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Impact of Tariff Threats Causes Sea Change in Denim Sourcing

When it comes to denim sourcing, uncertainty in political circles is driving diversification and a solidification of relationships and tenets.

Much of the mood has been forced on the industry by the U.S.-China trade war that has resulted in high anxiety over precisely when apparel imports from China will be hit by tariffs of as much as 25 percent by the U.S. as a cudgel against what the White House and the U.S textile industry charge is China’s failure to reform and police its intellectual property rights policies and unfair government subsidies of exporters.

Then there was the recent threat by President Trump to impose tariffs from 5 percent to 25 percent on imports from Mexico, which was rescinded at the last minute. But the propensity for Trump to use punitive import duties as threatened and actual political tools has now ingrained a risk-averse attitude in the denim sector that has caused real change in sourcing strategies, according to mills showing at the Kingpins New York show last week and elsewhere around the industry.

“When the Mexican tariff threat was taken back by Trump, all the Mexican mills walked back off the ledge,” Richard Costa, East Coast sales director at Twin Dragon, said.

Susan Lee, the new designer at Twin Dragon, said, “We produce globally and ship globally. That’s how you have to be today.”

Twin Dragon now manufactures in Mexico, China, Taiwan, Vietnam and Nicaragua. The company also uses a wash house, Blue River, in Los Angeles, for treatments such as laser and ozone dyeing and finishing.

Robert Antoshak, managing director at Olah Inc., which produces the Kingpins show, said, “People are diversifying their denim sourcing locations. Some people are getting out of China and some people are staying in China. Some are adding another component and finishing it in another country so they don’t have to say Made in China and can avoid tariffs. Others are just moving out entirely. There is definitely confusion in the marketplace.”

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Mexico and the West

Antoshak said the effects of the trade dispute with China have moved some supply chains back to the Western Hemisphere. He said companies are not going to be able to swallow the 25 percent tariff on Chinese goods and it will cause them to look elsewhere for their production.

“I’ve observed a strong interest in U.S. sources of fabric,” he said, noting that he’s been working with a startup, Vidalia Mills, in Louisiana, and that’s going to be one of the sources of premium denim in the U.S. “I think there’s renewed interest in general in this hemisphere.”

Denim apparel imports from the Western Hemisphere increased 13.41 percent in the first four months of the year to reach a value of $323.68 million. This represented a 27.4 percent market share of all U.S. imports of denim apparel, 97 percent of which is jeans, according to the Commerce Department’s Office of Textiles & Apparel (OTEXA).

Mexican mills such as Global Denim and Kaltex exhibiting at Kingpins said business was good, but trepidation was high.

Jim Lorber, a sales executive at Global Denim, said if a 5 percent tariff had been imposed on Mexico, mills, suppliers and customers would have worked together to absorb or adjust costs and prices. But, “if tariffs go to 25 percent, then we and others would find it very difficult to manufacture there.”

Lorber said the ongoing tariff threat has caused shocks and change in the supply chain. He said one of the reasons so many Los Angeles denim company moved their production to Mexico was to improve their margins and if that is taken away, it would be disruptive to their businesses.

So far, Mexico’s place as a denim apparel supplier remains strong. Imports from Mexico were up 17.44 percent in the year-to-date through April, to $261.23 million in value compared to the year-ago period, OTEXA reported. Nicaragua’s jeans shipments to the U.S. jumped 23.57 percent in the period to $32.38 million, while imports from Guatemala rose 36.58 percent to $10.77 million.

The two countries are part of the Central American Free Trade Agreement (CAFTA), which allows duty-free treatment under certain input stipulations and has boosted exports for U.S. yarn and fabric manufacturers. Jeans imports from the CAFTA countries rose 26 percent to $43.75 million in the first four months of the year compared to the year-ago period.

In the midst of the Mexican tariff threat, Levi Strauss & Co. said sourcing from Mexico and China combined makes up 15 percent to 20 percent of its U.S. imports.

“Given the ongoing threat of tariffs and trade disputes, we have been proactively managing down sourcing from each of these countries over the past two years,” Levi’s said. “Currently, total annual China imports represent less than 8 percent of U.S. imports and we are in the process of actively managing this down to very low-single-digits by fiscal year 2020.”

China and the East

Art Peck, president and CEO of Gap Inc., told analysts: “We’ve been migrating sourcing out of China for the last several years and we’ll continue to do this responsibly going forward. As recently as three years ago, about 25 percent of our product was manufactured in China. In our most recent disclosure, that number was down to 21 percent.”

Asian countries such as Bangladesh, Pakistan, Cambodia and India have seen their jeans shipments rise at the expense of Chinese production, which has seen its growth flatten in the last year, even while holding onto its spot as the top supplier.

Ebru Ozaydin, senior vice president of sales and marketing at Pakistan’s Artistic Milliners, described “so much turmoil” in the denim sector. On the one hand there is the continued spate of store closings that leaves denim suppliers and denim brands “trying to understand where retail is going and plan accordingly.”

“Then everybody is talking about what’s going to happen with trade,” Ozaydin said. “There’s no doubt that the trade war between the U.S. and China has resulted in production being spread out across Asia and being a Pakistan manufacturer, we have benefited.”

Jeans imports from Pakistan rose 5.42 percent in value in the year through April to $74.57 million, while China’s shipments fell 2.29 percent to $228.78 billion. Among the top suppliers, imports from Vietnam jumped 33.65 percent to $83.43 million.

“The most important thing, however, is that you have to be ready as a company,” Ozaydin said. ‘You have to have capacity in place and the capability to utilize it when business increases. It’s also very important to have the right sustainable technology, methods and certifications in place. Brands have an absolute expectation of that. Sustainability has to be a pillar of your company or some brands won’t even consider you as a partner.”

Tricia Carey, director of global business development for denim at Lenzing Fibers, said, “Everyone is confused about what Trump is doing on trade. Trade is shifting out of China and being split among many countries. Companies are saying if we don’t need to be in China, we’re getting out.”

Carey said the political machinations threaten some ongoing relationships and collaborations and strengthen others. She noted that Pakistan and India are getting more attention for denim production.

Lenzing has expanded its global cadre of mills that use its Tencel fibers. Carey noted that 80 percent of the mills at Kingpins were using one of Lenzing’s fibers, including Tencel Lyocell and Refibra.