China’s devaluation of its renminbi this week sent markets into a temporary tailspin, and though things have somewhat rebounded since, supply chains may still have a price to pay.
Whether designed to offset the cost of President Trump’s promised 10 percent tariff hike set to further burden the apparel, footwear and textile sectors starting Sept. 1, the currency fluctuation could have a manifold impact on sourcing costs.
Already, some Chinese suppliers are offering discounts as a result of the devaluation, but the price breaks haven’t been big enough to account for what the tariffs could do to costs. In fact, factories are so far only giving back the same 2 percent rate that the fluctuated since the announcement of tariffs.
“Certainly currency did fluctuate on Monday…and we’re seeing our factory partners’ willingness to renegotiate on account of that, but it’s just 2 percent,” Win Cramer, CEO of consumer electronics company JLab Audio, said speaking on a media call hosted by Tariffs Hurt the Heartland Wednesday. “We’ve still got 8 percent to worry about.”
With Chinese factories agreeing to concede just 2 percent on price in accordance with the currency shift, a 10 percent tariff on Chinese goods would still leave U.S. importers paying an 8 percent increase they’ll have to offset by reducing overhead in other ways to avoid margins taking a hit.
On Friday, the People’s Bank of China set the official midpoint reference for the yuan at 7.0136 per dollar, the weakest level in more than a decade. That midpoint serves as the daily anchor for the country’s currency, marking the central point from which the renminbi (RMB) can strengthen or weaken by up to 2 percent within a day. Still, some economists have said that, to offset a 10 percent increase in tariffs, the dollar-yuan exchange rate would need to weaken further to between 7.1 or 7.2 to the American dollar.
If the currency weakens to 7.5 or even 8 renminbi to the dollar, that would significantly weaken the effect of Trump’s tariffs, as it would be considerably cheaper for U.S. companies to buy Chinese goods.
But as far as discounting goes, Wade Miquelon, president and CEO of Jo-Ann Stores, agrees that while Chinese factories may modify prices, it won’t be by much.
“Most of the products we import from China have much of their cost in dollars because of their import content—things such as oil, raw cotton and the like. In fact, the local Chinese content can be as little as one-third of the cost, so there is not a lot of financial room for many suppliers to discount based on yuan devaluation,” Miquelon told Sourcing Journal.
And because many companies, the craft and fabric firm included, have developed their China-based supply chains over decades, certain products simply lack non-China alternatives.
“It often is a take-it-or-leave-it situation until viable alternative supply chains are developed,” Miquelon said. “If you’re the only game in town, you have leverage regardless of the RMB.”
That means if Trump sticks to his plan to put the new tariffs in place—and the renminbi doesn’t weaken much further—sourcing costs likely still will rise. And that means most brands and retailers are prepared to pass the costs along to consumers.
“We’ve had to take up some prices, and where we’ve had to take up prices, we’ve certainly seen hits from the customer,” Miquelon said, pointing to the impact the Tranche 3 tariffs had on the business and the price hike it created. “If you extrapolate that more broadly to what we’re going to see in List 4…it could create a vicious cycle of higher prices, less demand, higher prices, less demand.”
Acknowledging his agreement, Lance Ruttenberg, CEO of American Textile Company, said, “There’s no free lunch.”
“At the end of the day, an increase in cost is going to harm somebody in the supply chain, whether it’s the manufacturer or the retailer,” he said. And with a word of warning, he added, “As prices increase and features and benefits don’t, the demand will decrease.”
On apparel alone, David French, senior vice president of government relations at the National Retail Federation, said the new tariffs could ultimately cost American consumers $4.4 billion more each year.
“I think the tariffs so far have only been on the margins of the consumer economy, so what has happened to date is not a good indication of what will happen in the future,” French said on Wednesday’s Tariffs Hurt the Heartland call.
But according to Adidas CEO Kasper Rorsted, China’s currency fluctuation could pose even greater disruption to the industry than the tariffs would.
“We do 25 percent of our total business in China, 20 percent of our manufacturing capacity in China, so for us we can still move the rest out of China and have no impact,” Rorsted said, addressing the potential effects of the impending tariffs on Bloomberg TV Thursday, following Adidas’ second quarter earnings release Wednesday.
The much bigger impact in the current economic war, he said, is the fluctuation in the Chinese currency, and that is where his concern lies.
“The moment you start having a weaker RMB, this will hurt all regions in all countries, and it’s an illusion to think this will be a win-lose scenario. This will be a lose-lose scenario,” he said. “So I think when you look upon the macros of it…the currency war is much more severe, with much bigger consequences than the tariffs.”
With regard to how the currency devaluation—which made China’s currency weaker than 7 yuan to the dollar for the first time since the global financial crisis in 2008—affects the market outlook, IHS Markit chief economist Nariman Behravesh says the move adds even more uncertainty, and it’s either going to have little impact at all, or major ramifications for the global economy.
“China’s recent devaluation is relatively small in the whole scheme of things,” Behravesh said. “If it stops there, and neither the U.S. nor China take any other actions that would give markets a fit, then this episode will probably blow over. On the other hand, if this is the beginning of a new and dangerous phase of the trade war, then all bets are off, and the ensuing financial fire storm could push the U.S. and global economies into a recession.”