Apparel / Textiles & Accessories

The foreign trade situation this year is not optimistic. From January to February 2023, China's textile and clothing exports fell by 18.5% year-on-year, which was expanded compared to December 2022. What is the real reason for the sharp decline in foreign trade orders?

Textile and clothing exports continue to decline. What challenges will foreign trade enterprises face

In 2023, the risk of global economic recession is rising, and the growth of external demand continues to slow down, making China's foreign trade must face a severe test. The main contradiction in current foreign trade has shifted from the past supply chain obstruction and insufficient contractual capacity to the current weakening of external demand and declining orders.

According to data, in 2021, China's textile industry exceeded US $300 billion, making it the world's largest textile producer and exporter. The data from the first three quarters of 2022 shows that China's textile exports increased by 11% year-on-year, with a promising growth trend. However, it is worth noting that Southeast Asian countries such as Bangladesh have also increased by more than 20%, and the gap with China is constantly narrowing, which puts a lot of pressure on textile enterprises.

From January to February 2023, China's textile and clothing exports decreased by 18.5% year-on-year, with a slightly larger decline compared to December 22; The export of textiles and clothing decreased by 22.4% and 14.7% respectively year-on-year.

So what is the real reason behind the collapse in foreign trade orders?

First, the United States continues to raise interest rates. The Federal Reserve's interest rate hike has driven other countries to passively raise interest rates, not only causing the debt of relevant countries to rise, but also further inhibiting world economic growth. The Organization for Economic Cooperation and Development has sharply lowered the world economic growth rate next year to 2.2% from 3.1% this year. Recently, there was a Black Swan incident, and the Bank of Silicon Valley in the United States went bankrupt and closed.

On March 12, US Treasury Secretary Janet Yellen said that the core issue of the bankruptcy and closure of US Silicon Valley banks lies in the continued increase of interest rates by the US Federal Reserve, rather than the issue of technology companies. She said that the United States government will not provide assistance to banks in Silicon Valley.

However, this matter ushered in a turnaround later in the day, when the United States federal government announced that it would ensure that all deposits at Silicon Valley banks were paid. The statement was jointly issued by the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation (FDIC). "From the 13th, all depositors at Silicon Valley banks will be able to recover all their money. Losses related to the liquidation of Silicon Valley banks will not be borne by taxpayers," the statement said

In the past year, the Federal Reserve has raised interest rates eight times in a row, and the target range for the federal funds rate has risen to between 4.5% and 4.75%.

The second is the tense international relations, as well as the tense relations between the United States, the European Union, and China. This has also led to the tightening and repression of the global textile and clothing supply chain. The share of related goods imported by the United States from China has shown a significant downward trend. In November 2022, the volume of clothing imports from the United States from China almost halved year-on-year, with a decrease of 47%, and the volume of imports decreased by 38% year-on-year. From January to November 2022, China's market share of US clothing imports decreased from 24.1% a year ago to 22%, while Vietnam's share increased from 17.8% to 18.3%. According to the current trend, Vietnam will soon surpass China as the largest source of clothing imports from the United States. Bangladesh, the third largest source of clothing imports from the United States, is also growing rapidly. In November 2022, the volume of clothing imports from the United States to Bangladesh increased by 42.5% year-on-year, while the growth rate for the entire year of 2021 reached 37%.

Third, order backflow and industrial transfer. In 2021, due to the severe epidemic in Southeast Asia, some foreign trade orders returned to China. According to the statistics of the General Administration of Customs, in 2021, China's textile and clothing exports reached 315.47 billion US dollars, an increase of 8.4% year-on-year. However, after the local epidemic eased in May 2022, orders immediately returned to Southeast Asia, mainly due to the cost advantage of Southeast Asia. "The manufacturing cost of a T-shirt in China is about several times that of Southeast Asia, and the global textile and clothing manufacturing will continue to accelerate the transfer to Southeast Asia and other regions." The trend is for textile and clothing orders to shift to Southeast Asia with lower costs. A clothing foreign trade company said that it mainly purchases raw materials from China, while handing them over to factories for OEM, mainly sending them to OEM factories in Southeast Asia such as Vietnam or Myanmar in recent years.

The textile foreign trade market is mixed

The current situation is mixed for foreign trade enterprises. The good news is that we can carry out normal foreign trade activities, but the worry is that there are still some uncertain factors in the future, and the foreign trade competitiveness of other countries is changing, including some enterprises in some developed countries that are also competing with us for foreign trade orders. This is a new situation.

During the three years of the epidemic, the epidemic prevention policies in Southeast Asia have been gradually liberalized following the steps of Europe and the United States. Last year, while the growth rate of China's exports slowed, the growth rate of Southeast Asia's exports has significantly increased, with Indonesia's exports growing by over 40% year-on-year, Vietnam's by over 30%, and Malaysia, Thailand, and the Philippines by around 20%. At the same time, the "manufacturing backflow" in European and American countries is also seizing the market, and the competition for orders is becoming increasingly fierce. Currently, no matter in terms of capacity scale, product structure, or industrial chain integrity, overseas supply chains cannot pose a fundamental challenge to China in the short term. Its products are highly concentrated in end consumer goods such as clothing and home textiles, and it still takes a process to reach or surpass China in terms of scale or structure. Neighbouring countries rely heavily on Chinese textile raw materials, especially chemical fiber products. Vietnam, Bangladesh, and other countries import more than 60% of their textile raw materials from China. "Spillovers" in certain specific sectors of China's industry are inevitable.

There are three competitive advantages for Chinese manufacturing in the international market: one is that the industrial chain is very complete, the other is that the unified market with 1.4 billion people in China brings domestic demand advantages, and the third is that the application of Industry 4.0 brings about improved production efficiency. "Manufacturing in Vietnam will be a trend in some industries or products that replace manufacturing in China, and China will also eliminate some industries that lack competitiveness. However, on the whole, manufacturing in Vietnam will not replace manufacturing in China.".

China should fully seize the opportunity when neighboring countries still have a high degree of dependence on China, take advantage of RCEP opportunities, rationally distribute industries and trade, accelerate transformation and upgrading, and try to avoid the negative impact caused by rapid industrial transfer.

Some experts believe that currently, the pain period for foreign trade enterprises is 3-5 years, and the transition period may be 5-7 years. If it turns out well, in 2030, China will still be the most important value chain management center in the world.

So far, companies are also trying to find a way out. The first step is to transform domestic sales. However, when the epidemic prevention and control trend stabilizes, enterprises encounter the problem of insufficient domestic demand, and can only turn back to foreign trade to find a way out, but they have to face changes in the trade pattern.

When the cost advantage no longer exists, it is a trend for mid and low end foreign trade orders to shift to lower cost Southeast Asia. Chinese textile and clothing enterprises should shift more to research and development, design, and innovation, and improve the added value and technological content of their products to have room for development.

In the future, on the one hand, efforts should be made to promote a steady increase in the international market share of high value-added products, and on the other hand, it is necessary to avoid a rapid decline in the international share of mid - and low-end products. On the basis of maintaining a basically stable export scale, accelerate the transformation and upgrading of the industry, explore innovative growth points in trade, enhance comprehensive competitiveness, and achieve high-quality development of clothing foreign trade exports.