Preparing for a Highly Uncertain Future: Stay Resilient and Flexible

While the negative impacts of COVID-19 are receding, the Russia-Ukraine war that started in February this year has created new and difficult challenges to the already fragile global supply chains. The war has caused severe disruptions to traditional logistics routes, impeding the flow of goods and adding to inflationary pressures for energy, food, and other commodities. In the US, for example, inflation remains persistently high, and hit an annualized rate of 9.1% in June, the highest level in more than 40 years.

The apparel and footwear supply chain is under pressure from soaring manufacturing and sourcing costs. Most notably, global shortage of cotton has driven the spikes in cotton prices, which, as measured by the Cotlook A Index (Far East), climbed to an 11-year high in early May, before falling back in recent months due to weakened global demand and increased cotton production.

Many apparel sourcing destinations have also substantially raised minimum wages to support their low-paid workers through the rising cost of living. As of October 2022, 19 out of 23 garment-producing countries monitored by Fung Business Intelligence had increased minimum wages, including Cambodia, China, Egypt, Guatemala, Haiti, Honduras, India, Indonesia, Kenya, Lesotho, Malaysia, Mauritius, Mexico, Nicaragua, Pakistan, the Philippines, Thailand, Turkey, and Vietnam. Among them, Turkey raised its minimum wage twice this year, up 94.7% from the level a year ago, while Haiti raised its minimum wage by 37% from its previous level set in 2019.

On the currency front, the hawkish monetary policy stance of the US Fed to curb inflation has pushed the US dollar, as measured by the US dollar Index, to hit a 20-year high in late September. Over the first eight months of 2022, Asian currencies had depreciated sharply against the US dollar, including the Turkish lira (-28.8%), the Bangladeshi taka (-9.7%), the Chinese yuan (-7.8%), the Indian rupee (-5.5%) and the Indonesian rupiah (-3.9%). Apparel makers may face increasing cost pressures from imported raw materials, as well as price bargaining from buyers.

Meanwhile, heightened geopolitical tensions between China and the US continue to cast a shadow over the global recovery. While the scheduled four-year review of Section 301 tariffs on imports from China is undergoing, the so-called “Uyghur Forced Labour Prevention Act” of the US came into force on 21 June, banning cotton and other products from Xinjiang to the US. Against this backdrop, many fashion companies have continued to make effort to diversify their sourcing base. China accounted for about 37% of US textiles and apparel imports in 2018, when the China-US trade war began. The share has declined to 28% in 2021, and 25% in the first eight months of 2022, while other Asian countries such as Vietnam and Bangladesh have filled the gap. Despite this, China has continued to diversify its export destinations and remained an important sourcing base for apparel.

On the positive side, the re-opening of the world from the COVID-19 pandemic has not only helped ease supply-chain bottlenecks, but also fuelled post-pandemic spending sprees in many countries. Fashion retailers have enjoyed booming sales for the year so far. Nevertheless, consumers are starting to become more cautious amid the persistent inflation, and are likely to cut back on fashion spending in the months ahead.

The establishment of a modern and comprehensive multilateral trading system has made some progress as many bilateral/multilateral free trade agreements (FTAs) have come into effect throughout the year. In particular, the Regional Comprehensive Economic Partnership (RCEP) entered into force on 1 January, which will create the world’s largest free trade bloc in terms of GDP, population, and trade, upon full ratification. Other important developments of the year include: the China-Cambodia FTA came into force on 1 January; the India-UAE CEPA came into effect on 1 May; the US-led Indo-Pacific Economic Framework (IPEF) was launched on 23 May; the UK’s Developing Countries Trading Scheme (DCTS) was launched on 15 August; the EU and India relaunched bilateral negotiations to forge a free trade agreement.

Individual countries have also implemented favourable domestic policies to strengthen their positions in global supply chains, including infrastructure development, tax reductions and other business incentives. For example, China unveiled the National Highway Network Planning to build 79,000 kilometres of highways by 2035; Bangladesh extended the existing reduced 15% corporate tax for the textile sector for another three fiscal years to increase the global competitiveness of the “Made in Bangladesh” brand; the Philippines is preparing to set up a new Regional Yarn Production and Innovation Centre (RYPIC) in Northern Luzon to promote textile research and development activities in the region.

Looking ahead, global economic growth will slow further amid tightening financial conditions triggered by high inflation worldwide and the escalation of the Russia-Ukraine war in recent months. While prices are increasing with no end in sight, consumers may tighten their belts on non-essential spending and businesses may also struggle with increasing costs. Navigating the “new normal” of volatility, apparel supply chains will need to be enhanced with increasing speed, flexibility, and resilience. On one hand, some fashion companies may turn to nearshoring or onshoring for improved speed to market and greater certainty about compliance; others may continue to diversify their sourcing destinations in response to supply chain disruptions.

In any case, Asia will remain a manufacturing powerhouse for fashion products, not only because of its comparative advantage in labour and overhead costs, but also because of the integrated regional supply chains that provide sourcing flexibility and agility. As the largest exporter of textiles and clothing in the world, China will maintain its leading position as a textile supplier for apparel-exporting countries in the region. The “China plus one”, or even “China plus many”, sourcing strategy will remain dominant over the near term and present enormous opportunities to Asia as a whole.