The Changing Landscape of Sourcing: Challenges and Opportunities in 2023

This is the tenth USFIA Benchmarking Survey. During the past decade we have seen the fashion industry respond successfully to major disruptions and unpredictability. This year is definitely another very challenging time. In 2023 sourcing executives remain concerned about the economy and inflation. Only half of the survey respondents anticipate their sourcing volume will grow during 2023, while one year ago 90% of the sourcing executives predicted expanding business.

What is new in this Benchmarking Survey is the level of concern about the future of the U.S.-China business relationship. Lately it seems that one of the few issues that unites Republicans and Democrats in the U.S. Congress is their focus on the threat from China. At a recent Congressional hearing the theme was “Decouple, De-Risk, Diversify,” and diversification seems like an appropriate way to summarize how the fashion industry is responding to the new level of economic and diplomatic uncertainty. Nearly 80% of respondents plan to reduce their China sourcing over the next two years.

While not just a China issue, in 2023 concerns about forced labor allegations and potential risks in the fashion supply chain rank as the second most serious business concern. The Uyghur Forced Labor Prevention Act (UFLPA) is part of the impetus for this high level of concern. The fashion industry has not wavered in our commitment to eliminate all forced labor from the supply chain, but we know it is going to take time to achieve that goal. In the meantime, there is a very clear impact on cotton sourcing in China and Asia. This issue is a top priority for USFIA as we talk with the Biden Administration and the key officials at the Forced Labor Enforcement Task Force and U.S. Customs and Border Protection.

There are many positive findings in this year’s Survey. We celebrate the industry’s commitment to increase sourcing of apparel made from recycled and other sustainable textile fibers. This year the top recommendation for a trade policy initiative is to reduce or eliminate tariffs on imports of sustainable and recycled textile and apparel products. And we see a very clear trend to expand sourcing in the Western Hemisphere – especially from our FTA partners in CAFTA and USMCA. There are a lot more insights in this year’s USFIA Benchmarking Survey and I encourage you to read the complete report. Our mission at USFIA remains to support the fashion industry with analysis, education and training, and also to advocate for trade policy that supports Fashion Made Possible by Global Trade. We continue to work to show the benefits of trade, and fashion industry sustainability initiatives, to lawmakers and to the public.

Special recognition to Dr. Sheng Lu, Associate Professor in the University of Delaware’s Department of Fashion & Apparel Studies, for his hard work to analyze the data and develop these important conclusions. And special thanks to the sourcing executives who shared their views and insights.

To read more on the study, please click here.

Dr. Sheng Lu is an Associate Professor at the University of Delaware’s Department of Fashion & Apparel Studies.

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The relationship between the United States and China is destined to be increasingly fractious. The two countries occupy geopolitical tectonic plates, the movement of one unavoidably generating friction with the other. It is an open question as to how much the world economy, where the market has largely determined trade flows to date, will be reshaped to reflect geopolitical forces.

Global trade figures in gross terms do not reflect the growing geopolitical rivalry.

Despite being strong allies of the United States, for Germany, Japan, and Korea, China is the largest trading partner. In this still undivided world economy, the US, EU, Japan, and the Republic of Korea accounted for 42% of Chinese merchandise exports in 2021. In 2022, the EU, Taiwan, the Republic of Korea, Japan, and US supplied 43% of Chinese imports. Not even the invasion of Ukraine by China’s closest friend, Russia, has caused the trading system to divide into two camps – one led by Beijing and the other by Washington.

The overall numbers tell only part of the story. While the volume of trade between the US and China remains high, bilateral strategic decoupling is proceeding. This is a US-China bilateral phenomenon. It is reflected in the trade of others only selectively. For America’s allies, the US-China trade war had been a spectator event only. Two exceptions began to occur – one for supplying geostrategic-relevant goods, services and technology, and a second the result of identifying sources of geostrategic relevant supplies. Where the US pressed Japan and the Netherlands to join in restricting exports to China of semiconductor production equipment, they have done so. Separately, learning from the European experience with excess dependency on Russia for fossil fuels, Western capitals have begun planning the diversification of sourcing of critical minerals, to avoid dependency on a single country, particularly China.

Any decoupling that does occur between China and the West will likely be substantially “made-in-China”, that is caused by China’s own policies. US preaching in favor of supply chain resilience would fall on deaf ears were there no concerns generated by China with respect to its reliability as a supplier of critical materials.

The general trade policies of the two rivals will also shape trade flows. China is aggressively moving to lower barriers to its trade with others, first through RCEP and then applying to join CPTPP. The United States has moved in the opposite direction, failing to deepen economic relationships with even its avowed friends. In fact, through its recent trade measures it has tended to alienate these trading partners.

Other factors, not traditionally the subject of trade agreements, will contribute to fragmenting the trading world. The contest over global standards has yet to play out – setting standards regarding 5G telecommunications, internet protocols, privacy, AI, electric vehicles and other products at the frontiers of technology may divide markets. Potential effects on trade can be expected as a result of the debt owed to China by the beneficiaries of the Belt and Road Initiative (BRI) and China’s other development programs. For example, the need to repay debt has enabled privileged Chinese access to raw materials, a phenomenon just beginning to be witnessed. The exponential growth of Chinese overseas investment, which will affect trade, is likewise at an early stage. Another factor is the RMB perhaps taking on a more central role as a global currency. All of these economic and financial variables may play a part in shaping world trade. 

None of the aforementioned influences may prove to be as consequential for world trade as the deterioration of the multilateral trading system itself. The immense increase in global economic prosperity made possible by international trade over the last three-quarters of a century has depended in very large part on the certainty provided by the rule of law. As the two largest trading countries begin to ignore the existing structure of rules, this could become a tipping point, seen in retrospect as the end of an era and the beginning of another, a darker one. If the rules are increasingly ignored, the new age would more likely than not be characterized by slower economic growth and fragmented trade.

This is not to suggest that either of the two contesting powers have a conscious plan to discard the current trading system. Neither appears to have reached the conclusion that an end to the multilateral trading system would be in its interest. It is possible that neither is fully conscious of the spreading damage caused by their acting at cross purposes with the current rules. But their conduct is telling. In the case of the US, the departure from the international rule of law is demonstrated by ending binding WTO dispute settlement by blocking Appellate Body appointments, applying tariffs at odds with its contractual commitments (tariffs on trade with China in general and embracing a national security rationale to restrict steel and aluminum imports from all sources), and unapologetically subsidizing domestic industries without regard to any international rules. China’s departure from the rules is at one and the same time more overt and more opaque. China uses trade measures for purposes of coercion and denies that market forces must govern competitive outcomes as it increases the role of the state and the Communist party in its economy.

Neither Washington nor Beijing has declared an end to its adherence to the WTO-administered multilateral trading system. The reverse is the case. Perhaps current conduct at odds with the system is an aberration. US officials state that there is no general policy of decoupling from the Chinese economy. China’s policy of working towards “dual circulation” has not been accompanied by it announcing a retreat from global trade. What is clear is that each wishes to be less reliant on trading with the other. The world has seen nothing like this in inter-hemispheric trade since US measures toward the Empire of Japan in 1940-41, and no analogy with the past is a sufficient guide to the future.

The game changers for the global trading system consist of the adoption by the United States and China, for domestic reasons, of economic nationalism as a controlling factor in formulating their foreign economic policies. In the US the Trump Administration embraced economic nationalism primarily with rhetoric. The Biden Administration made the rhetoric reality in its major economic legislative initiatives. For China, nationalist policies were evident in its statements about achieving dominance in key industries of the future and the episodic deployment of trade measures for purposes of coercion. China’s domestic concerns for regime stability and its contest with the United States led it to support Russia during its invasion of Ukraine. Its priorities blinded it to the inevitable Western reaction. Neither nation has room in its current world view for actively supporting multilateralism.

Most other countries continue to steer an uncertain, non-aligned course, which may increasingly be governed by ad hoc determinations of self-interest. The world’s largest trading bloc, the European Union, has called for a policy of “strategic autonomy”. Whatever this turns out to be, it is not a vote to join Beijing or Washington in a trading bloc, nor is it a declaration in favor of the multilateral trading system. As for some of the others, one would not expect to hear from India nor South Africa that adherence to the existing multilateral trading system is a national priority. Neither are there any indications whatsoever of any country, including these two, aspiring to join a trade bloc.

The bottom line: world trade is not at present coalescing into two trading blocs, but the center, the multilateral trading system, is under stress. The question increasingly asked in academic symposia is whether it will hold.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics. He was Deputy Director-General of the World Trade Organization, Deputy US Special Representative for Trade Negotiations (USTR), and USTR General Counsel. He was a principal draftsman for the administration of the Trade Act of 1974, which provided the basic US negotiating mandate for future US trade negotiations. His book, Revitalizing the World Trading System (Cambridge University Press), is being published this month.

To read the full paper, please click here.

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Global trade will continue to face multiple challenges in 2023 as inflation and high interest rates, debt distress and geopolitical frictions weigh on many economies. The downside risks to the global economy and international trade are significant, ranging from an escalation of Russia’s war on Ukraine to deepening tensions between the US and China.

‘Reglobalization’ – rather than deglobalization – best describes the current pattern of economic integration and fracturing across different economies and sectors. Globalization is far from finished, but will increasingly emphasize greater regional links and the formation of economic blocs for sensitive and strategically important sectors. Comprehensive decoupling from China is neither achievable nor desirable for the G7 and like-minded partners.

The supply-chain disruptions of 2020–22 will continue to ease. Given that extreme weather events are the biggest threat to global production networks, supply-chain resilience and diversification efforts will persist, with added impetus to act on ‘greening’ trade.

The future of trade is closely linked to the transition to green and digital economies. As climate ambitions and technological leadership are intertwined with industrial policy objectives, concerns about unfair trade practices and protectionism are coming to a head not just as regards China, but also among the US, the EU and like-minded partners.

With major breakthroughs at the World Trade Organization unlikely in 2023, limited progress can be expected in some bilateral, regional and sectoral agreements. Meanwhile, efforts to avoid further trade fragmentation will progress more readily under Japan’s G7 presidency than under India’s G20 presidency.

Introduction

This briefing paper analyses the outlook for global trade in 2023, and examines the structural forces shaping global trade and globalization more broadly.

It argues that ‘reglobalization’ – rather than deglobalization – best describes the current and likely future pattern of economic integration and fracturing across different economies and sectors. Trade policy has an important role to play in underpinning the positive aspects of a reglobalized world and in balancing geopolitical competition and cooperation, not just through coordinated efforts to strengthen supply-chain resilience, but also in harnessing the twin transitions to green and digital economies.

The paper draws on insights from expert roundtable discussions and a high-level speaker series under the umbrella of the Chatham House Global Trade Policy Forum. It is the first of a new annual series that will highlight some of the major global trade trends and prospects for the year(s) ahead.

Marianne Schneider-Petsinger is a senior research fellow in the Global Economy and Finance Programme at Chatham House, responsible for analysis at the nexus of political and economic issues. Before joining Chatham House in 2016, she managed the Transatlantic Consumer Dialogue, an international membership body representing consumer organizations in the EU and the US. She also worked for a think-tank on transatlantic affairs in the US, and for the Thuringian Ministry of Economic Affairs in Germany.

To read the full report, please click here.

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At a glance

• No region is close to being self-sufficient. Every region relies on trade with others for more than 25 percent of at least one important type of good.
• About 40 percent of global trade is “concentrated.” Importing economies rely on three or fewer nations for this share of global trade.
• Three-quarters of this concentration comes from economy-specific choices. In these cases (30 percent of global trade), individual countries source a product from only a few nations, even when global supply options are diversified.
• Over the past five years, the largest economies have not systematically diversified the origins of imports. All have vulnerabilities, some more than others.
• Informed reimagination of global trade requires a granular approach¸ both in mapping concentrated trade relationships and in deciding on action—whether to double down, decouple, or diversify.

We live in a highly interconnected world. Every region relies on imports for more than 25 percent of at least one important type of good, according to recent McKinsey Global Institute (MGI) research. Interconnections have created broad benefits over time, improving efficiency, increasing global product availability, and fostering economic growth. But recent supply chain disruptions, Russia’s invasion of Ukraine, and rising tensions between China and the United States have highlighted the importance of resilience. Firms and policy makers alike are examining where inputs come from and, in some cases, contemplating reconfiguring or even breaking certain long-standing trade ties.

Concentrated global trade creates complications. On the one hand, concentrated trade relationships can reflect and drive efficiency gains. On the other, interruption of concentrated trade flows can be particularly disruptive if products are harder to replace on short notice due to a lack of visibility and alternatives.

Where do concentrated trading relationships exist across products and between countries? In the face of new disruptions, how should companies and countries adjust these relationships, if at all? To examine these questions, this article builds on the findings of MGI’s recent research on global flows, analyzing concentration across more than 120 countries, roughly 6,000 products, and eight million individual trade corridors.

About 40 percent of global trade is “concentrated”

For many products, countries rely on a diversified pool of trade partners. This is particularly true for larger economies. For example, China imports crude oil from more than 40 economies, and the United States imports cars from more than 25 nations.

However, for 40 percent of global trade, the importing economy relies on three or fewer nations for the supply of a given resource or manufactured good. These “concentrated” trade relationships exist in all sectors, at all stages of the production process, and in all economies. Narrowing the focus further, about 15 percent of global goods trade corresponds to cases where the importing economy relies on only two or fewer nations. Laptops, chromium, and palm oil are all examples.

Three-quarters of concentrated trade comes from economy-specific choices

In some instances, concentration arises because only relatively few economies export a given product, defined as “global concentration.” Soybeans are an example; Brazil and the United States account for more than 90 percent of globally traded supply.

However, most concentration arises when individual countries source from only a few trading partners even when global supply options are diversified, defined as “economy-specific concentration.” Wheat provides an illustration; while 15 economies provide 90 percent of globally traded supply, most countries import wheat from only two or three economies.

Important examples of economy-specific concentration abound across all sectors, from raw materials to final products 

• Economy-specific concentration is particularly pronounced in the food value chain, both in agriculture—including in staple central crops such as wheat, rice, and maize—and in food and beverages for many everyday goods ranging from fresh beef to beer.
• Concentration is high in both mining and electronics, in both cases driven in part by concentrated globally traded supply. Electronics has the highest proportion of globally concentrated trade of any manufactured goods sector, driven by mobile phones and laptops originating in China. In mining, 50 percent of all trade by value is in products supplied by three or fewer economies, most prominently iron ore, of which Australia and Brazil are the primary exporters.
• Most energy resources are not particularly concentrated for individual economies, but pipeline natural gas is. Because of the infrastructure needed to transport it, most countries import their pipeline supply from geographically proximate partners.

Over the past five years, the largest economies have not systematically diversified the origins of imports

Every country participates in concentrated trade relationships. Every country sources at least 20 percent of imports (by value) from three or fewer trading partners. Imports to smaller economies, which have smaller trading volumes, are, on average, 50 percent more concentrated. But even large economies often develop concentrated relationships with trading partners for specific products. For example, the United States imports nearly all of its semitrailer trucks and light goods vehicles from Mexico, while Mexico imports nearly all of its maize, propane, and refined petroleum products from the United States.

Looking at a range of large economies across regions—Brazil, China, Germany, India, South Africa, and the United States—each has a distinctive “concentration fingerprint.” Economies have often been most vulnerable to disruptions in sectors where domestic consumption relies on inputs that come from a concentrated set of trading relationships. China relies more on concentrated relationships in mining; for Germany, it is energy resources and agriculture; and for Brazil, India, South Africa, and the United States, it is electronics.

Between 2016 and 2021, these large economies largely did not diversify origins of imports. In fact for all countries examined, concentration fingerprints remained fairly stable, with most sectors not registering more than a 10 percent change in concentration. It has yet to be seen whether the political and economic disruptions of 2022 triggered shifts that register in sector-level trade data.

Informed reimagination of global trade requires a granular approach

In a world that demands resilience, firms and policy makers are reexamining supply chains and trade relationships. Informed reimagination of what comes next requires a granular approach, both in mapping concentrated trade relationships and in deciding on action—whether to double down, decouple, or diversify. Not every concentrated relationship is a source of vulnerability. Nor can every product be substituted. Decision makers can develop a portfolio of actions to derisk growth by tailoring the option by product and trade corridor:

• Double down. Some concentrated trade relationships are sources of competitive advantage, for instance providing access to technologically advanced inputs. Reinforcing such relationships to make them more resilient may be optimal.
• Decouple. Concentrated trade relationships may create levels of risk beyond the appetite of the business, for instance if policies restrict flows between countries, and it may make sense to spin off or divest such flows while pursuing new domestic sources of production. However, by trimming sources of supply, decoupling tends to increase rather than decrease overall levels of concentration.
• Diversify. Countries and firms can often address economy-specific concentration by reconfiguring trade relationships by tapping into additional sources of supply, or by partnering to pool sourcing risk. When alternative supply is not an option, such as when trade is globally concentrated, business and policy makers may look to redesign products or production processes to shift away from concentrated inputs.

By having a clear-eyed view of concentration, decision makers can calibrate effective strategy and reimagine, rather than retreat from, their global footprints. This is not only about managing risk. A transparent and up-to-date understanding of concentration, combined with the right measures to manage interdependencies, can be a source of competitive advantage. Organizations that demonstrate thoughtful management of concentrated exposures are likely to be more resilient in a changing world.

Olivia White is an MGI director and a senior partner in the San Francisco office; Jonathan Woetzel is an MGI director and a senior partner in the Shanghai office; Sven Smit is chair of MGI and a senior partner in the Amsterdam office; Jeongmin Seong is an MGI partner in the Shanghai office; and Tiago Devesa is an MGI fellow in the Sydney office.

To read the full summary, please click here.

To read the full report, please click here.

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ASEAN’s success as a manufacturing hub would not have been possible without both an openness to trade and the presence of regional supply chains that favorably position Southeast Asia as an essential supplier of raw materials and key components for final assembly in China. At the same time, however, it is becoming more difficult for ASEAN to navigate the uncertainties spilling into the investment environment from three areas often outside its control: geopolitics and decoupling, deglobalization, and climate change. In this essay, Vasuki Shastry, Associate Fellow in the Asia-Pacific Programme at Chatham House, examines both the tailwind trends behind ASEAN’s success in becoming a leading region for FDI and the headwinds that threaten to slow its ascent.

To read the full report from The Hinrich Foundation, please click here.

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The interim report reviewed the evolution of the U.S.-China relationship and identified six distinct areas that motivated U.S.-China engagement from 1972 through the end of the Trump administration: (1) geostrategy; (2) economics; (3) human rights and civil society; (4) global rules and norms; (5) global public goods; and (6) technology and innovation. This final report presents a framework for assessing specific economic activities as candidates for targeted decoupling, along with findings from three illustrative case studies designed to test it: artificial intelligence, biotechnology, and financial flows. The hope is that such a framework, which forces the identification of risks as well as U.S. objectives, can boost transparency and predictability, lessen regulatory uncertainty, and support engagement between the United States and China in areas that do not unacceptably compromise U.S. national security.

To read the full report from the Center for Strategic & International Studies, please click here.

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