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Get Ready For Higher Apparel Prices Thanks to the Trade War

So far, apparel has been lucky in the escalating trade war between the U.S. and China. But that good fortune would evaporate immediately should Donald Trump decided to make good on his threat to impose tariffs on everything imported from the country. Even if the full $500 billion worth of goods isn’t targeted though, $200 billion in goods already hangs in the balance in the president’s latest volley against the Chinese. The United States Trade Representative will ultimately decide whether clothing and footwear makes that list but either way, there are likely to be both short-term and long-term effects for apparel.

“Most of these first round of tariffs are likely to hit the economy in other ways, as it effects the costs of steel and other big manufacturing-focused parts, but this is unlikely to hit consumers in a meaningful way in Q4,” said Tiffany Hogan, senior analyst, apparel of Kantar Consulting.

Beyond that, she said, it’s wait and see.

What the industry can already see, though, is what’s happening in the laundry aisle of any big box retailer. Washing machines and dryers were on the USTR’s previous list and the price tags are bigger as a result.

“You see the price effect for the consumer is on dryers and washing machines. There was a tariff on that and consumer prices did jump up a little bit,” said Chris Christopher executive director of IHS Markit, adding those manufacturers basically passed on the full burden to consumers. “It’s a benefit to domestic manufacturers of washing machines and dryers but it drives up the price overall.”

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Christopher said anyone shopping for new clothes should expect to see the same thing should the next round of tariffs include apparel.

“With apparel, it’s a no brainer,” Christopher said. “With apparel, especially imported from China, that tariff will be fully realized in the consumer price.”

With back to school in full swing and the holidays just around the next corner, the industry is trying to head that off by stocking its shelves and warehouses in advance.

“People are trying to load up given that they don’t know where they’ll be in a month or two. They’re trying to increase their inventories,” he said, adding that this rush to stock up is creating other pressures. “The effect is transportation costs are going to go up, and it will drive the price up because people are competing and trying to find alternative sources to be ahead of the game.”

Further, he said, manufacturers with product on hand are in the driver’s seat since they too could take a wait and see approach, hoping those goods will bring in a lot more if the price of imports increases in a month or two.

Ultimately, the whole situation is more proof that the apparel industry can’t rely solely on one production location. The challenge, though, is that supply chains can’t be changed on a dime. So even as some look to diversify out of China, it’s a longer term play that isn’t going to solve any immediate woes.

As a former Levi’s supply chain executive, Peter Maerevoet, global CFO for finance solutions company Tradewind, said, while smaller orders might get diverted to other countries based on the threat of more tariffs, manufacturers are unlikely to upend their entire operations.

“I’m not sure if [the trade war] impacts sourcing changes because it has to be really meaningful, and historically companies I worked at haven’t changed sourcing strategies based off of tariff changes because tariffs can change every year and you need to have stability in your supplier base,” he said.

Worth the cost?

Instability, though, is exactly the point, according to Jeff Streader, managing director for Go Global, a firm that advises strategic investors in textiles, apparel and footwear.

Streader supports the president’s measures, which are based on uncertainty, saying higher prices are a small price to pay for a more equitable relationship with China. What’s more important, he said, is righting the trade imbalance and halting China’s harmful business practices—all of which will come to pass for one reason.

“[China is] exporting more than they import so at the end of the day, ‘tit for tat’ as it was stated in one of your articles, who’s going to suffer? The U.S. consumer, absolutely. But at the end of the day, China has more to lose because we’re their largest customer,” he said.

As the year wears on, Streader said shipments from China will slow until it reaches a crisis point in early 2019.

“Right before Chinese New Year, [we’ll] hear how the Chinese are closing factories and laying off people because demand is down, and it’s going to force their hand to stop the piracy, to enforce their intellectual property laws, which are lax, and to come to the table and work this out,” he said.

While Streader knows his opinion isn’t one that’s often echoed publicly in the apparel industry, he believes more people would show support for Trump’s tactics if they weren’t concerned about backlash from their shareholders.

“Take a step back, let’s not just look at the fact that sneakers are going to be $20 more,” Streader said. “Let’s look at the fact that we get everything from China. Let’s talk about something bigger.”