US apparel stocks have taken a battering, while “truly shocking” and “a disaster” are among the first responses to President Trump’s tweet that an extra 10% tariff will be imposed on $300bn worth of US imports from China – including all textiles, apparel and footwear – beginning 1 September. 

To say US apparel brands, retailers and importers are reeling from the latest move is an understatement.

Yes it had potentially been on the cards since May, when initial threats to impose an additional 25% tariff on all remaining imports from China were first mooted. 

But to all intents and purposes, trade talks between the two sides appeared to be gathering momentum again following two days of meetings in Shanghai – with Trump even taking to twitter yesterday (1 August) to emphasise the “positive dialogue with China [is continuing] on a comprehensive Trade Deal” at the same time as revealing the “small additional” 10% tariff.

If the tariffs go ahead as proposed, then around US$36bn worth of textiles, apparel and home textile products sit on the list proposed in May (Tranche 4) – from tops and bottoms to underwear and outerwear, from swimwear to ski suits, and from ties and gloves to socks and hosiery.

And initial indications are that the 10% tariff, which would be in addition to any other applicable tariffs, will be applied on the entire list, according to customs and trade law firm Sandler, Travis & Rosenberg (ST&R).

While a Federal Register notice providing additional clarifying details is expected shortly, the law firm says that based on experience with Tranche 3 goods, it is unlikely that requests to exclude specific products from Tranche 4 will be accepted while the tariff rate remains at 10%. However, if this rate is increased to 25% – which could happen if the administration deems it necessary to gain additional leverage in the ongoing US-China trade talks – an exclusion process could be established.

How tariffs could hit trade

During a public comment period in June, dozens of executives from apparel and footwear brands, retailers and importers shared their concerns over how new China tariffs could hit the US apparel trade. 

They explained how any new tariffs would hike sourcing costs, increase competition for factory space outside of China, drive up the price of machinery and materials used by domestic US manufacturers, and wreak havoc through a lack of alternative sources of supply, not only for factory space but also inputs used throughout the footwear and clothing supply chain.

The companies also warned that US consumers would have to pay more as they would not be able to quickly shift sourcing away from China for many of the items under review. And the timing might mean that back-to-school clothing would be amongst the first to be hit.

The testimonies repeatedly referenced the fact that footwear and apparel goods are already subject to the highest US tariffs, behind only tobacco and peanut products. The industry is also subject to a disproportionate tariff, representing 4% of all imports in 2018, yet paying a whopping 30% of all duties collected. Children’s basic canvas sneakers already have a duty rate as high as 67.5% of the landed cost price, and certain manmade fibre apparel can have duty rates as high as 32%.

And China is the top supplier of these items by far, accounting for 42% of all apparel and 69% of all footwear imported into the United States in 2018. All other countries combined are ill-equipped to handle the sheer volume of capacity that would be required to move production out of China.

First feedback

Yesterday an incensed Tim Boyle, president and CEO of Columbia Sportswear Company, said if tariffs are raised “it will be a disaster for the American economy, employers and consumers.” 

He adds the company, whose brands include Columbia, Mountain Hardwear, Sorel and prAna, “will be forced to raise prices on our products – along with many other manufacturers in our industry. This is a massive tax on employers and consumers, not on China.

“Footwear and apparel are some of the most highly taxed products in the United States. With President Trump’s proposed 10% tax on goods manufactured in China, the American people will see almost half the cost of their shoes and clothing go to taxes.

“Furthermore, raising tariffs creates uncertainty, which makes it difficult for American business to make investments that can continue to grow the US economy. We’ve been fortunate to have a strong economy for the past decade. Let’s not tank the economy with the misguided conception that trade wars are fun.”

Rick Helfenbein, president and CEO of the American Apparel & Footwear Association (AAFA) adds: “The President’s decision to proceed with adding these additional costs for hard-working American families is truly shocking. This decision will increase the tariff bill on all clothes, shoes, and home textiles, like blankets and sheets – products that already account for the vast majority of the duties collected by the US government. 

“The fact that this tweet comes after only one meeting with the Chinese delegation following the resumption of talks is extremely concerning. It is time for Congress to step up and take back its authority to manage international trade as outlined under the US Constitution.”

Likewise, David French, senior vice president for government relations at the National Retail Federation (NRF), says: “We are disappointed the administration is doubling-down on a flawed tariff strategy that is already slowing US economic growth, creating uncertainty and discouraging investment. These additional tariffs will only threaten US jobs and raise costs for American families on everyday goods.

“The tariffs imposed over the past year haven’t worked, and there’s no evidence another tax increase on American businesses and consumers will yield new results.”

Research commissioned by the NRF in June suggested extra 25% duties on the apparel items in Tranche 4 would increase prices of apparel from China by 22%, and by 2% for products from US suppliers. Overall, US prices for apparel from all sources combined would rise by 5%.

A recent survey published by the United States Fashion Industry Association (USFIA) also found 83% of respondents expect to decrease sourcing from China over the next two years in direct response to the tariff uncertainty. 

Up to 63% also blame the US tariff action for higher sourcing costs, with the average price of US apparel imports from Bangladesh, Vietnam and India – the main alternatives to China – rising by more than 20% in the first five months of 2019 as more companies shift their orders to these countries.

But not all think Trump’s move is a bad idea. 

Kim Glas, president and CEO at the National Council of Textile Organizations (NCTO), which represents the US textile industry, says: “We believe this move will lead to more re-shoring of production to the United States and the Western Hemisphere production platform – and will also address and mitigate China’s rampant trade distortions.” 

However, the group does have concerns that some inputs already vetted by the administration and removed from previous retaliatory tariff lists may reappear on Tranche 4, including machinery, dyes and chemicals and textile components not available domestically, like rayon staple fibre.

And it wants the administration to apply the 301 retaliatory tariffs to de minimis shipments below $800, which are not currently subject to the tariffs. 

Options to offset tariffs

But with only a month until the tariff is set to be imposed, what are the options for companies to reduce or eliminate their exposure?

According to ST&R, firms should explore the legal options, and “should also carefully examine export dates and projected arrival dates to conform with the 1 September tariff start date.”

It has previously advised that companies could explore co-production since goods may move back and forth across borders multiple times before being completed and shipped to the US.

For example, garments may be cut and subcomponents joined in China, parts may be shipped to a third country where the major parts are assembled or major seams are sewn, and the goods may return to China for embroidery, screen-printing, other types of finishing as well as packing and export to the US.

While the finished goods incorporate Chinese processing and materials, their country of origin may be the third country, which would exclude them from the Section 301 tariffs.

That said, importers using co-production should keep thorough records to support the different types of processing that occurred inside and outside of China and the transfer of the goods and materials back and forth in order to respond to any CBP request to substantiate the origin of the goods.

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