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New China tariffs will create supply chain chaos

By Giacomo Lee 18 Sep 2018

US President Donald Trump has decided to move forward with a 10% tariff on an additional US$200bn worth of goods from China, in a move the US fashion industry says will considerably disrupt the sector's supply chain.

New China tariffs will create supply chain chaos

US President Donald Trump has decided to move forward with a 10% tariff on an additional US$200bn worth of goods from China, in a move the US fashion industry says will considerably disrupt the sector’s supply chain.

In a statement yesterday (17 September), President Trump said he has directed the United States Trade Representative (USTR) to proceed with placing additional tariffs on roughly $200bn of imports from China following seven weeks of public notice, hearings, and “extensive opportunities” for comment.

The tariffs will take effect on 24 September and will be set at a level of 10% until the end of the year. On 1 January 2019, the tariffs will rise to 25%.

“Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267bn of additional imports,” the President said, adding the latest tranche of tariffs come as a result of the Section 301 process that the USTR has been leading for more than 12 months.

The US claims China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing US companies to transfer technology to Chinese counterparts. 

“For months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies. We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices,” Trump said.

“As President, it is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself. My Administration will not remain idle when those interests are under attack.

“China has had many opportunities to fully address our concerns. Once again, I urge China’s leaders to take swift action to end their country’s unfair trade practices. Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection.”

The additional tariffs, which are on top of penalties enacted earlier this year, will only serve to further stir up tensions between China and the US, which have been engaged in a tit-for-tat trade war. 

The latest move, taken with the previous tariffs, means roughly half of the products that China sells to the US each year will be hit by American tariffs, according to CNN

A formal notice of the most recent $200bn tariff action will be published shortly in the Federal Register. 

The list contains 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on 10 July. Changes to the proposed list were made after USTR and the interagency Section 301 Committee sought and received comments over a six-week period and testimony during a six-day public hearing in August.  

It does, however, still include several fashion and consumer products including leather and fur apparel, hats, backpacks, handbags, and purses, as well as textiles and machinery that are used for domestic manufacturing.

Supply chain “chaos”

The news has sparked “deep concern” among the US fashion industry and retailers who claim Trump’s tariff action is cruel to American interests – particularly since companies are only being given one week’s notice ahead of the 10% tariff enforcement – and will create “chaos” for the fashion industry’s supply chains.

In a statement, the United States Fashion Industry Association (USFIA) said it “strongly opposes” the tariff action which, in addition to amounting to a tax on consumers, will add considerable disruption to the supply chain.

“The fact that the tariffs will start at 10% now and will rise to 25% on 1 January creates additional chaos in the fashion industry’s supply chains, which will have a wide-ranging negative impact on consumers, companies, and jobs in the United States,” it said. “We urge the Trump Administration to reconsider this decision, and we will continue to join with our members and other industry groups to fight back on this tax on consumers and businesses.”

The group’s president, Julia Hughes, added the tariffs do little to punish China for its intellectual property and technology transfer practices but do a lot to harm American fashion brands and retailers as well as consumers of their products.

“These tariffs are a direct tax on the American consumer – and will affect consumers at all income levels, from the single parent struggling to make ends meet as they purchase back-to-school necessities for their kids, to the consumer of high-end fashion manufactured in the United States, and every American family in between.”

Risk to US consumers

Rick Helfenbein, president and CEO of the American Apparel & Footwear Association (AAFA), agrees, noting the latest tariff action is a “dangerous game”, which shows a deep disregard for American workers and families.

“While the association is thankful that the review committee agreed to grant relief for some textiles, the latest tariff action is cruel to US interests, particularly since companies are only being given one week’s notice and because the tariffs will automatically be increased to 25% after the first of the year,” he said.

“We are extremely disappointed that President Trump has, once again, decided to impose a huge new tax on American consumers and manufacturers,” he said. “During the public review process, AAFA and many of its members detailed the extreme damage this new tax will do to our industry, our nearly four million US workers, and to every American family. It seems most of those pleas were ignored. Instead, today’s announcement shows a deep disregard for American businesses, American workers, and American families, who will be negatively impacted by this decision. This is a very dangerous game to play, one that will not end with a winner.”

Matthew Shay, president and CEO of the National Retail Federation (NRF), concurs, adding that every time the so-called trade war escalates, the risk to US consumers grows.

“With these latest tariffs, many hardworking Americans will soon wonder why their shopping bills are higher and their budgets feel stretched.

“We cannot afford further escalation, especially with the holiday shopping season right around the corner. The mere talk of tariffs on all remaining Chinese imports is of serious concern to retailers since tariffs of that magnitude would touch every aspect of American life. Achieving better trade deals is an important priority, but there is nothing better about it when American families are forced to pay higher prices for everyday purchases.”

Bad news for retail 

Neil Saunders, managing director of GlobalData Retail, echoes Shay’s view, adding the latest tariff action is bad news for the retail sector, especially in the run-up to the key holiday trading season and coupled with the fact that the latest round seems to extend the tax to a vast array of consumer goods.

“Many retailers will now be faced with a difficult choice of whether to pass the cost increases across to consumers or to take a hit on their margins,” he explains. “The exact response will vary from retailer to retailer but, in our view, both strategies are likely to be used.”

He adds, while the consumer is currently in a position to cope with some mild rises in retail prices, an increase across the board will likely result in a decline in retail volumes over the longer term, which will be unhelpful to the sector.

Meanwhile, although Saunders notes shifting production is a further option for some retailers, with many looking at this option, given the extensive manufacturing capacity in China and the difficulty associated with quickly shifting supply chains, this can only be achieved over a period of time and will, in itself, result in some additional expense.

The small bit of good news from today’s announcement is that, initially, the tariff rate will only be 10%, Saunders says.

“This will still increase prices, but it does mean that the steeper rate of 25% will not be introduced before or during the critical holiday season. However, should an agreement between China and the US not be found before the New Year, retailers could well start 2019 on a gloomy note.

“Ultimately, while the President may have a sound political motivation for trying to level the playing field in world trade, these policies will bring at least short-term pain to retail and to the consumer.”

Click here to view the final tariff list.