Trade War: How Reliant Is Fashion on China?
Apparel, footwear and accessories could soon be in the firing line for higher tariffs as the trade dispute between the U.S. and China escalates.
The prospect of fashion being pulled into the escalating trade dispute between the U.S. and China is firmly back on the table. President Trump and other administration officials have over the last three days stepped up their rhetoric against China, warning of plans to increase tariffs on every single product imported from the Asian giant. It is unclear for now if their strong words are just part of a negotiating tactic as a Chinese delegation including Vice Premier Liu He heads to Washington, D.C., for make-or-break talks on Thursday, but one thing is certain — China is extremely important to the fashion world.
Companies might have made efforts over the past year to start to de-risk from China, but government figures lay bare just how reliant the industry still is on manufacturers in the world’s second-largest economy. According to the Commerce Department, at more than $27 billion, the U.S. imported more apparel from China than any other country last year. This was slightly higher than in 2017 and accounted for a third of all of America’s apparel imports. To put the number into context, it’s more than double the amount received from Vietnam, China’s closest competitor whose apparel imports totaled $12.2 billion last year, and the figure dwarfs third-in-line Bangladesh at $5.4 billion.
The American Apparel & Footwear Association’s calculations found that the stakes are even higher for retailers of footwear and travel goods, which include handbags, backpacks and wallets. It puts the percentage of imports of those products from China at 72 percent and 84 percent, respectively.
While much of the fashion category has managed to escape Trump’s first three tranches of tariffs, travel goods were not so lucky, getting hit with 10 percent tariffs in the second half of last year. They’re set to feel even more pain if talks between the U.S. and China fail Thursday because, in a duo of tweets Sunday, Trump threatened to push the 10 percent tariffs up to 25 percent on Friday.
The rest of the industry will have more time as his other pledge to place 25 percent tariffs on a remaining $325 billion worth of goods would take longer to put in place and may involve hearings on Capitol Hill from those affected.
“I think that process might take several weeks,” noted David French, senior vice president for government relations at the National Retail Federation, who is hoping there will be an exclusion process for goods that are particularly difficult to obtain in other markets.
Experts believe that if tariffs are introduced, retailers may see their margins squeezed in the short term. In the longer term, however, they will have little choice but to push up prices for consumers — threatening what has been the longest stretch of economic growth in decades.
The Accessories Council has estimated that under the new tariffs, with an additional 25 percent, a handbag priced at $100 retail would increase to $120.
One company that has made recent efforts to become less reliant on China is G-III, which has an array of businesses, including the DKNY and Donna Karan brands, which it owns outright, and Calvin Klein, Tommy Hilfiger and Karl Lagerfeld, which it produces goods for under license. Morris Goldfarb, G-III’s chairman and chief executive officer, previously told WWD that the group has been working hard for a large chunk of the past year to find solutions for production outside of China and has had some luck. “We’ve succeeded and we’ve brought down the percentage of dependency on China to a major degree, and it continues,” he said.
Elsewhere, Ted Dagnese, chief supply chain officer at Vancouver-based Lululemon Athletica Inc., told delegates at an AAFA conference that even though the fitness apparel company has been fortunate, with its China spend in the single digits, it has still had to make some adjustments due to the trade war.
But for many companies, moving a large portion of their operations out of China will be a lengthy process that could take several years, not something that can realistically be done in the space of a few weeks. For now, Wells Fargo analyst Ike Boruchow believes that a company that is most directly exposed if Trump goes ahead with the threat of new tariffs is Steve Madden, which sourced 94 percent of its products from China last year and generated 88 percent of revenues in the U.S. He also noted that Skechers USA Inc., Gap Inc. and Urban Outfitters Inc. stand to be negatively affected. All four companies saw their stock close down Tuesday, while the Dow Jones Industrial Average shed 473.39 points, or 1.8 percent, to 25,965.09 as investors started to take Trump’s threat more seriously. They appeared to be more shaken than on Monday, in part due to U.S. Trade Representative Robert Lighthizer backing up Trump’s tweets and confirming that higher tariffs will indeed come into effect on Friday.
Government officials and observers had projected for weeks that the U.S. talks with China were due to conclude soon with a deal that included not only trade concessions, but also steps by China to step up its protection of intellectual property. But Lighthizer explained that cracks had started to emerge in talks over the weekend, with China reneging on previous commitments for unknown reasons. While the Chinese government has made no official statement, an editorial in Xinhua, the state newspaper, described the U.S. approach as “regrettable” and stressed that it will not work.
“China will do its utmost to maximize the common interests and reach a mutually beneficial deal with the U.S. side, but it has also fully prepared for any situation that may occur,” it said. “It will continue to defend its core national interests, safeguard the fundamental interests of its people, and never compromise on issues of principle.”