Experts: Apparel Sourcing Changed From UFLPA More Than Due to Trade War

The U.S. announced Nov. 13 that textiles and apparel from El Salvador and Guatemala would be duty-free as long as they meet CAFTA-DR rules of origin. The announcement said the details would follow in two weeks, but they haven't (see 2511130057).

Sandler Travis International Trade Practice Leader Nicole Bivens Collinson said during a webinar last week hosted by Sourcing Journal that "many, many brands made a concerted effort" to source cotton goods outside of China, to places like Vietnam, Cambodia, Indonesia, India, Pakistan and Bangladesh. The 50% tariffs on Indian goods, though, are reducing orders there.

She said a big shift to Central America didn't take place even though some of the countries she listed tend to import fabric or yarns from China. That lack of growth in Latin America is "really due to capacity concerns," Collinson said.

Capacity, however, has expanded a little there this year, she said, and companies could shift to Latin America for both positive reasons -- the lack of 10% and most-favored-nation tariffs on apparel -- and negative ones -- apparel from someplace like Cambodia may no longer qualify as a good of Cambodia from substantial transformation.

Collinson said the trade community is concerned that the U.S. government will create a different definition of transshipment, given language in the Cambodia and Malaysian deals about rules of origin and that "any benefits should only accrue to the parties." Calling that code for "we don't want China in supply chains," she said it's an issue to watch.

She also said she expects rules of origin to become even more stringent for duty-free treatment. Collinson speculated that instead of a yarn-forward rule, you would have to use U.S. cotton, too, and that using fabric made in the region would get only a 20% discount, while using yarn but not domestic fiber could be 50% off.

Cotton Incorporated senior economist Jon Devine agreed that the more significant shifts in apparel sourcing predated President Donald Trump's second term, with the biggest trading shift 18 months ago. However, he noted that because some of the new source countries don't have as many fabric mills, shipments of Chinese fabrics to other countries for cut and sew operations have increased.

Devine said it's not a fully Asian supply chain, however. "We have seen some increased sales of U.S. cotton to Indonesia this year," he said.

Collinson said the relatively high tariff rates in Vietnam and Bangladesh have led some companies to increase their sourcing from China, as they believe rates there will be stable for at least a year, and with a 10% reciprocal tariff, maybe a 7.5% Section 301 tariff, and better logistics costs, it can be cheaper than Southeast Asian or South Asian competitors.

The ever-shifting tariff rates aren't the only headache for importers, she said. Typically, CBP issues compliance manuals to deal with changes. "That’s not been the case this year," she said, and with little guidance from CBP, companies could be noncompliant just from guessing wrong.

"CBP can come back at any time," she said, and say: "No, that’s not what we meant."

She also shared an example of a company that was trying to take advantage of an administration rule that goods with at least 20% American content can subtract that value from the cost of the import. She said the imports were from the CAFTA-DR region and used U.S. yarn, so they easily met the threshold. However, CBP in one day sent 54 requests for additional documentation of the U.S. content.

Collinson worried that the longtime practice of having foreign suppliers acting as importers of record is under the microscope. "We believe very strongly in the next year we could see the nonresident importer of record go away," she said. To apply for an importer number and set up an account could take two to three months, she said.

She predicted that the U.S. Supreme Court will rule against the use of the International Emergency Economic Powers Act for tariffs but said she expects CBP will make it as difficult as possible for importers to get their refunds.

If IEEPA is struck down, she predicted, "this administration is going to extract a pound of flesh. We’re going to see other tariffs take their place."

She said the administration could use Section 122, which allows a 15% tariff on goods from all countries that have a trade deficit. However, because that law allows those tariffs to last only 150 days, she said, the administration might impose them for 149 days, let them expire for one day, then do a new round.