Country Sourcing Report 2023

7 November 2023

Stay One Step Ahead in a Turbulent World

The world economic recovery is not as smooth as expected. When China lifted all travel restrictions earlier this year and re-opened to the world, markets were bullish and consumer confidence lifted, hoping post-pandemic China would drive faster growth for the global economy. China’s economy indeed rebounded; however, the initial growth trajectory lost steam in the second quarter. China’s domestic consumption only regained momentum in the third quarter after the central and local governments implemented a series of expansionary policies.

Inflation rates in various countries around the world have gradually dropped from their peaks in 2022, but have not fallen into target ranges set by their respective central banks. As a result, central bank officials are remaining cautious about rate cuts to prevent a potential inflation rate rebound. In the US and Western European countries, sluggish economies and high interest rates have suppressed import demands, which in turn has hit the export performance of most sourcing countries under our observation.

Excessive freight, raw material, and energy costs have plagued apparel and footwear exporters since late 2020 but have begun to decrease this year and are expected to continue their downward trend in the near future. Notably, the China Containerized Freight Index dropped from an all-time high of 3,587.91 on 11 February 2022 to a three-year low of 851.96 on 28 September this year. These resulted in the easing of cost pressures on apparel and footwear exporters.

On the currency front, the US dollar recovered most of its losses against a basket of currencies dating back to the closing months of 2022, as measured by the US dollar Index at the end of this September. Consequently, Asian currencies saw another decline against the US dollar in the first nine months of 2023, albeit much more modestly than in the same period last year; exceptions are the Turkish Lira and the Pakistan rupee, which have depreciated substantially, by 31.7% and 21.4% respectively year to date. Apparel makers therefore could find imported raw materials more expensive due to the currency factor.

On the other hand, many apparel sourcing destinations have raised minimum wages to support their low-paid workers against increased cost of living. As of September 2023, 15 out of 23 garment-producing countries monitored by our team had raised their minimum wages, including Cambodia, China, Egypt, Guatemala, Honduras, India, Indonesia, Mauritius, Mexico, Nicaragua, Pakistan, the Philippines, Turkey and Vietnam. The range of increases varies from 3.1% to 37.0%.

Global supply chains continue to be disrupted by regional conflicts. The Russia-Ukraine conflict has seen no end, and the latest escalation in the Palestinian-Israeli conflict that erupted this October casts a shadow over the dawn of peace in the Middle East. If the war were to extend beyond their national borders, the Suez Canal will be affected immediately, and subsequently the Strait of Hormuz. This would result in the severe disruption of the container shipping routes from Asia to Europe. The rise in oil prices, a usual consequence of conflicts in the Middle East, will add another layer of complexity to the global supply chain.

Despite increased contacts between Chinese and US officials, the economic relations between the two countries have deteriorated this year. The US Department of Commerce had added 82 more Chinese entities to the Entity List (a regulatory instrument that imposes severe restrictions on the ability of listed entities to access US software and technologies) as of October and released three new rules in October to further tighten export controls of advanced chips to China. US President Biden issued an Executive Order restricting US investment in certain Chinese technology sectors in August. In response, China placed export restrictions on 14 gallium and germanium items, key metals for the production of chips and other electronic components, starting from 1 August this year.

The building of regional trade blocs is still progressing this year despite the escalation of the Sino-US trade war and the fragmentation of global supply chains. The Regional Comprehensive Economic Partnership (RCEP) has been ratified by 14 of the 15 member countries with the Philippines being the latest RCEP signatory to ratify the agreement this June. Amidst the gloomy export performance of sourcing countries, the intra-RCEP trade stands out as a bright spot. For example, in the first nine months of 2023, Cambodia’s exports to the world decreased by 17.8% year-on-year (yoy), year-on-year (yoy), but its exports to other RCEP member countries increased by 23.6% yoy. In the same period, ASEAN overtook the US to become China’s largest export market. On the other side of the world, Mexico and Canada outpaced China to become the US’ top two largest source of imports this year — the first time since 2007 that China did not hold the top spot.

Globally, there are many bilateral/multilateral free trade agreements and arrangements making progress. In October, the European Parliament voted to extend the current Generalized System of Preferences for another four years until 2027 for developing countries to enjoy duty-free or minimum duty on exports to the European market. In June, the UK government introduced the new Developing Countries Trading Scheme to replace its Generalized Scheme of Preferences, offering lower tariffs, enhanced preferences, and simplified trading rules to an expanded group of developing countries. Meanwhile, the India-Australia Cooperation and Trade Agreement entered into force on 29 December 2022 and the Pakistan and Turkey Preferential Trade Agreement entered into force on 1 May 2023, while more trade agreements among other countries have been signed or in the negotiation process.

In 2023, we have seen several manufacturing countries accelerate their digital adoption and cooperation in order to boost the productivity and competitiveness of their firms. Singapore and Cambodia, for example, have collaborated on the Financial Transparency Corridor initiative, which allows financial institutions in the two countries to exchange trusted information about SME (small and medium-sized enterprises) buyers and sellers from their respective countries in order to assess financing support. The enhancement in information flows also helps SMEs to access broader digital trade networks such as the Business Sans Border Proxtera global network, and provides SMEs with greater trade connectivity within the ASEAN and other growth regions.

At the same time, sourcing countries are committed to building greener global supply chains. To encourage cleaner industrial production in non-EU countries, the EU has proposed a levy on imported carbon-intensive products through the Carbon Border Adjustment Mechanism (CBAM). The CBAM entered into application in its transitional phase on 1 October 2023 and initially applies to imports of certain goods and selected precursors whose production is carbon intensive and has the highest risk of carbon leakage, i.e. cement, iron and steel, aluminium, fertilizers, electricity and hydrogen. It will eventually capture more than 50% of the emissions in sectors covered by the EU Emissions Trading System. Textiles and garments, a carbon-intensive sector, would undoubtedly be subject to this tax with the expansion of the scope of the CBAM, according to our experts. Sourcing agents and manufacturers in the sector therefore must undertake sustainability initiatives immediately to reduce their carbon footprint if they want to keep an edge in the global supply chain.

The world going forward would only be more turbulent. Global sourcing enterprises need greater flexibility and resilience as well as the constant adoption of new technologies in order to quickly respond to emergencies. while the three mega trade groupings of north America, EMEA (Europe, middle East and Africa) and Asia are gradually taking shape and the nearshoring trend is strengthening, observers should not jump to the conclusion that China is losing its position as the centre of global supply chains. While countries like Mexico and Vietnam have been gaining ground as sourcing countries, Chinese direct investment in these countries has also been seen rising. Furthermore, Asia sill has a competitive advantage in terms of labour and operating costs, as well as complete regional supply chain capable of providing the flexibility required for sourcing. As a result, this region will continue to be the main production base for fashion products. china, as the world’s most competitive textile and clothing producer, will continue to be an important supplier of machinery, raw materials, and capital for apparel-exporting countries in Asia, playing an indispensable role in the global sourcing chain.

In this turbulent and uncertain world, governments and companies alike must maintain an innovative and growth mindset in order to hedge against the next big disruptions to the global economy and global supply chains.

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