WTO’s TFA will positively impact apparel and footwear logistics

Footwear and apparel is one of the most dynamic and complicated industries in the world. Not only is footwear and apparel manufactured in nearly every country on the planet, every human being consumes its products. More so, footwear and apparel is perishable. Fashions and seasons change quickly. Consequently, their value is impacted and diminished if something prohibits these goods from moving to end-users in a timely manner. Enter the World Trade Organization (WTO) and Trade Facilitation Agreement (TFA), which are expected to be a major employment and income generator for a host of industry sectors in the context of world trade. On November 13, a trade deal regarding food security was struck between the United States and India, thereby paving the way to allow the WTO to move quickly to ratify the TFA. Holding the TFA back during the Ninth Ministerial Conference held in Bali, Indonesia, in early December 2013 were disputes by India regarding specific food security programs maintained by some developing countries. In essence, India believed that the United States was only paying lip service to the WTO food-stockpiling program. India representatives maintained that if they didn’t push for a permanent solution at this stage, the WTO would fail to bring the developed countries to the negotiating table, leaving it unable to protect these programs. The issue was so potent that it carried the risk of undermining the legitimacy of the WTO itself, and thereby the utility of the multilateral trade body. After a four-month standoff, India finally agreed to drop its dispute. “With this deal in hand, we can now finally move forward with an agreement that, according to a recent World Economic Forum study, will save the world economy one trillion dollars,” says American Apparel and Footwear Association (AAFA) President and CEO Juanita D. Duggan.

Huge Impact While it might be difficult to understand how an agreement between the United States and India over food security programs might impact footwear and apparel, it does. “The impact is huge,” says Stephen Lamar, AAFA executive vice president. Besides generating enormous trade opportunities, the TFA is expected to create 21 million jobs worldwide.

The TFA is a series of disciplines that will reduce and eliminate cross border barriers and restrictions that hinder many routine international trade flows. It also harmonizes a number of customs procedures and requirements so that as shippers are trading products across various borders, they encounter fewer restrictions, less regulatory hurdles, and fewer obstacles. Some of those obstacles come in the form of time, paperwork, and additional requirements because there was not efficiency transparency. “For example, if someone is exporting a shipment of shoes from one country to another and didn’t realize there was a testing protocol, or it wasn’t clear there was a testing protocol, he or she will have to stop the shipment of shoes and have them tested, or produce a document that shows they were tested,” Lamar explains. “If the shipper knows about the requirements before the products are to be shipped across the border, they can achieve clearance of the products much faster. But if they do not know about them, or the requirements just took effect the day before, then the shipper cannot clear the goods as quickly.” Further, if the goods sit on docks due to such delays, they cannot be sold as quickly as expected and may lose value. According to statement by AAFA, with a key roadblock now removed, the 160 member World Trade Organization can now move fast to complete ratification of the landmark TFA. This is particularly important to the apparel and footwear industry since these products are some of the most heavily traded consumer goods in the world. “Everybody who wears clothes and shoes will benefit from these savings in the form of lower prices and a wider selection of higher quality garments and footwear,” Duggan says. Reducing barriers helps keep fashion affordable. The TFA is particularly significant to the industry because of the multiple times apparel and footwear products change hands and cross borders. The industry requires sophisticated global supply chains that handle the multitude of finished products and also the pieces (input) that go into making these products: buttons, thread, snaps, pockets, seams, elastic, eyes and hooks, heels, shoe tongues, etc. The list goes on and on. “The supply chain snake all over the globe,” Lamar adds. “We’re talking not only about getting finished products across borders, but also the input back and forth across borders.” Given the fact these products are both imports and exports, the TFA makes it much easier for US brands and retailers that are responsible for trading, production, distribution, logistics and retail to move their goods across borders. More so, the TFA is unique in that it doesn’t follow normal protectionist pressures regarding reducing duties that might accompany trade rules. That’s because many manufacturers may produce a product in a foreign country and import an input into that foreign country from other foreign countries. They may then sell the eventual products to yet another foreign country. “Consequently, everyone benefits from getting the regulatory barriers and customs procedures harmonized and reduced,” Lamar says. Besides giving the global economy a huge boost, observers have also commented that the cumulative benefit of the TFA could be as strong as the cumulative benefit of reducing all tariffs. While this has not been verified, Lamar does maintain that the opportunity for shipping and logistics companies that move not only apparel and footwear products, but other products impacted by the TFA is enormous. “There is greater efficiency and opportunities to trade goods,” he says. “Efficiency awards those competitive companies that can take advantage of this. Consequently, we see tremendous opportunities for logistics and shipping companies.” While the timetable for implementing the TFA is not yet set, Lamar contends that as countries begin to align their domestic procedures with these requirements, the benefits will take effect immediately. US Impact This is good news to the US footwear and apparel industry that is estimated to be worth about $361 billion US. The top countries from which the United States imports most footwear products are China, Vietnam, and Indonesia; apparel: China, Vietnam, India, Mexico, Honduras, and El Salvador. “On the export side, we don’t produce a lot that we export here in the United States,” Lamar points out. “We do produce and export apparel and footwear, but on the export side, companies view it as an opportunity to control production in other countries.” For example, US companies may export from India to China, or from Indonesia to Australia. “We often use the term ‘third country exports,’” Lamar explains. “The interesting thing about the Trade Facilitation Agreement is that it’s multilateral. We don’t view it from the lens of what gets across US borders, but what gets through borders anywhere.” Footwear Issues While the TFA benefits the footwear industry, that sector faces its own set of issues. With 99 percent of all footwear sold in the United States being imported, the AAFA estimates that US footwear firms pay the US Department of Treasury over $2 billion in import duties every year. Combined with mark-ups at the wholesale and retail level, those duties amount to a $6 billion tax on American families, AAFA reports in a statement. Currently, the association is advocating for passage of the Affordable Footwear Act that would temporarily eliminate approximately 35 percent of the over $2.5 billion in taxes paid on footwear imports every year. The legislation seeks to end these expensive imports duties, otherwise known as the shoe tax, on lower- to moderately-priced and children’s footwear no longer made in the United States. AAFA maintains that the average import tax on consumer goods is only 1.4 percent. Footwear duties, on average, are ten times higher than duties on consumer goods and peaks at an astonishing 37.5 percent, 48 percent and 67.5 percent. Many of these exorbitant taxes are left over from the Smoot Hawley Tariff Act of 1930, when the United States still made shoes. Today, 99 percent of all shoes sold in the US are made overseas. If AAFA is successful in convincing Congress to pass the Affordable Footwear Act, the sector should see an additional boost in sales.