The so-called "fast fashion" model is particularly vulnerable if the trade war continues

The so-called "fast fashion" model is particularly vulnerable if the trade war continues

The worsening tariff war between the US and China reads like a bad Cold War thriller to Robert Antoshak, managing director at Olah Inc. Here he looks at the possible next chapters and their implications on apparel sourcing.

The Trump administration has ramped up its tariff war with China by raising its next round of proposed unilateral tariffs to 25%, up from an initial level of 10%. These tariffs cover virtually all yarn and fabrics. All told, about $200bn worth of Chinese products exported to the US would be subject to the higher duties. 

The Chinese government, in turn, has announced a further round of tariffs aimed at about $60bn worth of US exports. Presumably, without some agreement between both sides to de-escalate the tariff battle, and after considering China's latest intention to levy tariffs on more US products, it is likely that the Trump administration will impose duties in a third round of tariffs covering all remaining products not already covered previously. 

Such a final round would result in higher tariffs for virtually all products China exports to the US. About $500bn worth of merchandise would be subject to higher tariffs. What would the Chinese government do next?  

All of this reads like some second-rate thriller written during the Cold War. Is DEFCON 1 next on the horizon? Nevertheless, we are approaching an uh-oh moment when things to go too far.

Business implications

Our industry, however, has been caught in the middle of this trade war. We didn't cause it, but politics between two significant powers may inflict a lot of pain on us. Textiles may be bad enough, but for me, things will have gone too far when finished apparel – consumer items – make the punitive tariff list. 

There are significant implications for our industry: higher prices, altered supply chains, disruption of the ordinary course of business. Moreover, relationships established between suppliers and buyers over the past 20 years or so are increasingly coming under pressure.

In particular, we have to wonder what will happen to the so-called "fast fashion" model of business if the trade war continues. 

For many companies, fast fashion has proven to be an efficient means to maintain sales in a rapidly evolving retail environment, a savior of sorts for an industry struggling with the effects of changing demographics, fickle consumers, and the impact of technology. Higher tariffs, brought about by a trade war, will only complicate, if not disrupt, this model of sourcing. 

Why? The cost of production will go up for a variety of reasons exacerbated by higher tariffs. Importing companies may have to dramatically alter their supply chains and search for ways of producing their products in countries with suppliers that may not be able to adjust to the demands of importing companies quickly. In turn, quality may suffer along with longer delivery times. 

It's a gloomy prospect for many importing brands and retailers accustomed to the traditional Chinese norms of quality and efficiency at a decent price. Fast fashion functions utilising a highly choreographed supply chain efficiency where low prices equally match product churn. Higher tariffs threaten that model of production.  

And what about the Chinese manufacturers? Will they absorb the cost of higher tariffs to avoid losing business to suppliers in other countries? They may try, but it would be challenging. What will the Chinese government do? Will US importers find themselves in the unenviable position of paying the tariffs themselves? Or will American consumers end up bearing the tariff costs by paying more for their clothing at retail? 

I am sceptical that American consumers, long accustomed to low-cost clothing, would be willing to pay more; consumers may cut back on their purchases. Industry sales may suffer as a result.

A new tax

No matter how you look at it, Trump's tariff policy adds up to a new tax. I find this ironic after Trump boasted so much about the income tax cut enacted earlier this year: give with one hand and take away with the other. Up until now, companies have absorbed some of the tariffs already imposed by both countries, but that's not a sustainable solution regardless of where you operate in the supply chain.

It also seems that the Chinese authorities are gradually lowering the value of the yuan opposite to other currencies to cushion the impact of higher US tariffs on their exports in an effort to use exchange rates to make the price of their exports cheaper. But for how long will currency manipulation alone be able to offset higher duties? In the end, tariffs are merely a tax, something that someone somewhere will have to pay. 

A porous solution

The Chinese strategy will likely be to let Trump make the moves, while China takes its time and makes counter-moves as necessary. There will be a lot of posturing and a lot of tariffs and counter tariffs. Eventually, though, this will hit a point where tariffs by themselves won't be enough to satisfy either side. And that, ladies and gentlemen, is when quotas may appear. Oh my, could it possibly be that we're going back to that?

A problem with a bilateral trade war is that despite its intended goal of restricting a specific country's trade, the opposite occurs. It leaks. Such trade fights are porous. Slap a quota on raw materials, like cotton? No problem, the products will just be exported via third countries in either their original form or in some new intermediate form. Too many jeans are entering the US for the liking of Trump. 

Slap on quotas – and herein lies the rub: there are ways of legally avoiding tariffs, but if such avoidance grows to a certain level, Trump, in his determination to "Make America Great Again" will ratchet up the pressure to include quotas. 

And our industry becomes a whole lot more complicated.  

Vietnam, for example, has been a beneficiary of this trade war. Many companies are already shifting supply chains to run outside of China to supply Chinese mills with much-needed yarn and fabrics. How will Trump respond to that? More tariffs, only now directed at Vietnamese producers, or will he choose to impose unilateral quotas? Under this scenario, we're just steps away from a return of the Multifiber Arrangement. 

I think Trump will keep raising the ante until he feels he's received the concessions from China he desires, although I still don't understand what his ultimate objective is other than to pander to his political base – with our industry caught in the middle.

Let's hope there is a sensible way out of this morass.