Latin American Countries Poised to Benefit from Fashion’s Search for Suppliers Outside of China

Latin American Countries Poised to Benefit from Fashion’s Search for Suppliers Outside of China

Countries in Central and South America could stand to benefit from the current political and business decoupling between the United States and China, according to a study from the United States Fashion Industry Association (USFIA).

The new report, which was conducted  by University of Delaware professor and industry consultant Sheng Lu, Ph.D., focuses on the fashion industry’s attempt to diversify its sources of labor and production away from China. The targeting against China by the US government is due to the accusations of forced labor in the country, including the alleged use and genocide of minorities like the Uyghur which is addressed by the Uyghur Forced Labor Prevention Act.

“As our survey results indicate, US fashion companies are eager to move out of China and find new sourcing destinations due to concerns about the forced labor risks and the deteriorating US-China relations,” Lu told Finance Americas. “Especially for cotton apparel products, fashion companies are actively looking for new sourcing capacities beyond Asia to ensure no forced labor in the supply chain.”

Despite the priorities of the US government and industry response, the push does not seem to be bringing fashion manufacturing jobs into the country, with the report stating that “there is no sign that US fashion companies plan to significantly expand their domestic apparel production capacity or shift their business model back to manufacturing.”

Instead, much of the effort within the fashion industry has focused on creating multiple sources of production and output to reduce the risk of forced labor being used in the industry, with close to three-quarters of the larger fashion companies sourcing from between six and 20 countries in 2023.

While sourcing continues to come heavily from other Asian countries, including Vietnam and Bangladesh, countries within the Western hemisphere are also being utilized more. So far, this has mainly occurred within Mexico and countries party to the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR).

Around 80% of fashion industry respondents are already currently sourcing their production of clothing materials within the country, with 40% of companies planning to increase their “apparel sourcing” there. One appeal of the Dominican Republic appears to be its proximity to the United States, as well as its stable political situation in comparison to many of the other countries in the region.

“Stable economic and political situations help improve a country’s competitiveness as a sourcing destination,” said Lu. “Political stability is also essential for developing countries like the Dominican Republic to attract foreign investments to expand and improve textile and apparel manufacturing capability.”

Despite that optimistic prognosis — with Lu adding that the nation’s future as a fashion manufacturing hub looks “promising” — the Dominican Republic, as well as countries like Mexico, are facing tougher barriers to encourage countries to move production towards their companies due to the need to comply with the requirements of the different free trade agreements between countries, including expensive textile requirements.

“Our survey respondents call for easier access to textile materials, especially fabrics, to strengthen CAFTA-DR members’ capability to make different clothing and play a more significant role as a sourcing destination,” said Lu. 

In Mexico, for example, many companies have to choose between using more expensive textile raw materials to qualify for duty-free treatment or  compromising with cheaper raw materials and removing the duty-saving benefits. 

“Currently, for relatively sophisticated product categories like dresses and outerwear, fashion companies can only source from China or the rest of Asia,” said Lu.

Meanwhile, when asked about the potential of Colombia and Peru to benefit from fashion companies looking for new places to source their production from, Lu said that despite the free-trade agreement, some factors are going against both countries.

“Compared with Asian suppliers, Peru and Colombia are with a much smaller population and production capacity,” he said. “The same with wage levels, which could offset the tariff advantage. As mentioned earlier, sourcing is about striking a balance today and many factors come into play.” 

Still, Lu is optimistic about the countries like Colombia finding ways to benefit from the move away from China and Asia. “US fashion companies’ growing interest in bringing the supply chain closer to home creates exciting new opportunities for countries like Peru and Colombia to play a more significant role as a sourcing destination.”

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