Replacing China as a supplier means replacing the source of 37-42% of all US garment imports

Replacing China as a supplier means replacing the source of 37-42% of all US garment imports

China is the target in the upcoming trade war with the US, and Donald Trump's latest threat to impose tariffs on all US$500bn of imported goods from China will undoubtedly hit garments. But replacing China means replacing 37-42% of all US apparel imports – and its deflationary impact on FOB prices, writes David Birnbaum.

At this point it seems clear that the US will impose further tariffs on made-in-China exports – and that these will include garments.

The only remaining questions are:

  • Who will benefit?
  • Who will lose? and
  • How much?

On the supply side, some will benefit. If you have a factory in Guatemala or possibly Mexico, you will be a two-time winner. First of all, because tariffs on made-in-China garments will automatically bring new business (almost certainly more than you can handle). Secondly, because both the DR-CAFTA and NAFTA agreements have Tariff Preference Levels (TPLs) and short supply provisions, you will be able to import fabric from third party countries, including China, and still export duty-free to the US.

Unfortunately, US based factories will not do well because they lack these provisions and therefore will be forced to pay duty on imported fabric. As I have argued elsewhere, albeit with no success, the US domestic industry would benefit from a free trade agreement between the US Government and the US domestic garment industry.

On the consumer side, some will also benefit. If you are consumer of $5000 Prada jackets or $15,000 Channel handbags, the news is good. Yes, retail prices will rise. However, you are in a market of reverse elasticity whereby rising prices make your preferred products more exclusive and therefore more desirable.  

Unfortunately, if you are a consumer of Walmart $25 jackets and $5 handbags, you will have to carry the burden of rising prices.

China will definitely lose out. After all, China is the target. However, the loss will not be all that great. Overall. The US accounts for 19% of China's product exports and 22% of China's garment exports. On the upside, as other countries move to take over China's market share, China's material exports will all most certainly rise.

China product exports 2017 (US$000)

  TotalGarmentsTextiles
Total 2,271,796,142145,563,55449,336,045
US431,664,27332,104,7251,717,166
19%22%3%

The big question is how much. This is the serious problem. Professionals have been telling us that US consumers have been buying fewer garments. The reality is somewhat different. In an industry where 97% of all goods are imports, the most accurate data is the trade figures. As you can see from the chart below, while garments (as measured in dollars) have indeed declined from 2015 to the 12 months ending May 2018, imports as measured in units have been rising slowly but steadily for the past 10 years. Conclusion: consumers are buying more but cheaper garments.

US garment imports

When we look at China's position we see a similar story. China's market share as measured in dollars has been falling from 2010. On the other hand, with the exception of 2018, its market share measured in units has been rising since 2011. Conclusion: again, more but cheaper garments.

US garment imports: China market share

Replacing China means replacing 37-42% of all US garment imports – which, I repeat, are 97% of all garments sold in the US. Can you imagine, if we take China out of the market, how much FOB prices and therefore retail prices will rise.

However, that is not the worst of it. The worst is that the decline in average garment FOB prices has been – and still is – almost entirely due to China.

FOB price: China vs World

Ten years ago in 2009, China's FOB prices were 8% below the average of US imports from all countries. As of the 12 months ending May 2018, that difference had risen to 21%.  

This is what we can look forward to in the US garment retail marketplace without China.