If your business imports materials or goods from overseas, there will always be the potential of tariffs to be levied or raised on countries that you are doing business with. This is a fact that your company will need to be aware of in times of favorable economic policy and in times more like today, when tariffs can seem to be increasing on a daily basis and it is exhausting to try to keep up with. The big question now is how are these tariffs affecting businesses large and small, and is there any positive impact that will result for the US economy and the US fashion industry?
Tariffs imposed on China are hitting even domestically produced brands hard if they are ordering their fabrics from Chinese suppliers. Over the course of about 6 months from late 2018 to early 2019 silk prices increased about $4.00 per yard due to imposed tariffs. Now you add on the increased labor costs that are found in US factories and you have a recipe for financial disaster for US brands made of imported materials.
While this is constantly changing, the US is threatening to levy up to 25% tariffs on about $300 billion worth of imported goods from China, including mobile phones, bedspreads, household goods and more. There is really no solution that would avoid impacting the price that the end consumer pays. Keep in mind that China is the world’s largest exporter of textiles and clothing. The United States is the largest consumer of those exports.
Mexico is also facing possible tariffs. Seeing that Mexico is the largest market for American-made textile exports, this has the potential to have a large negative impact on US based businesses.
So why don’t brands just pull production out of these regions to avoid these tariff hikes? Sourcing new suppliers and manufacturers can take years to do. Tariffs can go into effect almost immediately, causing instant financial hits that can last until production can logistically be moved. Depending on the size of your company and the amount of units per year you are producing, making such a drastic change does not happen over night and can itself become a huge financial undertaking. Another factor is making sure that the factories you move to are compliant with any ethical and quality standards that are necessary.
The US footwear industry, in a united front between those manufacturing domestically and those importing, wrote a letter to the president expressing grave concerns that these tariffs will cause a negative impact to all segments of the industry. They have warned that there will be unintended consequences that will continue to damage the industry for years to come. Consumers will be negatively impacted. Businesses will be negatively impacted. It is a lose-lose situation.
Previously, with the backing of 170 companies, the footwear industry has collectively called the new duties “unfathomable”. They believe that they could result in a 100 percent duty for some working-class families. These new duties could in fact undermine the domestic footwear industry by putting as much a financial strain on brands that are made in the US as brands that are importing. This is due to the fact that certain materials, trims and machinery are not made in the US and therefore will have to still be purchased from overseas suppliers, mainly in China, exposing them as well to the tariff hikes.
Most recently, the imposed 15% increase on apparel and footwear imported from China as of September 1st, will hit businesses with a significant increased cost of goods, especially small ones. Some companies are trying to skirt these tariffs by taking in goods early, changing composition of the fabrics they are using, working through trade partners and moving their supply chain all together. None of these options come without a cost and without time spent on sourcing and development. China also has factories with the largest production capacities, so moving all production out of China will be met with capacity constraints when working with other global countries, including the United States.
Rick Helfenbein, president and CEO of the American Apparel & Footwear Association has reacted to these new tariffs, calling them “truly shocking” for hard-working American families. The National Retail Federation has advised that a misjudged tariff strategy would harm the US economy more than help it. In general, most groups are supporting the goal of restructuring the trade relationship between the US and China. However, they seem to be unified in the belief that the current attempt to execute the necessary change will be detrimental to US companies and individual Americans alike.
The impact of this flawed tariff strategy is being shown as slowed US economic growth, fear of investment, and threatening US jobs. This is all on top of increasing costs for American families on everyday goods.
Re-shoring is a positive result that could come from this trade war. However, the US does not have the capacity, skilled labor, or all of the necessary supply options currently to fulfill a complete, or even major move to re-shore entire supply chains. Can it eventually? Sure. But it takes time to rebuild the industry up in the US. Skilled sewers are becoming harder and harder to come by here. Sewing is not being taught in most schools or households. Things like zippers and molded bra pads are not being produced in the United States. Tariffs happen quickly. Movement of industries happens slowly. In the meantime, there is likely to be drastic casualties to small businesses that are left to scramble to figure out their next move.
Glossy reports that Eileen Fisher CFO, Vince Phelan, has stated, “We are always reviewing our sourcing strategy to make sure that we are taking advantage of the most sustainable and efficient vendors who can produce clothing at the quality we demand while balancing that against the value we place on long term relationships. We have, though, revisited our sourcing strategy and reliance on vendors in China more quickly than we anticipated because of the increase in tariffs. With the hope of offsetting the financial impact of these increases, we are exploring vendors in different countries with similar and/or more innovative capabilities.”
Lafayette 148, who expects their costs per item to double, will be impacted greatly. For future seasons, they can plan their retail pricing to increase or engineer their costs down somehow. However, for the current season where there was not time to factor in doubled costs, they will lose significant margin that can be very costly for any company. Their brand specializes in women’s wear and footwear. They hold most of their stores in China: 15 versus 6 in the US. Revenue for the brand was $160 million in 2017 and they have steadily had sales increases for almost the entire life of the brand. However, they are still small enough to be seriously impacted by unexpected tariffs. Brands have to work to strike a balance of offsetting these additional costs with both sides, supply chains and consumers, to ensure their continued success. Deidre Quinn, CEO and founder of Lafeyette 148, has said “ To put it simply, a global crisis calls for a global solution.”
The CFDA noted in it’s response that large companies may be in a position to eat the added cost of tariffs at least for the short term, while smaller brands will have no choice but to pass the added cost onto their consumer by way of retail pricing increases. Small businesses then receive a major disadvantage when competing with larger companies, as most consumers make purchasing decisions based on price.
The fashion industry requires inputs from around the world. Yes, that includes Mexico and China. The American fashion industry will continue to move forward. Designers will continue to create. New businesses will continue to surface. Tariffs will not stop these facts. However, they threaten to have a devastating impact in the immediate and near future of many brands, while creating an additional layer of competition between small brands and large, fully funded companies.
As always, we love to hear from you. Leave a comment on your thoughts on tariffs or how they have affected your business. For more on retail trends, check out our recent blog post here.
Photo Credit: Charisse Kenion, Unsplash