Both supporters and critics of the Trump-era tariffs on China-made goods agree on one thing: they are here for the foreseeable future.
Following a customary four-year review, the United States Trade Representative (USTR) last month said it would keep Section 301 tariffs in place to the dismay of critics seeking relief from the additional tax burden. Ambassador Katherine Tai said USTR will continue to consider their efficacy moving forward, noting that the government won’t roll back tariffs until Beijing adopts market-oriented trade and economic principles.
“How I read that is that the tariffs that started four years ago are not ending anytime soon,” OEC Group vice president of customs brokerage Matt Haffner told Sourcing Journal. There’s “a lot of friction” within the bilateral trade relationship, and the Biden administration is loathe to appear “weak on China,” he said. “I’d be surprised and happy, but I don’t anticipate seeing any movement at this point on the sanctions.”
“I don’t see the Biden administration removing the tariffs on China,” added Kim Glas, president and CEO of the National Council of Textile Organizations (NCTO), whose 160 members range from Cotton Inc. to BASF, DuPont, Precision Textiles, SanMar Corp., Shawmut Corp. Unifi and others. But Glas and the trade group she represents argue the handicap on China’s industry has given U.S. companies and their nearshore partners room to grow. After decades of China dominance, material innovators, yarnmakers and textile manufacturers in the Americas are seeing new interest, and more importantly, a change in mindset, Glas said.
“I can think of no other manufacturing industry that has been harder hit by that by the Chinese over a period of time” than the textile sector, she said. According to Glas, U.S. companies have outsourced so much material and component production that it has decimated the domestic industry’s self-sufficiency in creating finished goods including apparel and home textiles. “We have chased ourselves out to the lowest-cost needle around the world, and that’s come at a great cost to all of us,” she said.
Glas believes the tides could be changing. “I would say over this past year, there’s been historic business being done in both the United States and some of my member companies in the region,” she said. Shipping delays and skyrocketing logistics prices in 2021 had suppliers on the hunt for alternative sourcing. “And guess who they called on? Those in closest proximity,” she said.
Since the tariffs have been in place and the Uyghur Forced Labor Prevention Act arrived in Washington, “there’s been a real shift by many brands and retailers to try to de-risk out of China and really look at opportunities to nearshore,” Glas added. This has unleashed over $1 billion in investments in yarn, fabric and apparel production capacity in Central America, along with “massive investment here in the United States,” she said. Apparel exports under the Central America Free Trade Agreement (CAFTA) that were made with U.S. inputs like cotton are up 25 percent year-over-year, underscoring the growing strength and mutual benefit of cross-border relationships, Glas said.
Today’s efforts to build out American production capacity have long-term potential, even when the supply chain headwinds die down, she added. “We’re placing substantial orders in the region—people don’t make investments in huge, brick-and-mortar projects without knowing that there’s going to be buyers.” Global players are taking note of the region’s potential; in September, South Korean apparel manufacturer Hansae, which operates facilities in Nicaragua, Haiti and Southeast Asia, announced expansion plans in Guatemala with a state-of-the-art verticalized factory and arrangements to source inputs such as yarns from local partners.
Glas isn’t sure repealing tariffs will help fashion brands’ bottom lines. “There’s no doubt in my mind that the Chinese government has long subsidized their industry” and stepped up that support post-tariffs so that supplier don’t lost market share, she said.
Growing interest in diversifying away from China isn’t solely a result of the Section 301 duties, but a confluence of other factors, from the country’s strict zero-Covid policies that periodically interrupt production and transport, to geopolitical risks, she said. These push companies to explore their options for the first time in decades—”and that’s something that’s welcomed by the U.S. industry and a lot of our regional allies,” Glas said.
But OEC’s Haffner said the tariffs have had an outsized negative impact on the custom brokerage firm’s sizable small-to-medium-sized clientele doing business in China. And while OEC has seen “some small movement towards Central America, South America and Mexico” over the past year, few are making a meaningful shift to nearshoring. “I’ve had questions [from clients] about the ‘what-ifs’” of sourcing in the Americas, he said, but ultimately brands have struggled to find sourcing capacity that meets their needs. “Traditionally, China has been the most cost-effective sourcing available to them, and brings a lot of flexibility to what they need.”
While the tariffs are burdensome, OEC clients haven’t had better luck sourcing elsewhere as those that explored Vietnam, Bangladesh, India, and other Asian nations “didn’t find it easy to make that transition because of the limited resources available in these other countries,” Haffner said. Because of China’s dominance in creating not just finished goods, but materials and components integral to apparel and footwear products, many roads eventually lead back to the sourcing superpower. What’s more, production rates across other sourcing locales have risen sharply in recent years due to limited capacity and a surplus of demand, negating any would-be cost savings associated with dodging the tariffs, Haffner said. “Although the USTR said they could look for other sourcing, it turned out that that was really not viable from a cost perspective.”
“It’s a long-term goal when you start moving your production line to a whole different country that you’ve never worked with before,” he added.
At this point, U.S. importers that have absorbed the duties for four years “could only do that for so long” before passing those costs to consumers. Haffner said that “some of this plays into the beginnings of the inflation we’re seeing now.” Between the “supply chain debacle” of the past year that saw “through-the-roof” ocean and air freight pricing, “it was it was a perfect storm for the small-to-medium-sized employers with not a lot of options available to them,” he said.
Haffner believes that many of OEC’s clients have been forced to raise prices at retail. “I would think at this stage of the game, their pricing has to reflect some of that pain,” he said. “I don’t think they could have continued down this path without readjusting their pricing, and if they haven’t, their margins are probably in very poor shape.”
While he supports the concept of new or revised tariff policy, the customs broker said that a rollback today wouldn’t be felt for months. “What ends up on the shelves has already been imported maybe three or four months ago,” and those products already have tariff costs built into their pricing, he said. Between ordering, production and transport, it would take nearly half a year to get reduced-duty goods onto store shelves, and for shoppers to see lower prices. Meanwhile, recession fears continue to grow.
Haffner believes that most Americans theoretically agree with tough-on-China policies, but are probably unaware that tariffs could be affecting their personal finances. “Most people are thinking about the much broader picture of this pocket of inflation that’s hitting them; they’re not really taking the time to think about breaking that up by sector or commodity,” he said.