The Ripple Effects of Trump's Tariffs within Fashion and Textiles

Posted on Friday, September 28, 2018 by Charlotte HannaNo comments

As of this week, President Trump’s administration is imposing $200bn more tariffs on Chinese goods, including several fashion and consumer products, a decision that has been strongly opposed by the United States Fashion Industry Association (USFIA).

While some textiles will be spared from the tariffs, the new list does target some textiles and machinery, plus handbags & hats. More specifically, apparel and clothing accessories made of leather, fur, plastic, rubber, and hooks, eyes and eyelets used for clothing, footwear, handbags and travel goods are some of the products that will be hit with the new 10 percent tariff next week.

Tariffs started at 10% on 24 September and are set to rise to 25% by 1 January 2019.

The new tariff are likely to add considerable disruption to the supply chain, and would amount to a tax on consumers.

How big is US trade with China?

According to official figures, the US racked up a trade in goods deficit of $375.6bn with China last year, meaning America bought far more from the world’s second largest economy than it has managed to sell to it.

US exports of goods totalled $129.9bn last year, while imports from China were $505.5bn. Exports to China support about 1m American jobs, according to the US-China Business Council, while aircraft and soybeans are the most valuable items sold to China. Mobile phones, computers, toys and games are the biggest imports to the US from China.

The White House is imposing tariffs on Chinese goods including boats, aircraft engines, nuclear reactors and other industrial and agricultural machinery, as part of a wide-ranging list of 818 types of product. The US has imposed tariffs worth $34bn on China so far, although it will introduce a second round covering 284 more products at a later date, taking the total to $50bn

Beijing is targeting the same value of goods, although has taken a different approach to slap tariffs on fewer American goods across broader categories. 

How will it affect other economies?

Mark Carney, the governor of the Bank of England, warned this week that further escalation of Trump’s trade disputes would hurt the American economy most with the potential to lower US economic growth by around 5%.

Publishing forecasts by the UK’s central bank, Carney warned that the American economy would suffer a 2.5% drop in GDP as a result of falling trade volumes alone over three years, should the White House increase US import tariffs by about 10 percentage points on all of its trading partners.

The world economy would take a hit to GDP of just over 1%, while there would be a smaller impact on the EU and the UK.

The wider net

The American Apparel and Footwear Association has dubbed the tariffs the “Trump tax.” Industry groups have also highlighted the duties’ potential to derail US economic growth. “These tariffs on imports of textiles, apparel, and accessories do little to punish China for its intellectual property and technology transfer practices, but do a lot to harm American fashion brands and retailers as well as consumers of their products,” said USFIA president Julia Hughes.

According to the Business of Fashion Annual Report, in 2018 an important tipping point will be reached when, for the first time, more than half of apparel and footwear sales will originate outside of Europe and North America. The main sources of growth are emerging market countries across Asia-Pacific, Latin America and other regions. With this the west will no longer be the global stronghold for fashion sales.

Other countries not excluded from the tariffs are already gearing up to retaliate in ways that will hit the fashion industry directly. The European Union’s trade commissioners pre-emptively said on Wednesday that Europe would impose its own tariffs on goods, including denim and T-shirts.

If U.S policy pushes up costs for Chinese manufacturers or reduces their economies of scale, retailers might find the goods they source become more expensive. The increase in cost would then have to be passed on by UK retailers to either the consumers, or taken from their margins - neither one being a positive outcome. On the flip side, prices of UK manufacturing may become more competitive in the global market. But if the Trump administration places barriers on the free movement of Chinese parts, or increases costs within their supply chain, then this cost will eventually find its way back to the consumer. With Bricks and mortar in decline, consumer confidence in the UK already being battered by Brexit, an increase in product prices is a future no one looks forward too.

Large, rated apparel manufacturers derive more than half of their revenue from the US; therefore, these additional tariffs, if imposed, would be credit negative for the US apparel & footwear sector because of the higher cost of goods sold for the US divisions of companies that import goods from China, a Moody’s report stated, adding the impact of the new tariffs will vary by company. The effect will depend on “how much they source products from China, the degree they can diversify away from China, their pricing flexibility and how they adjust product designs or cut costs elsewhere in their businesses.”

“Smaller apparel companies with high leverage or low profit, or both, could have particular exposure if their earnings decline relative to debt service costs or if they experience any disruptions in their supply chains – for instance reduced vendor or factor support or ill-timed shipment delays”.

Impact on U&I

We have yet to feel the effects of Trump’s policies. However, as our recruitment is global and many of our clients deal with both the European and US markets, they are going to be noticing the impact of increasing costs and consequently looking to make savings elsewhere. Recruiters across the board in this sector are already feeling the effects of the downturn in retail. Suppliers are constantly being squeezed, and this additional tax will  almost all who have production interests in China.

Most companies will look to pass along at least some of the additional cost to consumers, including on premium products where there is less price sensitivity. Larger companies with stronger margins and balance sheets, such as Wolverine and PVH Corp., could decide to absorb higher costs in an effort to gain market share. In addition, some firms will try to save on costs by adjusting product designs to achieve a cost or product pricing level or could cut costs within their organizations.

 

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