Caribbean Basin Partnership Trade Act that requires as aquid pro quo for duty-free entrance into the U.S. market that products sewn in CentralAmerica and the Caribbean utilize American textiles. But it also arises because of theproximity, quality, and cost of U.S. textile products that have made U.S. an attractivesource for Mexico even though under NAFTA duty-free treatment would be granted iftextiles originated in Mexico. The continuing effects of regional trade agreementsreducing relative tariffs and proximity advantages mean that significant demand for U.S.products should remain in the medium term, providing that both apparel and textileproviders take continuing advantage of the proximity premium. Equally, the backwardlinkage from apparel to textiles means that regional trade policies (e.g. the CentralAmerican Free Trade Act) may be especially important for that sector. A further implication of these trade figures is the longer term opportunity forMexico to further expand its textile sector. Along with increasing Mexican investment intextile production, many major U.S. textile companies have moved capital there. Yet theobstacles to developing a high quality, technologically advanced textile sector are muchmore substantial than for apparel. Textile production is a far more capital intensiveprocess requiring development of infrastructure, electricity, water, and the managementof sophisticated manufacturing processes. Thus, the development of a major textilesector in Mexico and its attendant effects on the U.S. industry will occur over a longerperiod of time. It is less clear that the CBI nations will be able to develop a textile sectorin the near term for several reasons. First, CAFTA still requires use of textile productsmanufactured in the U.S. (unlike NAFTA where there is no such precondition for apparelimported from Mexico). Second, capital constraints are more substantial in the CBInations than in Mexico. Finally, the CBI apparel manufacturers currently in operationhave specialized primarily in assembly. There is therefore less experience in themanagement of more complex apparel manufacturing than one finds in Mexico, limitingthe supply of skilled managers for textile operations.Version: December 22, 2005 19
  • 21. V. Conclusion The sourcing decisions facing textile and apparel manufacturers are daunting andfar more complicated than commonly acknowledged. With expanding free trade, thereare more potential producers in a wider variety of countries. With consumers demandingmore variety, more fashion, more product access and lower prices, pressure on suppliersto search for new sources of supply will only increase. Modern retailers place greaterrisk arising from added variability of product demand further up the supply chain, forcingsuppliers to balance the direct costs of sourcing against the indirect consequences ofbeing left “holding the bag” of inventory. Compounding these industry specific issues,decision makers are confronting currency volaility (for example, the movement awayfrom a fixed exchange rate by China in July 2005), impacts of changing policiesregarding terrorism, the potential threats to location posed by transnational diseases (e.g.SARS; avian flu), and ongoing uncertainty caused by changes in the political climatebetween trading partners (Arnold 2005). The ultimate impact of the removal of quotas on the global network of firmssupplying the U.S. and European markets rests on volitional choices taken by privateplayers along the supply chain and public entities in developed and developing nations inlight of these complex factors. Rather than a preordained future driven by inexorableforces, we believe that informed choices taken at the private and public level powerfullyaffect those who will win and lose in the next decade.Private Choices We have argued that the competitive strategies and choices of retailers, apparelmanufacturers, and textile producers will have a major impact on the location ofproduction for different types of products. The continuing importance of logisticconnections between the manufacturing and distribution of clothing mean that supplychains will reflect a blend of considerations regarding factor prices, transportation costsand increasingly adjustments to the risks associated with sourcing products in differentlocations. As supply chain decision-makers adopt better means of pricing these risks ashas happened in other markets, it will play an even larger role in sourcing activities. TheVersion: December 22, 2005 20
  • 22. fact that innovative firms like Li & Fung have brought risk considerations into their corestrategies is indicative of this latter trend. With the elimination of quotas, survival of the remaining-- but still sizeable--apparel sector in U.S. and EU markets depend on using the benefits of proximity from adesign, marketing, and production point of view to respond to increasingly volatilemarket demand. The persistence of apparel production in Southern California cannot beexplained away by low wages arising from slack enforcement of labor standards (Weil2005), but arises from the responsiveness of those firms that have survived. Yet thepressures to find new means to further expand the advantages from proximity aresignificant and will intensify. This requires new means of restructuring the way thatnetworks of contractors manage supply chain risks (see Tan and Gershwin 2004; Bouhiaand Abernathy 2004). Textile manufacturers that supply regional and U.S. apparel producers havesurvived by a combination of the preferential treatment of domestic fabrics and throughinvesting in technology at the spinning, weaving, and finishing steps of production thusallowing them to achieve some of the highest productivity and quality in the world. Inaddition, many producers have developed significant brand recognition, creatingdistinctive products such as Polartec®. Survival will require further progress in these areasas well as further improving their responsiveness to U.S. retailers and consumers. Similarly, the apparel industries in Mexico, Central America, and the Caribbeanwill only maintain their position—even with tariff advantages—by continually improvingthe advantages arising from proximity. The quantity of shipments from Mexico and to alesser extent from CBI nations has decreased since 2002, arising from the U.S. recession,trade-related impacts of the 9/11 attacks, and some substitution from other countries. Itmay also reflect, however, the lack of improvement in short cycle responsiveness amongMexican suppliers. Intrinsic advantages arising from physical proximity can be lost ifthose producers do not adjust manufacturing, information, and distribution practices toallow them to be responsive. The private choices facing developing nations are therefore more complex thansuggested by the common wisdom. Bair and Gereffi (2001, 2003) advocate that Mexicoand other developing nations should focus on the design and marketing phases of apparelVersion: December 22, 2005 21
  • 23. operation as a critical step towards survival. Although this strategy is very tempting,particularly because (as they point out) a great deal of the profits captured by the supplychain occur at the design and marketing end, it is not clear that they will successfullywrest these functions from retailers and major brands for this very reason. Instead, webelieve that Mexican suppliers in Torreon and elsewhere will need to be able not only toprovide the full package of product and services demanded by their powerful customers,but also do so in a manner that is sustainable for the companies. There is evidence thatthis has in fact happened in Mexico in recent years, leading to a very competitive butsubstantially restructured industry that contributes to Mexico’s continuing supply ofalmost 50 percent of jeans imported into the U.S. (Rosenberg 2005). Yet adjustments ofthis kind are far from simple: We have seen many U.S. firms whose domestic operationswere undermined as much by factor prices disadvantages as they were from theirincapacity to manage risk effectively. Opportunities for countries in Eastern Europe,North Africa, and Turkey for taking advantage of proximity advantages into the EUrequire similar types of competitive strategies and adjustments (e.g. Pickles et al, 2005). The impact of replenishment and risk shifting in supply channels also alters thetraditional role apparel and textile industries can play in developing nations. Apparel andtextile sectors remain attractive industries in terms of economic development. Butassuring the success of those industries has become more complex. It will be difficult formany nations with inadequate infrastructure, distant location from major consumermarkets, or political (or even climactic) instability, who will be at a considerablecompetitive disadvantage for many apparel products, even if they have low wage rates.Further, for those categories of apparel where replenishment is not a major factor insourcing, the presence of a large number of countries with extensive apparel capacitymeans more intense competition among these nations for a smaller market of non-replenishment products. Together, these forces will make the future of apparel industriesreliant solely on low wages as the source of competitive advantage (e.g., Bangladesh)increasingly bleak and vulnerable to the removal of quotas.Version: December 22, 2005 22
  • 24. Public Choices “The death of distance is exaggerated. Trade costs are large, even aside from trade-policy barriers and even between apparently highly integrated economies.” (Anderson and Wincoop 2004, p. 691; See also Coughlin 2004; Evans 2003; Evans and Harrigan 2005). Trade costs consist of transport, border-related, local distribution costs that standbetween foreign suppliers and final users. Many of these are directly affected by explicitpublic policy (tariffs, exchange rate systems like pegged currencies) as well as implicitpolicies such as investments in transportation infrastructures, the efficiency, variability,and integrity of administrative mechanisms affecting trade relations, and regulationsaffecting flows of goods. National public policies will therefore continue to have a major impact on aquota-free trading system. For nations hoping to expand their capacities, public policiesthat impact the links between their markets and U.S., EU, and other major consumermarkets will be critical. For example, the port infrastructures in Bangladesh suffer fromproblems arising from physical geography, climatologic uncertainty, and enormousadministrative problems. While the country has remained competitive due to itsfavorable trade status with the EU and low wages, Bangladesh’s long term viability as asource of apparel and textiles rests on the adoption of public policies that appreciablylower trade costs associated with the administrative problems (including a significantproblem of the integrity of those processes) and investments in infrastructures thatdramatically reduce the time required to move goods in and out of the country.Movement along these lines has been very limited in the view of a number of analysts(Rahman 2002; Bhattacharya and Rahman 2002). The very different fates of Bangladeshi T-shirts in the European and U.S. marketsserve as a reminder of the continuing role that public policies will play in shapingsourcing patterns. Bangladesh, due to its status as a “Least Developed Nation”, enjoysfree entry into the EU on apparel that undergoes two stages of production. In the case ofT-shirts, this is knitting and sewing, both well within the capability of Bangladeshiproducers. As shown above, this competitive advantage allows the country to be theVersion: December 22, 2005 23
  • 25. leading source of T-shirts into the EU, a status unrealized in the U.S. market whereMexico and Caribbean nations enjoy duty free T-shirt imports and Bangladesh does not.Clearly, then, through the forging of bi-lateral and regional trade agreements that reduceor eliminate tariffs for certain trade partners, governments will retain the opportunity toimpact global retailers’ sourcing decisions. Regional trade policies will also be important sources of public choices after2005. Tariffs will remain in place for the foreseeable future. In fact, despite thereduction of tariffs that are part of the WTO, the end of quotas will further reducenational interest in removing those tariffs. Because they will continue to representsignificant costs (see Table 3), regional agreements that provide tariff relief for signatorycountries like NAFTA, CBTPA and AGOA for the U.S. and the Euro-MediterraneanPartnership for the EU will remain important instruments of public policies. Proximityeffects further raise the ongoing benefits that may arise from regional arrangements. We have cited our skepticism about the conventional wisdom throughout thisessay. Although traditional factors and the ending of the quota system will impact thesourcing of products, we believe that mainstream predictions miss the mark in severalrespects—even in light of the immediate, post-quota surge of apparel imports fromChina. Even the most sophisticated efforts to forecast the post-2005 impacts have leftout the replenishment dynamic. The USITC models of the effects of China’s accession tothe WTO on U.S. apparel production and employment are indicative. These models arerun at the aggregate rather than commodity level, and therefore fail to capturecompositional changes in the products traded between countries. The USITC reportindirectly acknowledges this problem: “Finally, the simulations reflect the assumptionthat the purchasers’ willingness to substitute imports for domestic production remainsconstant throughout the 12-year period [1998-2010]. This may not be the case. Forexample, if domestic producers were to shift production to specialized sub-sectors,imports could become less viable substitutes and, as a result, purchasers would be lessresponsive to changes in import prices.” (USITC 1999, p. 8-20). Replenishment considerations arising from the new economics of distribution andproduction channels explain an important portion of the shifts in sourcing over the pastdecade. As lean retailing becomes even more widespread and suppliers moreVersion: December 22, 2005 24
  • 26. sophisticated in thinking about managing risk, replenishment considerations will factoreven more heavily into sourcing decisions. This will make the countries with proximitymore competitive for those goods where replenishment is important, and will subjectthose countries competing along traditional lines to greater competition over a smaller setof apparel products. As these economic factors will not disappear in coming years-indeed, they will intensify-- this driver of sourcing location will persist.AcknowledgementsWe are grateful to the Alfred P. Sloan Foundation for funds supporting this research. Weare also grateful to Soundouss Bouhia, Janice Hammond, Mustafizur Rahman, JonathanRose, and conference participants at the University of North Carolina and HarvardUniversity for their insights and input on this project and paper.References Abernathy, Frederick H., John T. Dunlop, and Janice H. Hammond, and DavidWeil. 1999. A Stitch in Time: Lean Retailing and the Transformation ofManufacturing—Lessons from the Apparel and Textile Industries. (New York: OxfordUniversity Press). Abernathy, Frederick H., John T. Dunlop, and Janice H. Hammond, and DavidWeil. 2000. “Control Your Inventory in a World of Lean Retailing.” Harvard BusinessReview, November/December, pp. 169-176. Abernathy, Frederick H., John T. Dunlop, and Janice H. Hammond, and DavidWeil. 2004. “Globalization in the Apparel and Textile Industries: What is New and Whatis Not?” in Martin Kenney and Richard Florida, eds., Locating Global Advantage:Industry Dynamics in the Global Supply Chain, (Stanford, CA: Stanford UniversityPress), pp. 23-51.Version: December 22, 2005 25
  • 27. Abernathy, Frederick H., Anthony Volpe, and David Weil. 2004. “Previewing theApparel and Textile Industries after 2005: Prospects and Choices.” www.hctar.org Anderson, James E. and Eric van Wincoop. 2004. “Trade Costs.” Journal ofEconomic Literature. V. 42 (September), pp. 691-751. Anderson, James E. and Eric van Wincoop. 2002. “Borders, Trade, andWelfare..” Brookings Trade Forum. Susan Collins and Dani Rodrik, eds., Washington,D.C.: Brookings Institution, pp. 207-244. Appelbaum, Richard. 2005. TNCs and the Removal of Textiles and ClothingQuotas. New York and Geneva: United Nations Conference on Trade and Development. Arnold, Dennis. 2005. “Textile and Apparel Sourcing: The Complexity BehindLow-Cost Labour in Supply Chains.” Asian Labour Update, Issue No. 54, pp. 1-8. Bair, Jennifer and Gary Gereffi. 2003. “Upgrading, Uneven Development, andJobs in the North American Apparel Industry.” Global Networks, v. 3, no. 2, pp. 143-169. Bhattacharya, Debapriya and Mustafizur Rahman. 2002. “Experience withImplementation of WTO-ATC and Implications for Bangladesh.” Centre for PolicyDialogue Occasional Paper Series No. 7. Bouhia, Soundouss and Frederick Abernathy. 2004. “Scheduling and OrderingProduction Policies in a Limited Capacity Manufacturing System: The MultipleReplenishment Products Case,” Working Paper, Harvard Center for Textile and ApparelResearch, http://www.hctar.org/pages/pubs.html. Chiron, Claire. 2004. “An Overview of Apparel and Textile Quota, Tariff andTrade Agreements,” Working Paper, Harvard Center for Textile and Apparel Research.Version: December 22, 2005 26
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  • 30. Tan, Baris and Stanley Gershwin. 2004. “Production and SubcontractingStrategies for Manufacturers with Limited Capacity and Volatile Demand.” Annals ofOperations Research, v. 125, pp. 205-232. Tewari, Meenu. 2005. “Post-MFA Adjustments in India’s Textile and ApparelIndustry: Emerging Issues and Trends.” Working Paper 167. Indian Council forResearch on International Economic Relations. United States International Trade Commission. 1999. Assessment of the EconomicEffects of China’s Accession to the WTO. Investigation No. 332-403, Publication 3229.Washington, DC: USITC. United States International Trade Commission. 2004 Textiles and Apparel:Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market.(Publication 3671. Washington, DC: USITC. Weil, David. 2005. “Public Enforcement / Private Monitoring: Evaluating a NewApproach to Regulating the Minimum Wage.” Industrial and Labor Relations Review.v.58, no.2, pp. 238-257.Version: December 22, 2005 29
  • 31. Table 1: Average Hourly Labor Cost in Textile andApparel Manufacturing(Current U.S. Dollars, Including all benefits and/or social charges)Country Apparel Textile 2002 Data 2004 DataIndonesia 0.27 0.55Madagascar 0.33 naKenya 0.38 0.67India 0.38 0.67Bangladesh 0.39 0.28Pakistan 0.41 0.37Sri Lanka 0.48 0.46Haiti 0.49 naChina - Inland 0.68 0.48Philippines 0.76 naEgypt 0.77 0.82Jordan 0.81 naChina - Coastal 0.88 0.76Thailand 0.91 1.29Nicaragua 0.92 naColombia 0.98 1.97Mauritius 1.25 1.57South Africa 1.38 3.80Malaysia 1.41 1.18Honduras 1.48 naGuatemala 1.49 naEl Salvador 1.58 naDominican Republic 1.65 naMexico 2.45 2.19Costa Rica 2.70 naPeru na 1.93Turkey na 2.88Hong Kong na 6.21Korea na 7.10Taiwan na 7.58Israel na 9.35United States 8.89 15.78Source : Data for the textile industries compiled from WernerInternational Management Consultants, “Primary Textiles Labor CostComparison, Winter 2004/2005” Reston, VA; data for the apparelindustries compiled from Jassin-O’Rourke Group, “GlobalCompetitiveness Report: Selling to Full Package Providers” (NewYork, NY), Nov. 2002.Version: December 22, 2005 30
  • 32. Table 2: Comparison of Suppliers Manufacturing and Shipping Costs for MensCotton Jeans and Cotton Ring-Spun T-Shirt Single Pair of Mens Jeans Cotton Ring-Spun T-ShirtGarment Producer / Exporter Mexico Nicaragua Coastal China Mexico Honduras Coastal ChinaFabric Source Mexico U.S. China Mexico U.S. ChinaTotal Fabric Cost per Garment $3.80 $4.23 $3.24 $1.05 $1.10 $1.03 Fabric Price/Linear Yard (incl. Shipping) $2.50 $2.78 $2.08 $0.96 $1.01 $0.92 Fabric Yield/garment (Linear Yds.) 1.5 1.5 1.6 1.1 1.1 1.1Trim Cost per garment (incl. Pocketing/Thread) $1.05 $1.10 $0.87 $0.19 $0.19 $0.17Wage Rate $2.45 $0.92 $0.88 $2.45 $1.48 $0.88Labor Cost (Cut, Make, Finish) $2.35 $2.17 $1.94 $0.44 $0.43 $0.36Profit per Garment $0.72 $0.75 $0.61 $0.17 $0.17 $0.16FOB Cost $7.92 $8.25 $6.66 $1.85 $1.89 $1.71Shipping Cost per Garment $0.04 $0.07 $0.09 $0.03 $0.03 $0.04Total Manufacturing & Shipping 7.96 8.32 6.75 1.88 1.93 1.75Source: Estimates based on Jassin O’Rourke Group 2002Table 3: Comparison of Suppliers Total Landed U.S. Cost for Mens Cotton Jeanand Cotton Ring Spun T-Shirt Single Pair of Mens Jeans Cotton Ring-Spun T-ShirtGarment Producer / Exporter Mexico Nicaragua Coastal China Mexico Honduras Coastal ChinaFabric Source Mexico U.S. China Mexico U.S. ChinaManufacturing & Shipping Cost per Garment $7.96 $8.32 $6.75 $1.88 $1.93 $1.75Relevant Trade Agreement NAFTA CBPTA None NAFTA CBPTA None2003 Quota Cost 0.00 0.00 4.00 0.00 0.00 2.172003 Duty Cost into U.S. 0.00 0.00 1.80 0.00 0.00 0.672003 Total Landed Cost $7.96 $8.32 $12.55 $1.88 $1.93 $4.59Duty Cost into U.S. (Absent Quota Cost) $0.00 $0.00 $1.12 $0.00 $0.00 $0.29Total Landed Cost (Absent Quota Cost) $7.96 $8.32 $7.88 $1.88 $1.93 $2.04Source: Estimates based on Jassin O’Rourke Group 2002 and data on current tariffs.* The U.S. tariff on men’s and boys’ blue denim jeans is 16.6% of the landed value, and 16.5% for cottonT-Shirts.Version: December 22, 2005 31
  • 33. Table 4: Comparison of Suppliers Inventory Related Costs for Mens Cotton Jeansand Cotton Ring-Spun T-Shirt Single Pair of Mens Jeans Cotton Ring-Spun T-ShirtGarment Producer / Exporter Mexico Nicaragua Coastal China Mexico Honduras Coastal ChinaFabric Source Mexico U.S. China Mexico U.S. ChinaTotal Landed Cost Absent Quota Cost $7.96 $8.32 $7.88 $1.88 $1.93 $2.04 Relevant Trade Agreement NAFTA CBPTA None NAFTA CBPTA NoneAverage Cycle Time (in Weeks) 4 5 11 3 5 11Inventory Carrying Cost Rate 18% 18% 18% 18% 18% 18%WIP Inventory Carrying Cost $0.11 $0.14 $0.30 $0.02 $0.03 $0.08Finished-Goods (FG) Inventory (in Weeks) 4 5 6 3 4 5FG Inventory Carrying Costs $0.11 $0.14 $0.16 $0.02 $0.03 $0.04Total Cost $8.18 $8.60 $8.34 $1.92 $1.99 $2.16Value of Apparel at Risk $65 $86 $142 $11 $18 $35 (Dollars/Weekly Single Unit Demand)Source: Landed cost estimates based on O’Rourke 2002. Cycle time, inventory cost, WIP and apparel riskestimates based on HCTAR models (see Abernathy et. al. 2000; Bouhia and Abernathy 2004).Version: December 22, 2005 32
  • 34. Table 5(a): Top 20 Exporters to U.S. in Table 5(b): Top 20 Exporters to EU inMens and Boys Denim Jeans* (2003 Mens and Boys Denim Jeans* (2003Volume) Volume) Unit Unit # Country Volume # Value Price # Country Volume Value Price (000 Doz) ($000) (per Dz) (000 Doz) ( 000) (per Dz) 1 Mexico 10,309 $ 993,344 $ 96 1 Bangladesh 2,449 115,940 47 2 Costa Rica 1,169 68,697 59 2 Turkey 1,674 240,129 143 3 Guatemala 1,082 113,602 105 3 Pakistan 1,417 86,235 61 4 Colombia 801 73,304 92 4 Tunisia 1,072 156,286 146 5 Honduras 694 35,060 50 5 Morocco 661 74,109 112 6 Cambodia 509 44,479 87 6 Malta 588 66,569 113 7 Nicaragua 508 34,137 67 7 Poland 501 71,816 143 8 Dominican Rep. 487 45,447 93 8 Hong Kong 386 40,805 106 9 Hong Kong 449 63,681 142 9 Romania 254 36,783 14510 Lesotho 400 28,360 71 10 Mauritius 202 17,296 8611 Egypt 397 28,391 72 11 Myanmar 182 8,377 4612 Vietnam 375 23,446 63 12 Hungary 166 22,607 13613 South Africa 349 23,433 67 13 Egypt 149 15,116 10114 Philippines 316 30,828 97 14 U.A.E. 148 7,226 4915 El Salvador 305 30,758 101 15 Cambodia 135 11,076 8216 Russia 264 14,189 54 16 Indonesia 128 9,809 7717 Canada 209 33,590 161 17 Malaysia 126 7,747 6218 China 176 23,629 134 18 Macao 117 12,586 10819 Pakistan 161 10,710 67 19 Thailand 110 8,938 8120 Mauritius 130 13,593 105 20 China 93 9,102 98 Sub-Total 19,091 $ 1,732,677 $ 91 Sub-Total 10,559 1,018,550 96 Pct of Total 92% 93% Pct of Total 95% 95%* HTS Codes 6203424010 and 6203424035. Aggregated together, * Bangladesh does not have sufficient weaving capacity to supplythere is a perfect correspondence to the EU 8 digit CN code all of the denim needed for their jeans exports to the EU and must62034231, which is represented at right. pay a duty on those garments not to have undergone two stages of production in the country.Source: OTEXA, compiled by HCTAR Source: EuroStat, compiled by HCTARVersion: December 22, 2005 33
  • 35. Table 5(c): Top 20 Exporters to U.S. inMens and Boys Denim Jeans* (Jan-Aug2005, Volume) Unit # Country Volume # Value Price (000 Doz) ($000) (per Dz) 1 Mexico 7,054 $ 687,269 $ 97 2 China 1,048 78,005 74 3 Costa Rica 776 41,218 53 4 Columbia 720 66,584 92 5 Honduras 616 34,380 56 6 Guatemala 604 70,640 117 7 Lesotho 574 43,023 75 8 Dominican Rep. 527 45,251 86 9 Nicaragua 497 33,925 6810 Bangladesh 472 30,586 6511 Phillipines 337 28,439 8412 Hong Kong 317 43,518 13713 Egypt 317 18,070 5714 Cambodia 301 20,236 6715 Madagascar 229 16,471 7216 Pakistan 222 12,608 5717 Indonesia 156 12,443 8018 Swaziland 152 8,602 5719 Jordan 147 11,136 7620 Haiti 104 8,865 86 Sub-Total 15,169 $ 1,311,269 $ 86 Pct of Total 94% 92%* HTS Codes 6203424010 and 6203424035.Source: OTEXA, compiled by HCTARVersion: December 22, 2005 34
  • 36. Table 6(a): Top 20 Exporters to U.S. in Table 6(b): Top 20 Exporters to EU in T-T-Shirts, Singlets & Other Vests of Shirts, Singlets & Other Vests of Cotton,Cotton, Knitted or Crocheted* (2003 Knitted or Crocheted* (2003 Volume)Volume) Unit Unit # Country Volume Value Price # Country Volume Value Price (000 Doz) ($000) (per Dz) (000 Doz) ( 000) (per Dz) 1 Honduras 39,098 $ 606,700 $ 16 1 Bangladesh 42,674 628,390 15 2 Mexico 32,203 703,916 22 2 Turkey 31,408 1,286,193 41 3 El Salvador 26,668 349,022 13 3 India 7,887 258,238 33 4 Dominican Repu 9,260 159,259 17 4 Morocco 7,784 189,166 24 5 Haiti 4,107 62,620 15 5 Mauritius 5,631 205,348 36 6 Guatemala 4,072 104,000 26 6 China 4,173 165,200 40 7 Canada 3,959 142,189 36 7 Hong Kong 2,980 127,274 43 8 Jamaica 3,812 52,516 14 8 Tunisia 2,775 96,621 35 9 Vietnam 2,626 60,584 23 9 Pakistan 2,741 57,310 2110 Turkey 2,312 75,396 33 10 Romania 2,573 72,207 2811 Pakistan 1,992 47,860 24 11 Egypt 2,374 58,866 2512 Bangladesh 1,929 28,708 15 12 Syria 1,748 29,756 1713 Peru 1,882 73,735 39 13 SriLanka 1,653 48,385 2914 Russia 1,845 30,535 17 14 Indonesia 1,585 52,349 3315 Brazil 1,765 31,730 18 15 Thailand 1,470 43,790 3016 Hong Kong 1,373 39,978 29 16 U.A.E. 1,433 27,970 2017 Egypt 1,215 20,276 17 17 Hungary 1,139 28,862 2518 China 1,104 35,740 32 18 Macao 1,079 41,347 3819 Turkmenistan 1,089 11,018 10 19 Honduras 1,049 14,436 1420 Thailand 1,053 20,077 19 20 Bulgaria 936 26,640 28 Sub-Total 143,362 $ 2,655,859 $ 19 Sub-Total 125,094 3,458,349 28 Pct of Total 91% 87% Pct of Total 92% 91%*HS Code 610910 *HS Code 610910Source: OTEXA, compiled by HCTAR Source: EuroStat, compiled by HCTARVersion: December 22, 2005 35
  • 37. Table 6(c): Top 20 Exporters to U.S. inT-Shirts, Singlets & Other Vests ofCotton, Knitted or Crocheted* (Jan-Aug2005, Volume) Unit # Country Volume Value Price (000 Doz) ($000) (per Dz) 1 Honduras 27,414 $ 448,380 $ 16 2 El Salvador 22,290 274,105 12 3 Mexico 19,671 389,698 20 4 China 8,433 155,761 18 5 Dominican Rep 7,138 120,774 17 6 Haiti 4,578 66,032 14 7 Guatemala 4,554 109,585 24 8 Pakistan 2,635 54,917 21 9 Peru 2,504 102,509 4110 Bangladesh 2,411 31,785 1311 India 2,314 63,432 2712 Canada 2,186 72,936 3313 Nicaragua 1,310 24,607 1914 Thailand 1,182 26,083 2215 Turkey 1,148 33,864 2916 Vietnam 957 31,665 3317 Cambodia 935 23,370 2518 Jamaica 918 17,453 1919 Macau 912 36,017 4020 Indonesia 873 23,438 27 114,363 $ 2,106,411 $ 18 91% 87%*HS Code 610910Source: OTEXA, compiled by HCTARVersion: December 22, 2005 36
  • 38. Table 7(a): Top 20 Exporters to U.S. in Table 7(b): Top 20 Exporters to EU inWomens & Girls Cotton Dresses, Not Womens & Girls Cotton Dresses, NotKnitted or Crocheted* (2003 Volume) Knitted or Crocheted* (2003 Volume) Unit Unit # Country Volume Value Price # Country Volume Value Price (000 Dz) ($000) (per Dz) (000 Dz) ( 000) (per Dz) 1 India 551 $ 39,915 $ 72 1 India 856 47,743 56 2 Philippines 491 29,220 60 2 Morocco 227 20,118 89 3 Bangladesh 319 14,564 46 3 Hong Kong 202 16,214 80 4 Sri Lanka 288 17,847 62 4 Germany 175 20,208 116 5 Thailand 164 8,668 53 5 Turkey 169 15,657 93 6 China 164 22,130 135 6 Bangladesh 156 5,966 38 7 Indonesia 146 8,975 62 7 Tunisia 150 14,905 100 8 Pakistan 134 3,999 30 8 China 133 11,217 85 9 Vietnam 126 5,734 46 9 Belgium 131 11,850 9110 Hong Kong 121 16,364 135 10 France 97 16,166 16711 UAE 84 4,535 54 11 Romania 73 8,514 11712 Cambodia 83 5,093 61 12 Sri Lanka 72 3,818 5313 Mexico 57 3,787 67 13 Italy 61 18,488 30514 El Salvador 32 2,671 83 14 Pakistan 60 2,303 3915 Qatar 30 1,313 44 15 Netherlands 58 7,583 13116 Macau 27 3,022 111 16 Spain 51 8,833 17517 Nepal 27 1,086 40 17 Thailand 46 2,502 5518 South Africa 24 1,223 52 18 Macao 45 3,740 8319 Taiwan 22 2,728 121 19 Indonesia 39 2,663 6720 Turkey 22 1,681 75 20 Portugal 38 5,001 133 Sub-Total 2,912 $ 194,554 $ 67 Sub-Total 2,835 243,490 86 Pct of Total 93% 88% Pct of Total 87% 84%* HS Code 620442 * HS Code 620442Source: OTEXA, compiled by HCTAR Source: EuroStat, compiled by HCTARVersion: December 22, 2005 37
  • 39. Table 7(c): Top 20 Exporters to U.S. inWomens & Girls Cotton Dresses, NotKnitted or Crocheted* (Jan-Aug 2005,Volume) Unit# Country Volume Value Price (000 Dz) ($000) (per Dz) 1 India 623 $ 45,525 $ 73 2 China 619 54,469 88 3 Phillipines 278 17,783 64 4 Bangladesh 256 10,608 41 5 Vietnam 239 12,254 51 6 Sri Lanka 155 10,653 69 7 Indonesia 123 8,357 68 8 Thailand 120 6,348 53 9 Pakistan 76 2,371 3110 Cambodia 75 4,011 5411 Mexico 63 4,070 6412 Hong Kong 27 3,794 13913 UAE 23 1,143 5014 El Salvador 22 2,160 9715 Colombia 21 2,752 13316 Guatemala 12 794 6517 Malaysia 12 874 7318 Italy 12 6,616 55919 Korea 12 2,211 19120 Dominican Rep. 9 215 24 Sub-Total 2,776 $ 197,008 $ 71 Pct of Total 98% 96%* HS Code 620442Source: OTEXA, compiled by HCTARVersion: December 22, 2005 38
  • 40. Figure 1: U.S. Apparel Consumption, by Producer $70.0 Domestic $60.0 Foreign $50.0 Value in $Billions $40.0 $30.0 $20.0 $10.0 $0.0 1989 1992 1995 1998 2001 2004 YearSource: Compiled by HCTAR from data provided by BEA, OTEXA, and the AmericanApparel and Footwear Association (Note: 2003 and 2004 U.S. production data areHCTAR estimates).Version: December 22, 2005 39
  • 41. Figure 2(a): 2004 U.S. Apparel Imports, by Regional Market ShareFigure 2(b): Top 10 Apparel Exporters to the U.S., 2004 2004 U.S. Apparel Imports*: $64.8B China Mexico Hong Kong Asia Big 3 Honduras Other 11% 19% Vietnam Indonesia Asean India 17% Dominican Rep Bangladesh CBI & Mexico 26% Guatemala China 14% $0 $2 $4 $6 $8 $10 2004 U.S. Apparel Im port Value (Bil USD) OAC 13%* Includes only MFA Apparel (i.e., appareldesignated in the Multi-Fiber Arrangement)Source: OTEXA, compiled by HCTARVersion: December 22, 2005 40
  • 42. % of total sales replenished 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 m br /w as s m ho /w si s er un y m de en rw s m pa ea r en nt s s/ su sh it or ts co m at /w s/ s co ba pa at bi m nt s es en s/ g s sh ar or m co ts en atVersion: December 22, 2005 ts s/ an ja ck d m et cl en s ot hi s ng su w ac its om ce en ss s or pa ie nt s s/ sh product categories, 2000 or ts ne ck w ea m r /w jo s gg ot in he g ra pp ar m el en s sh m w irt /w om s s en dr s sk es si co irt ng at s go s/ w ja ns ck et s Source: HCTAR analysis of retailer point of sale data, 2001. an d m ro /w be s s ni gh m tw w en ea om s r en sw s ea sh te irt rs s/ bl ou w se om en s s su its dr es w se /m s w sw Figure 3: Percent of products replenished by major retailer in selected garment om ea en te s rs sw ea gl te41 ov rs es /m itt en s
  • 43. Figure 4: Estimated Value of 2003 Replenishable* Apparel Imports, by Region $5.0 25% Replenishment as Percent Of Total Exports 2003 U.S. Replenishment Imports (Bil USD) $4.0 20% $3.0 to U.S. 15% $2.0 10% $1.0 $0.0 5% Mexico & Other Asean China OAC Asia Big 3 CBI Supplier Region* Estimated replenishment value of imports from a particular country is determined as follows: The valueof imports in each of the product classes defined in Figure 3 is multiplied by the respective replenishmentpercentage shown there. These 25 products are then summed together for a total replenishment value(vertical axis on left) and as a percent of total apparel exports from that country / area (vertical axis onright).Version: December 22, 2005 42
  • 44. Figure 5: Value of U.S. Textile Exports as a Percentage of U.S. Apparel ImportValue for Selected Countries, 2002 45.0% 40.8% 40.0% 35.0% Textile Exports as % of Apparel Imports 30.0% 28.9% 29.0% 25.0% 23.3% 20.0% 15.0% 10.0% 5.0% 1.7% 0.3% 0.0% Mexico Dominican Honduras CBI China Bangladesh Republic Source: OTEXA Website, Data compiled by HCTARVersion: December 22, 2005 43

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