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US and Global Footwear Sourcing, Second Quarter 2017
2017/11/13 15:27:10 Source: Global Footwear Partnerships Author:peter 点击率:
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Economy, Politics, Trade Policy and Shoe Market

US Economy. The US economy picked up steam in the second quarter of 2017, growing at a 2.6% annual rate, far better than the anemic 1.2% growth rate recorded for the first quarter. The second quarter upswing follows the pattern seen in each year since 2014 – slow start to the year followed by a strong middle. If this pattern continues, the rest of 2017 may produce slower growth as has occurred in recent years in the second half.

• Hiring continues to be encouraging. The US has added an average of some 180,000 new jobs per month so far in 2017. Although this is lower than the 200,000-monthly new job creation average of 2016, the US did create over 200,000 new hires in July. The low unemployment rate of 4.3%, however, suggests that there may little room for large workforce expansion.

• The aging US population (more and more folks are retiring) and the failure of a pickup in productivity (no one is sure why this is happening), suggests that a 2.0% growth rate for all of 2017 is likely, the same disappointing growth rate that prevailed for years under Obama.

• The sustained downturn in sales of new autos – heretofore a main driver of growth – is an ominous sign of consumer weakness.

• Trump’s pro-growth policies -- tax cuts and infrastructure spending – might boost economic activity above the 2.0% growth rate, but when and to what extent they will be implemented is not clear, especially considering the failure of health care reform in the Senate (this portends trouble passing the rest of his agenda in the Congress).

• The US stock market is at giddy all-time highs. One explanation for this seeming anomaly, given the slow growth, is that business is still strong on Trump, mainly because he does not attack and regulate it as Obama did with relish for eight years. Corporate earnings are also robust, owing to strong international sales, a weakening dollar and deep cost cutting.

Politics. The White House chaos gets more bizarre every day. Trump seems to be operating with little or no strategy, projecting a ‘fee for all’ atmosphere that is alienating friend and foe alike in the US and internationally.

• The Senate Republicans (GOP) could not muster the 51 votes on their side to pass any form of health care reform, despite their seven-year pledge to end it. This leaves Obama Care in place and without reforms, parts of it may colipase. This is a disgrace – revealing apparent unbridgeable differences among GOP senators, some of whom are pro-business free-marketers, while others are populist or closet Democrats worried about reelection. Trump’s ham-fisted lobbying did no good and it is a big loss for him too.

• Trump’s favorite line on his popular reality TV program, ‘The Apprentice’, was ‘Your fired!’ Seems he still likes the feeling: he has now axed seven top appointees, including most recently, his chief of staff and new director of communications (who lasted 10 days).

o His new chief of staff at the White House is General John F. Kelly, who moves over from head of the Department of Homeland Security. He has a lot of Washington experience with Congress and other administrations.

 His big challenge is Trump – can he get him to be more disciplined, consistent and competent in decision making. Only time will tell, but Trump is running out of chances.

• Congress now wants to move to tax reform.

o Good news is that the border adjustment tax (BAT), pushed by the free trade leadership in the House, is now officially dead. (The BAT would have added a 20% tax on all imports while giving exports a 20% cost reduction.)

 Trump’s team got the House to drop it in the opening negotiations.

 Trump wants to keep the prospect of unilateral extra duties for specific countries as a trade lever, something he would have lost if an across the board BAT were adopted.

o The goal is to cut the world’s highest corporate tax rate down from 35% to somewhere around 20%, and maybe realign individual rates lower.

 How the lost revenues will be made up is the key question and with the BAT out, there is no clear answer.

o The divisions among GOP senators on tax are at least as deep as on health care; not at all likely that any Democrats will be allowed to participate in writing the new tax regime. So, the same tough political struggle of health care looms for tax reform as well.

 Not sure this can be accomplished this year, or indeed, ever.

 The last major tax update was in 1986; lack of political consensus has been absent for 31 years and there is no indication that this has changed much.

Trade Policy. The lull in trade action by Trump may be coming to an end. The long-awaited renegotiation of the North American Free Trade Agreement (NAFTA) will start later in August and Trump is now moving with more aggressive trade initiatives against China, following his disappointment with China’s weak intervention on the North Korean nuclear/missile standoff.

• NAFTA may morph into a messy round of talks. Both Mexico and Canada are poised to be tough, as both have powerful local constituencies that will resist US demands.

o Agriculture issues both north and south of the US border will be especially difficult – Canada with lumber, dairy, etc. and Mexico with corn and others.

o Autos will also play a big part, as most of the US deficit with both countries is due to the massive cross border trade in parts, technology and finished product. One parts supplier noted that it is not uncommon for a part to cross the three borders up to seven times before it settles in a finished vehicle.

 Rule of origin (ROO) changes are likely here, although this could be a complicated revamp. Nevertheless, several of the key auto firms are prepared to work with Trump to get it the way he wants.

 They need him to fix the ghastly environmentally skewed mileage standards mandated for new cars over the next decade – an issue of more importance than NAFTA ROO.

o There is also likely to be a lot of the Trans-Pacific Partnership (TPP) included in the NAFTA update especially on e-commerce, intellectual property, etc.

o Perhaps the most controversial issue could be a US demand to eliminate or water down the dispute settlement procedure which the US claims undermines enforcement of its unfair trading rules.

 This is critical for Canada especially for its lumber, dairy, etc. sectors and was the last and most contentious issue in the US-Canada FTA that preceded NAFTA.

o On footwear, the US importers seem poised to seek a supplemental ROO to be added to the current NAFTA rules, perhaps along the lines agreed to in the TPP deal.

 It is not yet at all clear if the US will open the footwear ROO, as it could become a complication if one of the other parties is not happy.

 Otherwise, shoes are not likely to be affected in the talks.

• China trade policy seems poised to move into a more active phase.

o The failure of China to rein in North Korea’s nuclear/missile program may now open China to more trade based pressure from the US.

 Nevertheless, the Korea issue is still more important to Trump and China could play this card further if the trade issue gets too troublesome, or at least some US businesses think so.

o Perhaps the most worrisome development is the announcement that Trump has launched a Section 301 investigation of China’s intellectual property regime – US and EU interests have complained bitterly in recent years that China forces them to share secrets with their China partners, establishes rules that exclude them form lucrative projects (reserved for favored local firms), etc. – in violation of WTO rules.

 There is not much new is this and the US has filed more than a dozen cases in the WTO against such practices by China.

 The problem is that China has in one way or another dodged these rulings, leaving the foreign businesses unsatisfied.

 It is also clear that the WTO dispute settlement process is cumbersome – takes years – and the remedy for a successful case is a directive to the losing side to fix the problem. If this does not work, the offended party must then seek permission to retaliate; another procedure that takes years.

 One possible reason that Trump is using Section 301 is that it gives him the legal authority under US law to impose retaliation directly without recourse to the WTO.

• The downside of this is that China could retaliate in kind, also without recourse to the WTO – this is what a ‘trade war’ would look like.

• Another downside is that the US could retaliate on any import it wanted from China – even those that have nothing to do with the offending practice in China.

o In the runup to China joining the WTO in 2001, the US threatened such retaliation including against some footwear from China, although negotiated settlements precluded implementation of the proposed huge duties on shoes.

• The national security investigation into China’s unfair trading of steel and aluminum should have been completed by this time. Once the announcement is made we expect that some new regime against these products will follow lengthy talks.

o The US may be waiting for the G-20 steel investigation to mature. No doubt that the prospect for curbing China would be enhanced by a broad international consensus.

• There is also concern in the US that at least some of the $347 billion US trade deficit with China in 2016 was due to China’s high regular duties. Agriculture, food stuffs, and even clothing and leather shoes have high duties, although none are as high as those imposed by the EU on dairy products.

o China has not broadly reduced its regular duties since it joined the WTO sixteen years ago and its economy and industry are vastly more developed now.

o There is no doubt that China anticipated reducing its regular duties in the WTO Doha round, but with the failure of that initiative, China has held back.

o It thus seems possible that the US may pressure China to lower its duties unilaterally as part of a broader trade negotiation with the US and possibly with others like the EU.


 

[US, EU and China Duties table]

US Footwear Sourcing Update.

• Total Footwear Imports. Overall, US shoe imports showed some strength in the first half of 2017, managing a 0.5% increase in pairs, an improvement over the decline of 2.4% in the first quarter of this year and a marked bettering of the decline of 6.3% recorded for the first half of 2016.

o While niche suppliers – Bangladesh, Portugal, Ethiopia, and Burma – recorded double digit increases, only Vietnam with a 9.7% increase, among major suppliers, showed a strong performance.

o Nearly all other major suppliers, including China, basically held steady during the first half of the year in their pairs shipments to the US.

o Indeed, China’s market share fell only marginally to 72% from the 73.2% recorded for the first half of 2016.


 

[US Footwear Imports Jan-June 2017]

• Leather Footwear. For the first six months of 2017, US imports of leather shoes fell by 7.5%, slightly less than the 10.1% decline reported for the first six months of 2016. This represents somewhat of an improvement from the decline in the first quarter, since these imports declined by 8.4% in the January to March period in 2017.

o The somewhat positive change, however, is not large enough to signal a shift back to more leather shoes.

o While the athleisure market is slowing a bit, it does not seem to have yet benefited the women’s leather fashion business in a meaningful way.

o Not surprisingly, imports fell from just about all major supply countries with the largest percentage declines reported for Dominican Republic (DR) (specialists in leather outdoor boots), India and Brazil (both women’s leather fashion leaders) as well as Italy.

o For Asia, imports fell from China, Vietnam, Indonesia and Thailand with only Bangladesh (probably covering some of the leather work boots moved out of the DR) and Cambodia recording increases in the first half of the year.

o Increases were also noted for Ethiopia and Burma, although both are tiny suppliers.

o Overall, leather shoe import prices were flat for the first half of 2017.


 

[US Leather Footwear Imports Jan-June2017]

• Overall Leather Goods Imports. The category on a value basis continues its decline, falling by 6.8% in the first half of 2017, somewhat better than 10.4% level of descent recorded for the like period in 2016.

o Apparel, shoes and finished leather all recorded declines in imports into the US in the first half.

o It remains clear that athleisure life styles continue to dominate men’s and women’s ensembles, where there is little room for leather accessories.

o China’s share of leather imports into the US fell marginally to 40.9% from 41.5% from the same period in 2016; its biggest declines were in leather apparel (15.9%) and shoes (9.1%).


 

[US Imports of Leather Goods Jan-June 2017]

Results of Global Shoe Worker Costs Survey 2017.

• Continuing the pattern of recent years, the lowest worker costs in the shoe sector are Ethiopia, Bangladesh, India, Nicaragua, and Cambodia.

o China has the highest work costs among major shoe producers in Asia.

o Despite our best efforts, no data was available from Burma, although we believe that its hourly cost for workers is even lower than Ethiopia.

• Worker costs increased significantly in Cambodia, Thailand, Indonesia, Mexico, Brazil and India. Much of the change seems due to the shift of value of the local currency against the dollar since the 2016 survey.

o For the first three countries listed, real cost increases outweighed the impact of the change in the dollar/local currency relationship.

• Only marginal increases in work costs were recorded for China and Vietnam, as well as Nicaragua, Portugal and Italy.

• Worker cost declines were noted for Bangladesh, Ethiopia, and Turkey, as well as the DR.

• Survey Methodology. The GFP annual worker cost survey aggregates data from shoe factories globally. It includes all costs to the factory for the worker – wages, social benefits, food, lodging, etc. We then convert the local costs to dollars and divide the monthly total cost by the hours worked, arriving at a cost per hour in US dollars.


 

[Shoe Worker Cost Comparison 2017 table]

Peter T. Mangione, Global Footwear Partnerships LLC, Washington, DC, August 7, 2017, ptmangione@gmail.com, Copyright@Global Footwear Partnerships LLC. All rights reserved. No reproduction without written permission

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