"Taking China out of the US garment equation will mean a substantial FOB price increase"

"Taking China out of the US garment equation will mean a substantial FOB price increase"

As President Donald Trump prepares to impose punitive tariffs on Chinese imports into the United States – which could include apparel and footwear – David Birnbaum takes a look at the potential winners and losers in the global garment trade.

The tariffs being considered against Chinese consumer products would be imposed under Section 301 of the Trade Act, as part of an investigation into unfair Chinese technology and intellectual property policies and practices. Some tariff measures could be unveiled as soon as Friday (23 March), according to reports.

As with any change, there will be winners and losers. Many of these will be different than were planned. As a rule the less thought-out, the greater the difference.

In this regard, we should not be surprised that effects of the anticipated Trump tariff will be the reverse of the result planned by the US administration.

  • China will be the great winner.
  • The transnational factory groups will do well.

On the losing side:

  • US importers and retailers will not do well.
  • The US consumer will be the great loser in the form of a very regressive tax-oid that will weigh heaviest on those least able to afford it.

To understand what will happen we have to consider the data that is most relevant to the player.

For example, importers and China factories are affected because orders normally placed with China factories will have to be moved to other countries. As a result, China exports measured in units are a determining factor.

On the other hand, retailers and US consumers will be affected by rising prices. As a result of which, China exports by value will be the determining factor.

As we can see from the chart below, from 2010-2017, China's US market share by units remains little changed, at 42%.

However, during the same period, market share by value has been decreasing.

While it is clear that moving a 42% market share will affect everyone, this is a big number – and finding alternative sources will not be easy.

China's US market share:

20102017% change
Units41.9841.91-0.2
Value39.233.7-14.1

The impact of the 14% decline in market share by value is a little more complex. The first thing to note is that shipping the same number of garments while receiving less revenue can be explained only by a significant reduction in FOB prices. This will have a most serious result. Clearly, taking China out of the US garment equation will mean a substantial FOB price increase. However, what we might not realise is that price increases will be two-fold FOB:

  • We will no longer have the benefit of the China price reduction, which is obvious.
  • However, what might not be as obvious is that the required increases in orders to other garment exporting countries will result in higher FOB prices from these countries. We will be moving from what has been for 30+ years a buyers' market, to a sellers' market.

Consider the chart below. Looking just at past years, not only have China's FOB prices been declining, but that decline has been materially greater than the decline from all importers.

FOB prices:

2015YE 11-16YE 11-17=+/- 2015=+/- YE 11-16=+/- 11-17
World$3.13$3.01$2.96
China$2.68$2.52$2.38-14.27%-16.27%-19.50%

Take away China and we will have an enormous jump in FOB prices. In the US, a country where imports account for over 96% of all garments sold at retail, any increase in FOB price will automatically be translated into a proportional increase in retail prices.

If we think of increased prices as a tax on the consumer, taking China out of the market will create the most regressive tax imaginable:

  • Wealthy people spend a smaller percent of their disposable income on garments.
  • It will be those with more modest incomes – the Wal-Mart and Target consumers ­– who will be disproportionately affected.

China the big winner

As we can see from the graph below, the US is an important market for made-in-China garments, reaching 20% in 2016. But garments as a whole are of declining importance to China's export trade. Furthermore, despite President Trump's efforts, 80% of China's garment exports would remain unaffected, so the overall result will be that even if China's US garment market share should fall to zero, the total loss of global market share for all products would fall by a modest 1.4%.

China garment exports:

The Trump punitive tariff will be of great benefit to China.

  • China has one of the world's fastest growing consumer markets. Concentrating on that market would bring higher profits to China-based garment factories;
  • China suffers from a chronic shortage of workers. Moving workers from labour intensive industries such as garments to capital intensive industries such as electronics and automobile manufacturing would increase productivity and per capita income;
  • China garment factories have long recognised the need to move off-shore. Regrettably, to date they have not done a good job. The loss of the US market might well be the impetus needed to go global.
  • A Trump attack on China's garment exports provides the PRC Government with a strong stick with which to beat the US. Here is a policy, where almost everyone suffers ­– US importers, US retailers, US consumers all suffer. Should China decide to take action, it has a good case. It is certainly large enough to cause serious harm, particularly to Trump supporters. China could source agricultural products elsewhere thus upsetting the red states in the Midwest. China could declare automobile parts products of national security and prohibit their import to China, thus wiping out the American/Chinese joint ventures in what has become the world's largest automobile market. China could simply favour Airbus over Boeing, thus denying access to the world's largest market for commercial aircraft.

What could the Trump administration say? It could argue that being locked out of the world's largest market for agricultural goods, aircraft and automobiles is a small price to pay for making the US safe for domestically produced brassieres.

The transnational factory groups will do quite well thank you.

  • Many of the garments made in China are produced by factories owned and/or controlled by the major Korean, Taiwanese and Hong Kong based transnational factory groups. These are companies with 55-years' experience in moving goods offshore. With branches already in operation in many countries, I am sure senior management in these companies are now determining just where and for what specific products they want to increase production; and how much they can charge in the new Trump sellers' market.

One important factor:

  • Moving to the US will probably be a non-starter. The major obstacle being textiles. The US domestic industry, with some few exceptions, has long ago moved away from fashion fabrics towards specialised materials such as industrial fabrics and automotive and aircraft fabrics. At the same time the duty rate on fabric imports to the US remains high. The preferred solution will be NAFTA and DR-CAFTA, which have duty-free access and are located in close proximity to the US market. Most importantly, both the NAFTA and DR-CAFTA agreements have short supply provisions that allow material imports from third party countries when a particular fabric is not available from mills located within the FTA area.

For US importers and retailers, the answer looks bleak.

There are some important products where China's US market share is below 25%. In all probability, importers can solve their problem by increasing production in existing factories located outside China.

On the other hand, there are many more equally important products where China's US market share is above 50%, in which case importers will have to seek new factories outside China. These factories do already exist, but their collective market share is not encouraging.

China US market share by units – low market share (%):

20102017
Cotton T-shirts17.514.2
Cotton Underwear10.69.3
Cotton Pants (M&B)21.619.7
MMF Pants (MB)22.619.9
Cotton Woven Shirts30.921
MMF T-shirts (M&B)22.619.9

China US market share by units – high market share (%):

20102017
MMF Hosiery79.981.2
MF Bras59.357.3
MMF Gloves77.867.5
MMF Dresses57.350.9
Cotton Gloves62.850
MMF Pajamas63.969
MMF Jackets (W&G)5957.8
MMF Jackets (M&B)54.755.1
MMF Robes72.473.2
Cotton Jacket W&G)48.952.8
Cotton Sweaters86.478.5
MMF Sweaters (W&G)64.681.7
MMF Suits (M&B)77.674.4

Finding new suppliers will not be easy. Below is a partial list of industries with factories producing goods on China's 50+%.

Hosiery (6115):

%
Turkey8.4
Italy6.4
Germany4.6
Netherlands2.7
Pakistan2.5

MMF Bras (6212.10):

%
Morocco10.9
France6.4
Germany5.2
China4.6
Indonesia4.1
Italy3.7

MMF Dresses (6204.49):

%
Italy17.7
France7.4
UK4.9
India4.7
Romania2.5

MMF Pyjamas (M&B) (620722):

%
India48.5
Vietnam2.6
Bangladesh2.2
Panama2.1

Sweaters (6110):

%
Bangladesh9.2
Vietnam6.6
Italy5.3
Germany3.9
Turkey3.3

We can see the winners and the losers. What is not so clear is a way out for the United States.