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The Compounded Effects of Tariffs and the Coronavirus

The fashion industry’s heavy reliance on China has come into question as forces ranging from the deadly coronavirus outbreak to the ongoing trade dispute with the United States challenge companies’ bottom lines.

Sourcing costs out of China had already been on the rise courtesy of heavy tariffs on apparel and footwear, but COVID-19, as coronavirus is officially known, is compounding the financial hit while also creating logistics bottlenecks.

During Sourcing Journal’s “China Tariffs & Trade 2020” webinar, Vincent Iacopella, executive vice president of growth and strategy of Alba Wheels Up International, Inc., explained that with carriers idle, capacity will shrink. As a result, as production in China picks back up, shipping capacity will likely fail to keep up with demand. “If there is a massive reduction in capacity, which is supply, and you have this massive increase in demand, it’s going to center around price…You will see pressure upward on pricing,” he said.

Those with higher-margin goods may be able to better afford to transport their products.

Ultimately there are only so many costs that can be passed on to consumers, so retailers are likely to take a blow to their margins as companies absorb the additional expenses throughout the supply chain.

At same time, companies’ retail sales are suffering, compounding the financial strain. With falling foot traffic and closed stores in China, Steve Lamar, CEO and president of the American Apparel & Footwear Association, said retailers operating in the nation will be left with the challenge of moving inventory at the start of the next season.

And firms that produce outside China are not immune. Many rely on raw materials from the nation. For instance, Myanmar sources 90 percent of its raw materials from China. With the risk of running out of raw materials, these manufacturers are also feeling the impact of the epidemic.

While tariffs have lately been overshadowed by the coronavirus crisis, the experts said they remain a chief concern. The hope is that the industry will see a Phase Two deal that would offer relief but Ron Sorini, principal of Sorini, Samet & Associates, said he doesn’t see it on the horizon. And regardless of the outcome of the 2020 presidential election, the speakers believe it is unlikely a party change will usher in a rollback of tariffs.

“I think unfortunately, we have to be prepared that the tariffs are going to be in for the long haul,” Sorini said.

To navigate disruption in China, one of the biggest opportunities is diversification. While Vietnam’s trade deficit with the U.S. may make it a target for tariffs, Sorini noted countries including Myanmar, Cambodia, Thailand and Indonesia are less likely to be subject to these trade actions.

“Probably what the coronavirus crisis is going to teach the broader supply chain is that in addition to diversifying your tier one, you need to make sure you have a diversified tier two and tier three, perhaps to the point where you have independent vertical capacity in other countries, so you’re not dependent on any one country,” Lamar said, “and in any supply chain, you’re not dependent on more than one country.”

Watch “China Tariffs & Trade 2020: What’s On the Table, Off the Table, and Up Ahead for Tariffs & More,” sponsored by Alba Wheels Up International and Sorini, Samet & Associates, to learn more about:

  • How the coronavirus is impacting trade
  • How to build contingency plans for transportation tie-ups
  • The effect the outbreak is having on retail prices
  • The best-case scenario for bouncing back post outbreak
  • The outlook for a Phase Two trade deal with China
  • How the 2020 election will affect the trade negotiations
  • U.S. trade relations with Mexico and India

Click here to watch the webinar now.

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