The Trump trade war has moved from reality to Trump World

The Trump trade war has moved from reality to Trump World

President Trump's goal to force brands and retailers to move their orders out of China, at no cost to the US consumer, is the final triumph of fantasy over reality, writes David Birnbaum. Where are we going to move production? Will there be an added cost? And if so, who will pay?

The tell me that "Politics is the art of the possible." That may have held true 160 years ago in Germany, but today in the United States, the possible has been thrown out of the Whitehouse window, replaced with the new Trump dictum "Politics is the art of the impossible."

In the real world, if we are smart, we take reality as we find it and use it as a basis for our decisions. 

President Trump's goal to force brands and retailers to move their orders out of China, at no cost to the US consumer, is the final triumph of fantasy over reality.

In the real garment industry China accounts for about 40% of all US garment imports as measured in units. When we look at the 53 products that constitute fashion garments as of year-to-date June 2019, that number rises to 53%. If we add Vietnam, the unit market share rises to 65%.

If we are to move fashion-garment production out of China to some third countries, to determine solutions consistent with reality, we must find the answer to three questions:

  • Where are we going to move production?
  • Will there be an added cost?
  • If so, who will pay?

The answer to question #1 is, there is no answer. A 65% market share means that every factory currently producing fashion goods would have to triple production, as of yesterday (1 September) when the US went ahead with an extra 15% tariff on US$31bn in textile, apparel and home textile products from China.

Moving production back to the US is not an option for the simple reason that for all practical purposes, with imports accounting for 95% of all retail, the US does not have a garment industry.

The answer to question #2 moves the Trump policy further unto the Trump fantasy world:

First of all, as of year-to-date June 2019, China's FOB (free on board) price discount for fashion products was 19.7% below the average price of all fashion garment imports (up 17.6% from the same period in 2018).

Secondly, even in June, a period before brands and retailers seriously considered moving out of China, FOB prices were already moving up compared with the same period in 2018. 

  • Vietnam: 4.6%
  • Bangladesh: 7.1%
  • Indonesia: 1.6%
  • India: 5.5%

In our real world, no sane importer is going to move from a country that offers goods at 20% below average to a country where average price is currently 1.6%-7.1% above average and rising, in order to save 15% on tariff. In fact, I would go further. I suggest that in the present situation, very few brands and retailers are going to leave China even for a 25% increase in tariffs.

#3: Who is going to pay the cost?

Certainly not the factories. Should retailers and brands try to move out of China, every factory capable of producing any fashion item will be overbooked. In the real world: overbooked = increased price.

Certainly not the brands or importers. They do not have the margin

Once again, the consumer will pay the bills.

The Trump trade war will result in higher prices paid by the consumer, and greater profits for the suppliers particularly China.

There is a point where fantasy impacts on reality. The 'Law of Unintended Consequences' tells us the greater imposed fantasy the greater the consequences. The Trump trade war will create one amazing change – an economic tsunami.

For 70 years our industry has operated in a buyers' market, where for much of the time factories were forced to continuously reduce their FOB prices. President Trump is about to reverse that trend. Due to his efforts, we are about to move to a sellers' market, where FOB prices will rise everywhere, including China.