fashion essay

U.S.-China Tariff War and Textiles and Apparel (Updated August 2020)

I. A By-the-Numbers Look at the Apparel Industry Proves What’s at Stake in Tariff Wars

If you want to understand the apparel industry, you must first understand five numbers: 98, 95, 75, 51 and 6. 98 – This represents the percent of clothing and shoes purchased in the U.S. that are imported. While we still make clothes and shoes in this country, most of what we consume is physically produced offshore. China is the dominant source, but other top trading partners include Vietnam, Indonesia, India, among others. 95 – This represents the percentage of people on the planet who wear clothes and shoes and live outside of the United States. The power of these foreign consumers is growing, not only in number but in purchasing power. Another sobering fact? There are more middle-class consumers in China than there are people in the entire United States. These first two numbers tell us that, to be successful in this industry, you need access to global markets and global suppliers. Gone are the days when you can make and sell only in the U.S. Most companies make and/or sell their product in multiple countries—sometimes that combination gives them a “local for local” model, but many times it gives them a supply chain that stretches through many countries and continents. 75 – This represents the percentage of an average imported garment’s retail value that is attributed to U.S. inputs.

This high value-added figure makes sense once you realize all the steps a garment goes through from concept to consumer, and that most of the value is added at the beginning and ending stages of the value chain. This high U.S. value-add also reconciles with the fact that 4 million U.S. workers are employed in the U.S. apparel and footwear industry, engaged in a wide array of skills including design, distribution, compliance, legal, manufacturing and retail. Of course, given the high import penetration noted above, that means these 4 million U.S. workers are almost entirely dependent upon imports. 51 – This is the percentage of duties collected by the United States Government on imports of apparel, footwear, travel goods and textiles. 6 – This is the percentage of imports into the U.S. that are represented by apparel, footwear, travel goods and textiles. The last two figures go together and bear repeating–our industry accounts for just 6 percent of all imports but generates more than 51 percent of all duties collected. This situation is a consequence of the very high duties (as high as 67 percent) still in place from the 1930s for our industry. They also shine a spotlight on the imbalance and regressive nature of U.S. tariff policy. Most of the tariff burden is concentrated on apparel and footwear, items that literally touch everyone. If the good news is that we all wear clothes and shoes, the bad news is that we all pay this tax. And the poor pay the tax at a disproportionately higher rate than wealthier Americans since a much larger portion of their budget goes to these products. Such tariffs are levied and paid without most Americans’ knowledge, which means they constitute a massive hidden consumer tax. Collectively, these five numbers–98, 95, 75, 51, and 6–tell a powerful story about our business. We are a global industry that supports many U.S. jobs. But we are an industry that is overtaxed– and that tax burden has consequences that hurt U.S. consumers and U.S. workers alike. II. Apparel Companies Fear Tariffs Could Squash Profits U.S. apparel companies are bracing for squeezed profits and potential store closures as a result of the Trump administration’s pledge to extend tariffs on Chinese imports. About 40% of all clothing and 70% of shoes sold in the U.S. are made in China, according to the American Apparel and Footwear Association. After China became a member of the World Trade Organization in 2001, U.S. retailers increasingly relied on manufacturing their goods there because of cheaper labor and production costs. In all, about $33 billion in apparel, shoes and hats are among the items subject to a 10% tariff on Chinese imports beginning Sept. 1, 2019 according to a Wall Street Journal analysis of data from the Office of the U.S. Trade Representative and the Census Bureau. As fall approaches, the apparel that will be hit by the tariffs includes gloves, mittens, overcoats and sweaters.

Many apparel companies have already been cutting prices to fend off heightened competition from discount chains, Amazon.com Inc. and other online retailers. That has left them operating on such thin margins that absorbing even a portion of any costs associated with the new tariffs would be painful. The tariffs would come not long before the start of the holiday shopping season, which apparel retailers count on for much of their annual sales. “Tariffs could wipe out their profits,” said Wade Miquelon, chief executive officer of Jo-Ann Fabric and Craft Stores, in a recent press call. Jay Sole, a retail and department store analyst at UBS, estimated that if the administration raised tariffs on China to 25%, it could lead to as many as 12,000 stores closing, about 10% of the stores among the 524 retailers UBS tracks. Even the proposed 10% tariff would pressure hundreds of stores throughout the U.S., he added. Some retail landlords are less pessimistic. They suggest it could take years before tariffs siphon enough cash flow to threaten rent payments of most retailers. “It’s a little far down the line,” said Charles Lanier, director of real estate at Plaza Associates Inc., a private commercial-property landlord that runs Crabtree Valley Mall in Raleigh, N.C. The administration has already imposed 25% tariffs on $250 billion of Chinese goods. With plans for new duties on additional Chinese products, virtually all imports from China would be subject to tariffs by year’s end. Most apparel companies are expected to absorb the cost increase themselves or negotiate ways to cut expenses with their Chinese manufacturers to avoid antagonizing customers with higher prices. Macy’s Inc., which raised prices on some luggage, housewares and furniture when tariffs on such items rose to 25% in May, said it was unlikely to repeat that approach for apparel subject to new tariffs. “We learned from that experience that the customer had very little appetite for those cost increases,” CEO Jeffrey Gennette said during the company’s earnings call last week. Instead, he said, Macy’s would work with its Chinese partners to absorb the extra costs. Many apparel companies would find it painful to do the same. Fifteen publicly traded clothing, footwear and accessories retailers tracked by UBS have margins of less than 3%. These companies represent $42 billion in sales, and they operate more than 12,000 stores, UBS said. Still, not all apparel firms would suffer equally. Some brands have already taken steps to mitigate the potential impact of new China tariffs, or even to benefit from them. Weyco Group Inc., which sells Florsheim and Stacy Adams shoes, said it increased imports from China in the spring to stay ahead of tariffs that would affect apparel and footwear.

“In May, when the threat again became evident, we had discussions with all the factories in China and just tried to pull everything for that we could,” Weyco CEO Thomas W. Florsheim Jr. said during an earnings call this month. Columbia Sportswear Co. said it may stop offering some products made in China. “When there’s uncertainty, that’s the enemy of investment,” said Peter Bragdon, Columbia Sportswear’s executive vice president. At least a few retailers already facing tariffs have been able to raise prices without much consumer backlash. In May, Home Depot said it managed to pass the tariff costs on imported washing machines to its customers. Sales initially sagged, then recovered. Steven Madden Ltd., a shoe and fashion-accessory company, said it has already moved some production out of China. If any competitors feel compelled to raise prices after the China tariffs, the company would view that as an opportunity to gain market share. “We’re making a good chunk of the Steve Madden-branded products in Mexico for fall,” CEO Edward Rosenfeld said on a recent earnings call. He added that some production was moved to Cambodia “and a number of other countries.” But shifting suppliers isn’t an easy option for most apparel companies. It takes years to build relationships and establish new supply chains. Retailers have built quality-control systems in Chinese factories that can’t be dismantled and reassembled in another country overnight. China’s currency depreciation earlier this month, when officials reduced the value of the yuan against the dollar by around 2.5%, helps a bit by making Chinese products cheaper in dollar terms. Yet, many expenses tied to importing products including gasoline and materials such as cotton are dollar-based. Jo-Ann Fabric, which has 850 stores across 49 states, faces tariffs on artificial-floral supplies and plans to hold prices steady this year and absorb any losses for now, rather than risk alienating customers with higher prices or closing down stores. “We don’t want to cut hours or give up good properties,” said Mr. Miquelon, the CEO. III. Tariff Deferral’s Impact on Apparel and Footwear The 90-day duty deferral on certain imports for American businesses will have some benefits, but many in the apparel and footwear industries are hoping for more from the administration in its efforts to support a flailing retail sector. The executive order announced in early April 2020 accompanied by a ruling from U.S. Customs and Border Protection (CBP) gives importers a 90-day break on paying tariffs for certain products, but it excludes the fashion items hit with punitive China tariffs. Only importers that have suffered a 40 percent drop in gross receipts in March and April are eligible for the payment pause, which is expected to have a positive impact on cash flow for retailers.

“While the public comments are detailed, the trade is still in a dialogue with CBP over some of the operational questions around how it will work,” Vincent Iacopella, executive vice president of growth and strategy at Alba Wheels Up International Inc., a customs brokerage company, told Sourcing Journal Monday. “So far, it looks like this could help mitigate some liquidity challenges for apparel importers who have China goods not subject to 301 duties, or that are manufacturing in other Pacific Rim countries on which 301 duties would not apply.” Retailers are facing a squeeze from all sides as demand has all but disappeared and pressure on the supply side is mounting with orders unpaid for piling up at factories and DCs. The duty aid, while welcome, may not be enough to help some out of the situation the COVID-19 outbreak has forced them into. The National Retail Federation (NRF) said as much in a statement Monday. “Retailers don’t build stores, buy products and hire associates only to close their doors for weeks at a time. The challenges to the retail industry brought on by this pandemic are severely acute, at best,” NRF president and CEO Matthew Shay said, adding, “We encourage the administration to broaden these deferrals for additional relief. Similarly, Retail Industry Leaders Association (RILA) president Brian Dodge wants to see the deferral broadened to 180 days to boost up an industry that has already sent millions into unemployment lines. As the order presently stands, in its own calculations of the 90-day deferral action’s value, the American Apparel and Footwear Association (AAFA) estimated that roughly 35 percent of apparel, 34 percent of footwear and 65 percent of travel goods will likely be excluded from the benefit “because of the high concentration of products still made in China and the high concentration of those products that are subject to 301,” AAFA president and CEO Steve Lamar said. “It won’t help those [goods] subject to 301 China duties, but will help any company importing from countries on goods not subject to trade remedies, for example Vietnam, Bangladesh. Especially since apparel is not presently included in GSP1,” Iacopella noted. For footwear, the duty deferral will apply to most goods made outside of China, which is only around 30 percent of what the U.S. imports, as roughly 70 percent of shoes sold stateside do come from China. The bright side, according to Footwear Distributors and Retailers of America ( FDRA) president and CEO Matt Priest, may be the list 4B China tariffs that had been slated to take effect on Dec. 15, 2019 before President Trump called them off.

1 GSP refers to the Generalized System of Preferences Program, which provides exports from qualified least developed countries tariff-free and duty-free market access to the United States. However, deemed as “import sensitive”, textiles and apparel are excluded from the GSP program.

“If your product is from China and it’s on list 4B…our expectation is that you can defer duties on those products,” he said. “And that’s a lot of product, some of the lower-priced goods that were at Walmart and Target and the like.” Items like sports footwear, golf shoes, most footwear with rubber outsoles, plus leather uppers for shoes, had been on the 4B list. When it comes to list 4A goods, which still face a 7.5 percent additional tariff, Priest says importers won’t be able to defer the regular duty rate and only pay the punitive portion. “There’s no ability to split those two up, so for product on list 4A, you cannot defer those duty payments, even if it’s the part of your duties not part of the 301,” he said. For the footwear industry, the 90-day deferral still means a sizable, albeit temporary, relief. “There’s a potential that there’s $250 to $300 million in duties that companies will be able to defer for products that came in in March and April,” Priest said. On the other side of the conversation, the National Council of Textile Organizations (NCTO), which represents the U.S. textile manufacturers, thinks the tariff deferral is “counterproductive” to what could be a time for rebuilding the domestic industry—a mission the Trump administration has claimed to champion. “At a time when domestic textile producers and [their] workforce have mobilized to transform their production lines to manufacture the personal protective equipment (PPE) supplies for frontline healthcare and medical workers fighting the COVID-19 pandemic, the administration’s decision to defer duties for 90 days on the vast majority of products imported into the United States is counterproductive,” NCTO president and CEO Kim Glas said. “Our industry is being asked to do extraordinary things,” she added. “We are heeding that call, but we need help to ensure the supply chains we are creating overnight don’t evaporate tomorrow. We need strong procurement policies and additional funding for our industries to ramp up and retool–not further measures that incentivize offshore production.” IV. U.S. Trade Officials Grant Tariff Relief for Face Masks, Medical Equipment WASHINGTON—The Trump administration has granted exclusions from import tariffs for more than 100 medical items imported from China, including face masks, examination gloves and sanitizing wipes. The exclusions were approved for 27 companies, all of which filed their requests before a Jan. 31 deadline. The coronavirus outbreak was still largely centered in China at that time, but U.S. companies were already girding for a pandemic. “There is currently a critical shortage of face masks that will likely have ramifications across the globe,” Medline Industries Inc. of Northfield, Ill., said in its filing for a tariff exclusion. “Medline is adding capacity as quickly as possible but in order to ensure public safety and health we must continue to maximize capacity at all available suppliers, both those inside and outside of China.”

Medline received 30 of the 103 exclusions granted. Its products receiving tariff waivers included face masks, surgical drapes, specimen containers and surgical gowns. Other companies also received relief from the tariffs on operating-room-table covers, antimicrobial linens, identification wristbands, blood-pressure sleeves and stethoscope covers. The office of the U.S. Trade Representative didn’t respond to a request for comment. The USTR spared pharmaceuticals from its various tariff lists but put tariffs on a range of medical supplies, despite vociferous objections from medical-supply companies. At a public hearing held by USTR in June, industry representatives testified about the risk of imposing tariffs on medical supplies. Matthew Rowan, president of the Health Industry Distributors Association, which represents wholesalers supplying physicians’ offices, hospitals and nursing homes, testified that “health- care products are essential to the nation’s pandemic- and emergency-readiness capabilities.” “The risks to health care and public health from tariffs outweigh any benefit to trade or economics,” he said. The tariffs increase the costs of medical supplies at a time when some items are already in limited supply, exacerbating the medical system’s ability to be prepared to confront the pandemic. The exclusions provide some economic relief to companies importing medical goods from China, but they won’t have any effect on supply chains, several company spokespeople said. “This tariff piece is more of an economic piece within the supply chain,” said Ron Prybella, spokesman for Medegen Medical Products of Hauppauge, N.Y. The company received 16 exclusions for products including bags, masks and containers. During the U.S.-China trade war that began in 2018, the Trump administration placed tariffs on over half of Chinese imports, imposing the new levies in four different tranches. The exclusions on Thursday were the first to be granted under the $120 billion fourth tranche of tariffs, which affects $120 billion in Chinese goods. The fourth tranche, which included hundreds of medical items, was the final action scheduled by the U.S. in the trade war. Tariffs of 15% were imposed on these items in September. They were reduced to 7.5% in February following the signing of the phase-one trade agreement between the U.S. and China in January. The USTR has been working through more than 52,000 tariff-exclusion requests, with more than 12,000 left to decide. Although it granted 35% of requests under the first two tranches of China tariffs, its approval rate under the third tranche, which consists of more consumer and assembled goods, is just 3%.