As America continues to head toward a recession, many will begin to question exactly how the fashion and textiles industry is affected by global trade in 2008.
Approaching recession effects on Free Trade and fashion/textiles industry
Special to FashionIndustryToday.com
April 15, 2008
by Katherine Olsen, San Francisco
The United States has recently found itself approaching what some economists fear could be the next recession, and it’s impacting many industries negatively in terms of profit and human capital. Among the industries that would be hit by the recession is the U.S. fashion and textiles industry, as they outsource manufacturing and labor, as well as import raw materials and other products from foreign countries. As America continues to head toward a recession, many will begin to question exactly how the fashion and textiles industry is affected by global trade in 2008.
International trade blew up in the 1990s and 2000s with the creation of many international trade agreements, including NAFTA in 1994 and DR-CAFTA in 2004, which allow free trade across borders. The organization created to monitor international trade is the WTO. Established in 1995, the WTO now has 151 member countries. These agreements and organizations all facilitate free trade. The one concept that coincides with free trade is comparative advantage. Political science professor, Daniel W. Drezner, from the University of Chicago, says of comparative advantage, “the standard case for free trade holds that countries are best off when they focus on sectors in which they have a comparative advantage—that is, sectors that have the lowest opportunity costs of production.
Allowing countries to specialize accordingly increases productivity across all countries. This specialization translates into cheaper goods, and a greater variety of them, for all consumers.” In other words, the United States and its foreign trade partners should benefit economically from international trade because of comparative advantage. There is opposition to free trade in the form of protectionism. Protectionists take the stance of believing trade with foreign countries should be limited in order to protect American jobs the country’s economy. Protectionism is now on the rise because of an increased fear of terrorism and the recent economic downturn.
Experts agree that the United States economy is currently under stress. With the possibility of a recession looming, American consumers are beginning to cut back on their spending. Socit Gnrale economist Stephen Gallagher states about the current economic situation, “Housing is very weak, gas prices are soaring and lately job growth has sputtered. Additionally, the news from financial markets and the discussions of bankruptcy for a handful are fanning concerns among consumers.” A recent spike in unemployment also adds to the apprehension of Americans spending. The Department of Labor recently released statistics that showed “retailers cut payrolls by a seasonally adjusted 14,100 workers in February as the overall economy lost 63,000 jobs, the worst loss in five years.”
So what effect does this have on consumer spending within the fashion industry? Many believe that in the up and coming months, shoppers will tend to purchase necessary goods over luxury or discretionary items. Some optimists however, think that women shoppers, especially, will have a tendency to look for savings on everyday items in order to provide themselves with luxury products, such as a massage or that $100 pair of stilettos, yet those optimists maintain that the fear of a recession is still very present in shoppers’ minds.
CL King retail analyst Mark Montagna says companies like Limited Brands Inc. and Coldwater Creek Inc. are cutting back on plans for store expansion. Ann Taylor Stores Corp., Talbots Inc. and Pacific Sunwear of California Inc. have also planned to downsize this year by closing some of their U.S. locations. Discount retailers, however, are picking up more business with the onset of a recession. USA Today journalist Jayne O’Donnell has observed, “The weaker the economy gets, it seems, the more some discounters benefit and the bleaker the outlook for their higher-priced competitors. That trend burst into view during the holiday season, when Wal-Mart and some off-price retailers outperformed full-price stores.”
The economy hasn’t just effected the profitability of the apparel and textiles industry, it’s also resulted in a change of current fashion trends, where the past has been reinterpreted into modern designs. The look of the past is now being used in many different ways by designers through their latest collections. Marshal Cohen, a chief retail analyst with market research firm, the NPD Group, says, “We have certainly reached the time where people want to feel good again, to go back to Camelot and pre-Camelot days. Boomers especially are harkening back to a day before there were issues.” The issues Cohen is referring to includes terrorism, global warming, drugs and the Iraq war.
Ruth La Ferla, journalist for the New York Times Style section, describes that, “In collections for fall that American designers plan to present starting on Friday, when another Fashion Week begins in New York, many will jettison the baby-doll dresses, the thigh-high skirts and the disco boots of the spirited Warhol years — touchstones of recent seasons — in favor of a meticulously tailored look that evokes the White House years of Jacqueline Kennedy.” The past provides comfort to Americans during such an uncertain time.
Price also plays a role in the design of current trends. Robert Burke, a New York retail consultant, says that now is the time to come out with avant-garde, over the top designs. “Too conservative an attitude is not the best approach,” he says. “People are not going to be interested in paying luxury prices for basics.”
Analysis
By taking the country’s current economic position into consideration then using it to analyze the strengths and weaknesses of free trade within the U.S. fashion and textiles industry will indicate different opportunities and threats that exist in the market today.
Strengths
Daniel Griswold, director for the Center for Trade Policy Studies at the Cato Institute, asserts that international trade is not connected to recessions seen through the United States’ history. Research shows that as global trade has become more the mainstream, the recessions that America has experienced since the end of WWII have become milder, and now some economists consider it as a way of moderating the business cycle. The fact is free trade allows retailers to import products at a lower cost, therefore increasing that retailer’s profit. Restrictions on free trade limit the opportunities that businesses in the U.S. have to operate in a global market, because it prevents those businesses from making use of all available resources.
Quotas on 34 Chinese apparel and textile import categories are set to expire are the end of this year. Gary Ross, former corporate vice president of global manufacturing and sourcing for Liz Claiborne Inc., who now owns his own consulting firm, GERoss Consulting, says this will have a positive impact on U.S. companies.
Mark Jaeger, senior vice president and general counsel at Jockey International, has feelings similar to Ross. He stated that companies are anxiously awaiting the removal of quotas on the specific apparel and textile imports from China. Jaeger explains, “They resulted in additional costs and uncertainty in sourcing from China.” He says the removal of quotas will be a net positive for companies, but not “quite as dramatic an adjustment” as in 2005 when the quotas were removed and resulted in a gush of Chinese imports by 1,000% in many apparel categories. This means that American apparel companies should remain optimistic that the elimination of quotas at the end of 2008 will bring some of their costs down.
Another hot button issue that is currently affecting the U.S. fashion and textiles industry is cotton subsidies. Oxfam released research which shows “that a substantial reform of American cotton subsidies could lead to increased income to feed an additional million children for a year or pay school fees for at least two million children living in extremely poor West African cotton growing households.” In 2004, the WTO concluded that United States cotton subsidies does violate global trade rules, and the DOHA round in progress is now at a standstill on the U.S. cotton subsidies issue. Oxfam says that a subsidy reduction would have a negligible effect on consumer prices.
The cotton subsidies controversy is just one example of how today’s consumer is more human rights conscious and environmentally concerned. By becoming more socially responsible, retailers who endorse the reduction of subsidies or provide aid to those suffering in third world countries affected by subsidies may attract new customers.
Weaknesses
They say nothing is ever truly free. So when the term free trade comes to mind, one wonders, at what price does it come? Free trade encourages comparative advantage, which allows various countries to specialize in the sector that offers the lowest opportunity costs of production. Perhaps one country has an abundance of a type of natural resource; they then ideally would use that resource in manufacturing and exporting as one of the major contributors to the country’s GDP.
Global commerce, however, tends to overlook things like “labor protection, environmental standards and job safety,” says Governor of New Mexico, Bill Richardson. The rise of world trade in the 90’s and 2000’s also brought about the rise of sweatshops, child labor, and dangerous product recalls, made on everything from poisonous pet food sold in stores in the United States to dangerous car tires to lead paint on the popular Thomas & Friends wooden toys—all manufactured by factories in China. Some experts are worried that the removal of the quotas on China at the end of 2008 will cause many of these problems to worsen.
The above mentioned labor violations and recalls can easily injure the livelihood of a retail operation, because they can result in direct profit loss for the business. One example is Mattel Inc. In late 2007 the company had to recall a few million toys that had been produced overseas at a low cost factory in China. As a result, Mattel experienced an onslaught of bad publicity and suffered a loss in profit; especially since the recalls occurred right before the holiday season.
As mentioned before, the modern American consumer strives to be more ethical, which means they’re much more knowledgeable about where the product was made and how eco-friendly the materials used to make it are. Retailers must be careful, especially with the upcoming removal of the quotas on China, to be informed about whom they choose to do business with in the international market.
Opportunities
With a possible recession approaching, retailers, designers and popular brands must consider using new methods of attracting business in today’s weak economy. Consumers are holding off on the spending, and its driving them to shop at discount retailers such as Target and Wal-Mart. Retail analyst Jeff Stein says, “Off-price retailers are in a ‘customer-gathering mode’” and that “Department store customers are able to shop in a different venue and get the same brands. (T.J. Maxx and Marshalls) are gaining exposure to non-traditional customers.” These discount retailers offer cute, popular fashions—not luxury garments by any means, but similar in style—at much lower prices, which is just too hard to pass up for shoppers during this economy.
Michael Niemira, chief economist of the International Council of Shopping Centers advises that “Companies ‘need to be more promotional’ to cater to increasingly cost-conscious consumers.” Customers want to buy clothing pieces that are innovative and look expensive at a price they can afford. Niemira, however, warns that “No retailer is totally immune, whether you are luxury or the lowest of the low—every retailer is affected in some way.”
To draw in customers, a retailer may also think about selling fair trade products. In a fair trade transaction, manufacturing would be outsourced to an impoverished foreign country at a fair price, which would ultimately push the nation to become economically self-sufficient. It’s viewed as a way to level the playing field between large and small countries in the global market. Fair trade helps to alleviate human rights violations by ensuring that farmers in the third world and overseas factory workers are paid fairly.
Fair trade is not just an economics model, its also becoming quite the trend. In cities nationwide, coffee shops and boutiques that offer fair trade products are becoming more popular with young people and the “hipster” crowd . Emily Santamore is the founder and a designer of Moral Fervor, which is a line of eco friendly yoga clothing “produced sweatshop-free in Portugal.” Santamore says that boutiques regularly ask about the origins of her products, and for her customers, she added, fair trade assurances are “becoming almost necessary.”
Threats
Society today has become more environmentally conscious, especially with the release of films like “Inconvenient Truth.” Global warming used to be the last thing on America’s mind, but now, the threat of melting icecaps has become a very real one. Global warming is caused by greenhouse gas emissions, which are much higher now as a result of human activities, like mass production in factories and other industrial processes. It’s vital to take precautions when conducting business abroad, to avoid becoming an enabler of environmentally dangerous practices.
For the reason ethical consumers are shifting towards fair trade products, they at the same time wary of companies who contribute to the problem. In a shopping survey conducted last September by branding agency BBMG, more than half of those surveyed said “they were looking for certification seals on green claims to feel confident about their purchases.” Raphael Bemporad, a partner in the agency, comments on the results of the survey. “It is no longer O.K. to slap a green label on something and think that is acceptable to consumers. If you just put an eco-friendly phrase on something, you are risking a backlash from more savvy consumers.”
In the past, the global trade model allows companies to somewhat cover up their unethical actions, where the sea provides quite a barrier between American retailers and their overseas business partners, to the point where one entity might not always know what the other is doing. In the future, the effects of substantial environmental damage are not easily undone; it will create a price increase in numerous industries worldwide.[]
Katherine Olsen is a business writer at FashionIndustryToday.com.