While the trade war between the U.S. and China has generally excluded punitive tariffs on apparel and footwear, the uncertainty it has created has had a substantial impact, Laura Rabinowitz, an international trade attorney with the law firm Kelley Drye, said Tuesday during a “Fashion and Retail Trade Roundtable” webinar.
“There’s tremendous uncertainty at this time,” said Rabinowitz, who specialized in international trade and customs law. “Duties have been put on half of all Chinese imports to the U.S. and an additional 25 percent in duties that would likely include apparel and footwear was scheduled to go into effect on March 1.”
The Trump administration has been using what was a little known provision, Section 301 of the Trade Act of 1974—which allows the president to take actions on trade if he deems a situation burdensome or restrictive to U.S. commerce—to push China to make structural changes to its policies related to technology transfer, currency and intellectual property, which have hurt U.S. companies trying to do business in China, Rabinowitz said. Since them, Trump has used Section 301 to levy tariffs against China, China has retaliated, and much of the last year has been about that tit-for-tat.
And the pressure on China hasn’t yet subsided.
“We just had a busy weekend,” Rabinowitz said. “The President announced that he was delaying the U.S. increase in tariffs scheduled for March 1 and that he was planning a summit with Chinese President Xi sometime in late March” where a deal on ending the dispute could be signed.
The issue of raising tariffs on China, Rabinowtiz said, “has become a bipartisan issue, with Democrats calling for Trump to take a hard line on China and its trade and economic policies.”
Fashion and apparel companies already pay substantial duties on most goods imported from China and an additional 25 percent duty would be difficult to overcome.
The fallout from the tariff-fueled trade war has meant higher costs and shifts in sourcing strategies, Rabinowitz noted. U.S. importers paid an additional $2.8 billion in tariffs in November, she said, while also incurring higher freight rates and higher inventories.
“Companies rushed to get their inventories in prior to the end of 2018 because there was so much uncertainty,” Rabinowitz said. “Countries like Vietnam, Cambodia, Indonesia and Mexico have been winning the trade war. Companies have started to looks at issues like, ‘where can I go [outside of China], and what will it do to my costs?’”
There are risks in moving to other countries, though. As Rabinowtiz noted, “Bangladesh doesn’t seem like it has come very far since the Rana Plaza disaster in 2013,” when it comes to things like building safety, pointing to another warehouse fire that just occurred.
Companies can, however, take certain actions to reduce or defer duties. One method is called the “First Sale” rule, where a product is bought and sold multiple times outside the U.S. According to this rule, importers only apply duty to the price paid at the first sale of goods, instead of paying duty on the final price paid by the importer, which has been marked up. It is particularly valuable in industries where product is subject to higher duty rates, such as apparel.
Importers can also ship goods that don’t need to be distributed for a while to Free Trade Zones or bonded warehouses. Then, the duties aren’t paid until they leave those facilities.