Aug 13, 2019 | By Christine Pomeranz

Managing Global Supply Chains in the Face of Today's Uncertainties

The flurry of external forces confronting the textile, apparel, footwear, and related industries from

  • disruptors like Amazon and Alibaba, to
  • the shifting purchasing trends of the younger millennial and Gen Z consumers influenced by technology, social media, climate change, and social justice, as well as
  • the alternating ebbs and flows of the US-China and many other countries’ trade negotiations on and off the table

is intensifying the responsibility of fashion industry executives to prioritize reformulation or adaptation of strategies to accomplish their companies’ mission.

This article intends to focus on the last factor with emphasis on the recent background and proposed solutions to settle the two-year trade negotiations between US and China.

Recent Background

While reports indicate that some fifty or more companies recently redirected or intend to transfer their supply chains from China to other lower cost producing countries like Vietnam to stem escalating production expenses as well as tariffs that the US and China imposed on each other to induce successful conclusion of their trade negotiations, companies may be better off postponing the move and approaching these challenges by formulating comprehensive corporate strategies that proactively focus on building their internal strengths, overcoming their inner weaknesses, and reaching potential external opportunities, rather than reacting to outward threats they are unable to control.

Although quickly switching the supply chains can seem to positively influence costs in the short-term, there are overt and hidden risks that could adversely impact long term profitability. For example, there are uncertainties relating to a new supplier's ability to timely deliver quality merchandise, perform economies of scale for the larger brands, and exactly follow customer specifications, which Chinese suppliers already have been known to provide. In addition, there could be infrastructure, cultural, legal, logistical, financial, and social issues in the new producer's country that may be inconsistent with a buyer’s own expectations, values, and mission. Further, other external forces, such as a corresponding increase in wages resulting from the collective expanded business from all companies similarly realigning their supply chains might result in increased production costs. Likewise, with the US administration narrowly focusing on the balance of trade in goods, it would be reasonable to see the threat of Section 301 or 232 tariffs on other trading partners, as diminishing the benefits of supply-chain relocation (just like the threat the administration has signaled for Vietnam, Mexico, etc.). So, by simply shifting (as opposed to strategically diversifying) sources of raw materials or finished goods, which could amplify trade (and possibly the trade deficit) between the US and the new supplier's country, one might also unwittingly be leading the US administration to levy new tariffs on goods being imported from that country. Thus, the decision to restructure the supply chain should include an added scenario that calculates how much the company can withstand the negative effects of tariffs and other trade barriers that could be imposed in the new supply chain.

Urgency for Agreement Completion and Enforcement

The urgency of fruitful negotiations has become more tangible as other developments arise. For instance, while the US-China trade negotiations have started and stalled since the new US administration took office, other countries have successfully concluded multilateral and bilateral agreements (Comprehensive andProgressive Trans Pacific Partnership or CP-TPP, which includes the TPP countries less the US, EU/Japan, EU/Canada, EU/Mercosur, etc.), giving them an advantage. As a historical example, after Canada enforced a free trade agreement (FTA) with Chile in 1997 (updated in 2019), Chrysler temporarily shifted from the US to Canada the production of vehicles intended for export to Chile until the US concluded its own FTA with Chile.

More compellingly, although the US as well as trade are important to China’s economic growth and its OneBelt One Road Initiative (OBOR), prioritizing and spreading its economic expansion strategy to certain parts of Asia, Europe, and Africa, has met implementation hurdles, OBOR, in addition to other strategic and cultural aspects discussed below, seems to be driving its actions. To demonstrate, China’s response to US’ provocative negotiations, at least from the Asian perspective, are considered relatively measured. Chinese tariffs, and subsequently non-purchases of agricultural products, seem to have been specifically directed to farmers and others perceived as predominantly important supporters of the US administration’s policies. While farmers are receiving subsidies, some of them reportedly prefer to nurture lasting customer relationships because they risk losing them permanently to other agriculturists in Brazil, Argentina, India,Canada, etc. Likewise, China supposedly refused cherry shipments from the US and sourced them instead from countries involved in its OBOR initiative.

Yet, while trust in the US as a global leader has been dissipated by inconsistent policies that conflict with those of its allies, there is an opportunity for the country to come out ahead in the negotiations because several countries involved in infrastructure projects under OBOR have been burdened by cost overruns and South East Asian countries are distrustful of China’s intentions in the South China Sea area.

In addition, while the US, owing to its proportionately larger purchase of Chinese goods than China's import of US goods, at first seemed to have the upper hand in the so-called “tit for tat” strikes, China has shown that it may have a deeper cache of tools it can use to fend off US’ threats and actions. A case in point played out on Monday, 5 August, when China allowed market forces to depreciate the renminbi more acutely than its 2% daily movement limit. While the US Treasury labeled this move as currency manipulation and is subject to discussion with the International Monetary Fund (IMF) for remedies, it is unlikely that the IMF will agree to the label because the institution itself just declared the renminbi to have a fair value, it was the market forces, i.e. supply and demand, that brought the renminbi value down, and it did not meet all of the criteria set by the US 1988 Omnibus Foreign Trade and Competitiveness Act and the 2015 Act. All the same, importers must be prepared for the possibility that the designation of China as a currency manipulator could lead to counter-vailing investigations and duties.

Further, according to USGS National Minerals Information Center on 12 April 2017, China is the single largest source of mineral commodities for the United States, particularly for resources like rare earth elements, germanium, and industrial diamonds. In fact, of the forty-seven mineral commodities that the United States is more than 50 percent reliant on foreign sources, twenty-four came in part from China. Though not explicitly mentioned, China could possibly restrict its export of rare earth minerals used in manufacturing cell phones, computer memory, DVDs, rechargeable batteries, magnets, fluorescent lighting, ceramics, glass making/polishing, military equipment, etc. since these elements are most commonly found in China, it is difficult to mine, and it cannot be substituted for the time being because they “have unique magnetic, heat-resistant, and phosphorescent properties” not present in other elements.

Moreover, the BRICS New Development Bank, based in Shanghai and charged with providing soft loans for infrastructure projects in these member countries, announced this month its intention to shift from dollar to local currency funding, suggesting the collective member countries’ intention to diminish the importance of the dollar in international transactions. This is also consistent with China’s efforts to increase acceptance of the renminbi as an international reserve currency as signified by the currency’s inclusion in IMF’s special drawing rights.

While there is an option to wait for the 2020 US presidential elections, in both main parties, there are no major candidates emerging to champion global trade and there does not seem to be a nuanced understanding of the different countries involved in negotiating trade agreements. For example, as the world’s second largest economy, China expects the US to respect it in the world stage while the poorer countries may not yet be able to comply with US salary, workers, and environmental standards. In addition, there is a failure, both within the current US administration and the opposition, to recognize the importance of the service sector in international trade. While most of the rhetoric focuses on the trade deficit in goods, scant attention is paid to the surplus the US maintains in services. If trade policy continues to be adversarial, the US may also find fewer international buyers of its services.

Proposed Approach

While we agree that China’s intellectual property violations of intellectual property rights and other unfair technology transfers, subsidies, and market entry need to be addressed, successful resolution of the impasse depends on whether the negotiators, and ultimately the US President, recognize the significance of blending US/western and Asian/Chinese styles as it is highly unlikely that the Chinese will give in unilaterally to the US and conversely. Negotiations are successful when each side recognizes the limitations of the other party and when each side recognizes the impact of culture on negotiations. It is widely recognized that Chinese tend to view contracts as documents that are intended to be renegotiated as opposed to the traditional western view that such agreements serve as a basis for compliance with the terms. Successful entities in China prepare for this and react to “renegotiation” calmly and continue the process to achieve their goals. Those who are not successful walk away from the table asserting a breach. From the Asian perspective, walking away from the table often results in withdrawing from the transaction. In addition, the western perspective tends to view the negotiations step by step while Asians tend to agree only to the final terms at the end of, not during, negotiations.

Yet, this is exactly what transpired this past May. Believing there was the basis for a “contract”, the administration reacted not calmly but with escalation when their Chinese counterparts walked back on part of the agreement. The wise thing would have been to go back to the table and resume negotiations instead of the US publicly airing its grievances, essentially retreating from the table.

Against this backdrop, our recommendations for a constructive outcome of the US administration’s efforts to elicit fair trade with China are as follows:

  1. Establish certainty in the US policies by building consensus among the United States’ allies, who agree that tangible steps addressing China’s World Trade Organization (WTO) violations need to be planned, coordinated, and executed, could be more effective in pressuring China to produce the intended result (Chinese Intellectual Property Policies, Cato at Liberty, Cato Institute, January 2,2018). Although there are recent signs that the USTR is quietly eliciting cooperation from its counterparts at the European Union and Japan, the efforts need to be more concretely and comprehensively manifested. By unilaterally imposing tariffs on China, the US is isolating itself from its allies and has opened the American economy, companies, citizens, and residents to increased costs because it is the American importers who pay the tariffs and larger deficits from production further shifting to other lower cost but less efficient producing countries at higher prices. It has also invited retaliation from China in the form of tariffs, stoppage of agricultural purchases, and renminbi depreciation. Indeed, even prior to the announcement of the initial 301 tariffs, President Xi Jinping had been very effectively articulating both to the Chinese audience and to the world China’s position as an advocate of a rules-based trading regime. The US’ unilateral imposition of tariffs simply adds ammunition to this narrative. Together with the increased cost of imported components, the retaliatory tariffs are shrinking the markets for U.S. goods. China is also lowering its tariffs on products from other countries, giving competitors to US companies an additional advantage while American producers are shifting production outside of the US to avoid increased cost on imported raw materials.
  2. There is an opportunity for the US to lead a win-win negotiation since both the US and China value intellectual property protection. According to the World Intellectual Property Organization of the United Nations, excluding North America, Asia led the world in intellectual property filing, accounting for almost two thirds of patent filing alone in 2016 (WIPO IP Facts and Figures Report 2017). China received more patent applications than the next four countries, including the US, combined and continues to have the largest number of applicants for trademark protection. We recommend negotiating from the Chinese perspective, highlighting the value that respecting the World Trade Organization’s guidelines would bring to both countries. China would more readily respond to positive rather than confrontational approaches, which could elicit harmful actions for China to save face or dignity rather than the desired outcomes advantageous to the US (The Chinese Negotiation by John L. Graham and N. Mark Lam, Harvard Business Review, 1 October 2003). In fact, Asians rarely, if at all, reward contentious behavior because acquiescing to such an approach could encourage it again in future negotiations. US products, be they consumer goods, industrial goods, or services, are extremely well received in China because the general public perceives them as superior to domestic brands. However, the Chinese state and the controlled social media platform is extremely effective in shaping public opinion, with the very plausible outcome that public opinion will turn against US products, allowing lower quality domestic brands to gain market share, at the expense of American products. Korea’s Lotte and France’s Carrefour are examples of the power of the Chinese state media effectively manipulating the Chinese consumer.
  3. The US Commercial Service’s mission is to “promote economic prosperity, enhance, job creation, and strengthen national security through a global network of the best international trade professionals in the world.” The proposed tariffs could have a two-fold effect that would be detrimental to achieving this mission as follows: Tariffs on equipment to manufacture in the US could impede growth in US manufacturing by increasing its costs and reducing productivity. For example, the list of goods subject to the existing and proposed Section 301 tariff includes products classified under Chapter 84 of the Harmonized Tariff System of the US. Such products include manufacturing equipment, such as textile spinning machines, textile printing machines, machinery for producing textile yarns, circular knitting machines, warp knitting machines, flat knitting machines, braiding and lace braiding machines, and embroidery machines important to the large fashion and related industries in the US. This serves to impede rather than encourage manufacturing in the US, not to mention that the proposed list to take effect on 1 September and 15 December now includes consumer goods.

    In the past twenty-five years, US exports increased five-fold from $224 billion to more than $1.1 trillion. About one of every five or twenty per cent of all jobs in America's manufacturing sector depends on exports, whose workers typically receive wages eighteen per cent higher than the national average. Manufacturing jobs that went abroad were replaced by service jobs, such as compliance, logistics, etc. In addition, according to the Financial Times, a study by the Center for Business and Economic Research at Ball State University indicated that most manufacturing jobs lost resulted from automation rather than trade. Thus, creation of jobs in the United States might better be addressed by studying the effects of technology and changing consumer tastes than on international trade, which on the whole is not the main cause of job displacements (Manufacturing Discord by Daniel J. Ikenson, Trade Briefing Paper No. 29, Cato Institute, May 4, 2010). Preparing American workers to adjust to present and future jobs would help position the US as the leading supplier of high skilled workers to a more competitive global society.

In conclusion, a more effective means to protect the interests of US entities is a collaborative approach with our trading partners, all of whom share our concerns about market access, protection of intellectual property, and China’s hesitancy to implement its commitments under the WTO. Enlisting our trading partners to file joint complaints in the WTO instead of the US by itself can draw a more productive result. While the United States has won more of its cases brought to the WTO lately than it did in the past, there is some validity to the concern that adjudication in the WTO takes so long that even when an aggrieved nation is victorious, the damage done is irreversible. That being the case, the United States should lead the process of improving this aspect of the WTO. With China’s growing global power, this multilateral agency could ensure America’s leading position as the principal example of fair and practical global trade practices.

While China may never fully embrace the concept of intellectual property protection when the “victims” are foreigners, when the victims are Chinese, they will. Thus, we advocate enlisting the support of major Chinese entities like Alibaba, Tencent, Haier, TCL, Bosideng, Lining, Pechoin as potential “victims” in the future without fair protection from the Chinese state.

Over the Long-term

Regardless of the outcome of these negotiations, the magnitude of problems and corresponding solutions is so immense that fashion companies should plan accordingly. As suggested earlier, actions must align with strategies that reflect the mission of the company. Overtime, to complement importation and mitigate some of the risks associated with it, fashion industry leaders might form a coalition of representatives of stakeholders and work with the US administration to consider the following thoughts on facilitating manufacturing in the US:

  1. Ethical manufacturing through blockchain, energy conservation (laundry, drying, ironing), rechanneling waste to other use, etc.,
  2. Innovation (3D/4D printing, augmented reality, development of textile technology, etc.),
  3. Playing up speed to market/smaller inventory/language advantage/intellectual property rights protection,
  4. Focusing on luxury as well as small- to medium-sized businesses (SMEs), which have been the main engines of economic and employment growth,
  5. Coordinating federal and state with financial and training support, and
  6. Providing incentives for industry and trade associations to work alongside universities on the above referenced opportunities.

About the Authors:

Lawrence Delson is Founder and President of Delson International Inc. and is Adjunct Assistant Professor at Fashion Institute of Technology’s International Trade and Marketing program. He is also CoChair of the New York District Export Council’s Outreach Committee.

Christine S. Pomeranz is Chair of Fashion Institute of Technology’s International Trade and Marketing program. She is also Chair of the New York District Export Council’s Legislative Committee.