The Huge Trade Disruption Between China & the US That No One Anticipated
Chinese and American businesses both woke up on May 10, 2019 like any other day of the week, nothing out of the ordinary. Looking back at it, it should have been chaos and mayhem. Business executives should have been frantically getting on conference calls, putting all their best minds together to rapidly problem solve.
What happened? By now, you’ve heard. That morning, the Office of the United States Trade Representative (USTR) officially increased China tariffs on Section 301 List 3 goods from 10% to 25%.
The China tariffs went into effect immediately. President Trump had tweeted a few days beforehand, on May 5, his intention to raise the tariffs, but usually it would’ve required certain steps before the Harmonized Tariff Schedule (HTS) could be changed. This time, no official announcement was ever posted by the Federal Register and hundreds of companies were caught off guard.
Why the China Tariffs All of a Sudden Increased
For a bit of background on the situation, it’s important to know that this China tariff hike wasn’t completely out of the blue. In August, 2017, the USTR initiated an investigation under Section 301 of the Trade Act of 1974 into alleged unfair trade practices by the Chinese government.
Based on its findings, the US released a plan to raise China tariffs on imported goods that divided them into four lists. Lists 1 and 2, worth about $50B in imported goods, had already undergone a tariff hike to 25% in 2018.
List 3, worth about $200B in imported goods, experienced a tariff increase to 10%. The China tariffs on List 3 were scheduled to be raised to 25% on January 1, 2019 but due to improved trade negotiations with China, that date was pushed to March 2, 2019. As March came around, trade negotiations with China still seemed to be improving and the date was postponed again indefinitely. And then, this.
Businesses in both countries have had a few days to process the new reality of the market. This affects US companies greatly, leaving them with only two immediate options: either take the hit to their profit margin and suffer the losses or find a way to transfer the costs to their customers. Consumers who see prices rising on some of their goods can attribute it to the tariff hikes.
How Tariffs Will Affect Fashion Designers, Clothing Manufacturers, and the Fashion Industry?
The tariffs will impact a lot of industries and the fashion industry is no exception. China is well known in the American fashion industry as one of the first countries that apparel production was outsourced to back in the late 70s, when China opened its doors to trade.
It was the birth of fast fashion in the U.S., the business model of the most successful brands and the buttress of the industry. The fashion industry hasn’t taken too big of a hit from the tariff hikes… yet.
How come? All finished apparel goods actually fall on the USTR’s List 4. When the tariffs on List 3 were raised to 25% last week, Trump indicated that List 4 would be next. List 4, the largest representing $325B in annual imports, have not yet been affected by any Section 301 tariffs. It seems the Trump administration has saved the worst for last.
Despite the fact that all finished apparel goods produced in China haven’t experienced a tariff increase yet, the fashion industry hasn’t gone completely unaffected. List 3 housed most textile goods such as raw silk, wool, cotton, spun yarn, several knit, crocheted, woven textiles, and more. Several synthetic textiles remain on List 4.
Raising tariffs on textile goods will hurt both brands and consumers. Textile importers or mills that develop their own textiles but import fibers from China are now paying more in tariffs to get their goods into the U.S. The apparel manufacturers who buy their textiles will also pass on the costs. It’s the brands, stockists, and retailers who buy from apparel manufacturers who will be less likely to pass on the higher cost they’re paying for apparel and home goods to the customer. Consumers will only pay so much more for the brands they’re used to. Some may absorb the hit, but some will look elsewhere, ultimately hurting American fashion designers and brands.
Right now, most apparel goods are still produced and finished in China and then imported to the US These are the List 4 goods that have yet to see a tariff hike. The only goods with price increases are those that are “Made in America” but source their textiles and fibers in China, a small fraction of the industry. But, once List 4 goes into effect, there will be no way to avoid the impact.
What Do China Tariffs Mean for the Future of American Clothing Designers?
Unless other negotiations take place to reverse any of the actions of the USTR between the US and China, American clothing companies and consumers have three options:
- increased prices
- more of their goods to read “Made in Vietnam,” “Made in India,” or “Made in Bangladesh”
- more of their goods to read “Made in USA”
If companies choose to keep their manufacturing in China, their prices will inevitably rise. The other options for them, of course, are to move their clothing manufacturing to overseas manufacturing hubs or back stateside to the USA. The latter option will raise costs on some line items because the U.S. has stricter labor laws, but it may balance out others with savings on transportation costs, faster turnaround times, less waste, and higher sustainability.
The money that would’ve been spent on tariffs can instead be spent on improving the supply chain and product, including better quality fabrics, ethical labor, and more sustainable processes. By investing the supply chain with money otherwise allocated to tariffs, the money is being put back into the pockets of American workers, ultimately improving the American manufacturing sector.
Realistically, we don’t expect American clothing companies to move their manufacturing completely back to the US. We recommend that American clothing companies take a multi-faceted approach. Diversifying your supply chain will be the best way to both protect your company from trade wars and scale your company’s growth.
While there are still benefits to manufacturing abroad, moving production back to the US also makes fiscal sense. Americans are increasingly turning their attention to sustainably and transparently made clothes – and prove again and again that they’ll pay a premium for them. See the latest research on just how important sustainability is to Americans.
Our hope is that American consumers will start seeing more “Made in America” labels than ever before as fashion brands and entrepreneurs take a multifaceted approach, diversify their supply chain, and appreciate the rising value of sustainable “Made in USA” clothing.