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Signed ear ly thi s year , the Trans Pacific Partnership Agreement (TPPA) has had mixed reactions from the various sectors of partner countries. Non-membe r countries that are being urged to join are investigating how the TPPA could deliver its promise of wider market reach without jeopardising competitiveness. One sector in consideration is the footwear industry: will a zero- tariff agreement keep the footwear industry on its toes, asks Angelica Buan in this report.
Contending with China’s footwear market
Comprising 12 countries (US, New Zealand, Australia, Chile, Mexico, Japan, Peru, Canada, Vietnam, Singapore, Brunei and Malaysia), the TPPA represents the US’s geopolitical rebalance towards Asia and the heart of its trade policy in the region. It is also expected to help lift the droopy US manufacturing and stunted export growth, owing to soft global demand and fluctuating currencies.
While TPPA is heralded as an ambitious pact, representing about 40% of the global economy, it has left out China. This means that half the global economy will wean its dependence off China.
With the exclusion of China, the largest global footwear manufacturer, consumer and exporter, observers are wondering how the US-led bloc’s footwear industries will be able to capture a share of the global market that is forecast to reach US$258.22 billion by 2023, based on a report by Transparency Market Research. The global footwear market, the report said, is driven by rising retail culture and demand for both athletic and non-athletic footwear.
According to IBISWorld, in its China Footwear Market Research Report, the global footwear industry was sluggish in 2015, with retailers coping with the slow growth and reduced margins. China’s gross domestic product (GDP) growth slowed further and with weaker consumer sentiment, the sector has floundered. Moreover, operating costs remain a hurdle for footwear retailers, squeezing their profits.
In 2015, China’s exports slid by 4.7% and exports as a share of industry revenue are estimated at 46.6%.
Southeast Asia is getting stronger as a manufacturing destination, and thus adds to the Chinese industry’s challenges.
Asian footwear industry stepping up
As the TPPA unfolds, footwear business is expected to flourish in Southeast Asia. The trade agreement will strike out almost all duties on footwear, a majority of which will be taking effect the first year of TPPA’s implementation and the remaining 18 items will be scratched off over the next 12 years of the agreement.
Citing information from PIERS, a database of US waterborne activity, footwear imports from countries like Vietnam, Indonesia and Cambodia have increased from 2010 onwards, in contrast to China and Hong Kong where imports have declined.
In 2014, US imports of footwear from China slid by 3% from 2010, while Hong Kong’s slid by 36%. Vietnam’s exports to the US increased by 86% over the four-year period, thus making it the second largest exporter of footwear to the US, outpacing Hong Kong.
The fourth largest footwear supplier to the US, Indonesia, also increased its exports by 82% in 2014, while Cambodia has more than tripled its footwear exports within the same period.
Malaysia, the ninth member in the TPPA league, is projected to benefit from the elimination of duties on 12.4% of its exports, particularly on footwear and textile and apparel products, which have been levied hefty duties of 37.5% and 32%, respectively, according to the country’s Ministry of International Trade and Industry (MITI). Moreover, an additional 11.7% of Malaysia’s global trade will be accorded preferential treatment under the said agreement, thus bringing the total figure to 71.2% of Malaysia’s global trade.
Malaysia, which already has an existing trade agreement with the US, will also benefit from the elimination of specific duties on cocoa products, petroleum oils, metal products and clocks and watches under the TPPA.
Outsourcing to Asia – generating savings from TPPA
The outsourcing of footwear is driven by labour costs and duties. Prior to the TPPA, US footwear importers were reportedly shelling out US$2.5 billion year-on-year for approximately 2 billion pairs of shoes, or an average tariff rate of 10.1% for footwear.
With the high duties imposed on footwear, the Footwear Distributors and Retailers of America (FDRA), the largest footwear trade association in the US representing a broad scope of industry players from small family-owned importers to global footwear brands and retailers, is hoping that the TPPA will significantly cut its members’ costs and up their profit margins.
Matt Priest, FDRA President, commented that in 2014 the US footwear industry paid US$2.7 billion in duties alone, or a 6.6% increase over 2013, higher than the footwear industry’s 2014 US sales growth as a percentage. Of that amount, almost US$449 million went to paying import taxes from TPPA countries and that included US$446 million, which went to Vietnamese footwear exports. Moreover, over the last 27 years, the industry has paid US$45 billion in tariffs, impacting the retail costs of shoes for every footwear consumer.
With the TPPA, FDRA estimates savings for the industry of more than US$450 million in the first year of the trade agreement’s implementation and over US$6 billion in the next ten years.
The Washington-headquartered industry association says that Vietnam is the second largest footwear exporter to the US, after China, accounting for 10% of footwear imports. A few of the shoemakers that have factories in Vietnam include Nike, Wolverine Worldwide, and Payless ShoeSource, Adidas, Puma, Dansu Group and Ever Rite International.
Furthermore, US footwear firms are also shifting production from China to Vietnam, resulting in a 19% volume increase in Vietnamese footwear exports to the US in 2014. A majority of FDRA members are sourcing from Vietnam and this trend is expected to continue with plans to increase orders with factories in Vietnam in the near future.
By 2019, Vietnam would be supplying 22% of the volume of all US footwear, FDRA states.
US shoemakers on unsure footing
Boston-based footwear company New Balance, which is the only athletic shoe company still producing in the US, has been on the opposite side of TPPA, unlike competitor Nike.
While Nike executives have been pushing for TPPA, New Balance has been fighting to keep tariffs in place for Vietnam, since the deal was touted in 2012. It says that the deal will take a toll on the last few footwear factories operating from the US that will lose out to cheaper footwear coming from Vietnam, for example. The TPPA will also give a pricing advantage to competitor shoemakers that source from overseas, where labour costs are lower, making footwear makers like New Balance lose out.
FDRA, meanwhile, sees the TPPA as favourable for the US footwear industry since 99% of all footwear sold currently in the US is imported. Consumers will also be able to enjoy footwear from other trading partners party to the TPPA, such as Mexico, the group said.
Asian non-TPPA members get a leg-up
Meanwhile, Indonesia, a non-TPPA member is considering joining the trade faction. Ranked among the world’s top six footwear exporters, Indonesia is contending with high import duties of up to 30% to enter the US market. Nonetheless, it posted a 6.8% year-on-year growth to US$4.7 billion in 2015, according to the Indonesian Footwear Association (Aprisindo).
Furthermore, the Philippines, which has expressed its desire to join the TPPA, is still evaluating its readiness to comply with the accord’s tax reduction requirements and how that would impact the local industries.
The Philippine footwear industry consists of small and medium-size enterprises producing sports shoes, leather and non-leather footwear, slippers, sandals and other footwear products. Larger companies operate in export processing zones, manufacturing footwear under contract from foreign brands, according to the Canadian International Development Agency (CIDA)– funded Pearl 2 Project.
The World Bank, which projects the country to grow 4-6% in 2016, noted that the country’s apparel and footwear exports could drop by 19% based on increased competition from TPPA members.
As well, the Philippine Exporters Confederation (Philexport), the umbrella organisation of accredited Philippine exporters, is of the opinion that the Philippines’ highly labour-intensive footwear sector may not yet be ready for the TPPA.
Challenges facing Asian countries
Whether Asian countries chose to enter the TPPA, competition is surging against the back of low labour costs and Asian footwear producers are competing head-on with each other, with China remaining a strong contender in terms of production and supply.
With its “low wage” tag, Asia has the label of being a “sweat shop”, a stigma that some countries are striving to override with the introduction of minimum wages. One such country is Indonesia, which after introducing a minimum wage packet saw several foreign investments cancelled and investors relocating their plants to lower-wage ASEAN countries like Cambodia and Vietnam. It was partly for this reason, Aprisindo said, that the footwear industry failed to hit its US$5 billion export target in 2014.
Another challenge is inadequate access to raw materials. Being the second largest rubber producer does not guarantee Indonesia an adequate supply of rubber for its shoe making sector. It also sources for leather and other materials due to insufficient local processing facilities.
Finally, unrest amongst workers may also add on to the problems. Last year, almost 90,000 workers at the Vietnamese subsidiary of Taiwan-based Pou Chen Corp. went on strike over a Vietnamese government pension-policy change. The company makes footwear for Nike and Adidas, according to its website. Though the issue was resolved, it shows that Asia’s production sector is not without its problems.