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Sourcing Summit: On Trade, the More Things Change, the More They Could Stay the Same

For those looking for a major change in U.S. trade policy toward China if Democratic candidate Joe Biden wins the presidential election, be prepared for some disappointment.

According to three experts on the Sourcing Journal Summit panel titled, “Battleground: Where US-China Trade Relations Are Headed and What it Will Mean for Fashion,” Biden is likely to continue the Trump get-tough policy on China, but perhaps with a more diplomatic approach.

“I think the elections are going to have less change than people think with regard to the reaction on China,” said Ron Sorini, principal of Sorini, Samet & Associates.

China cotton and tariffs

Sorini said Senate Minority leader Chuck Schumer (D-N.Y.) has told the Trump administration, “Don’t give up the tariffs, that’s our only leverage with China.” He said a Biden administration might extend the Section 301 tariff exclusions to help U.S. businesses, but on the issue of forced labor of the minority Uyghur population in Xinjiang, China, Sorini said, “I think Democrats will be more intense than the Republicans. Rhetoric will be softened, policies may not.”

As many as 3,500 companies represented by multiple law firms have now joined a lawsuit against the Trump administration at the U.S. Court of International Trade that contests the assessment of List 3 and List 4 tariffs imposed on China-made goods under Section 301 of the Trade Act of 1974. A World Trade Organization dispute panel report has concluded that actions taken by the United States to combat China’s alleged theft of U.S. technology and intellectual property were inconsistent with the global trade body’s rules. The panel found that punitive tariffs imposed on a wide range of Chinese imports were inconsistent because they applied only to products from China and because they were applied in excess of the rates to which the U.S. had previously agreed upon.

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On the issue of Xinjiang, a major cotton-growing region in China, there have been widespread allegations of forced and child labor there resulting in seizures by U.S. Customs & Border Protection and congressional action to tightly regulate and ban certain imports from the area.

Last month, the House passed the Uyghur Forced Labor Prevention Act, which imposes various restrictions related to China’s Xinjiang Uyghur Autonomous region, including prohibiting certain imports from Xinjiang and imposing sanctions on those responsible for human-rights violations there.

The bipartisan bill, which is pending in the Senate, calls for goods manufactured or produced in Xinjiang to be denied entry into the United States unless Customs & Border Protection determines they were not manufactured by convict labor, forced labor or indentured labor under penal sanctions and reports such a determination to Congress and to the public.

Stephen Lamar, president and CEO of the American Apparel & Footwear Association, said the industry has “zero tolerance” for forced labor. Fashion, he added, is committed to stamping it out and will “mitigate and remediate” to make sure that forced labor anywhere in the world doesn’t make its way into supply chains and the United States.

“For some years now, China has been engaging in a series of horrific practices, including forced labor, but building toward a larger campaign of repression toward Uyghurs and other ethnic minorities,” Lamar said.

It’s come to a point where traditional methods of due diligence don’t work, he said, and have become a problem of “scale, scope and complexity that’s not really been seen in modern supply chains.”

This has led to governmental and industry action against China’s policies. Lamar said what’s needed beyond exposing what’s going on in Xinjiang is to put economic pressure on China to end the practices and policies.

“The U.S. and China are having two different conversations,” he said. “Until that changes, we won’t have any progress on this issue.”

The political climate, therefore, has come to the point where “whether you’re a Republican or a Democrat, there is a lot of interest in pointing fingers at China,” Lamar said.

“Democrats are still going to be looking at tariffs as a policy,” he said. “Democrats will say the president wasn’t smart and we’re going to be smarter in our toughness. The tools may be the same, tools may be a little different. The relationship is going to go through a rough patch for a little while longer.”

Vincent Iacopella, executive vice president of growth and strategy for Alba Wheels Up, said everybody will come out and say they don’t like the tariffs, and that the trade war is reckless.

“West Coast Democrats don’t like the tariffs much, but they still have issues with China, whether it’s IP theft or currency manipulation,” Icacopella said. “I don’t think you will get an immediate reversal of 301s [tariffs] under a Biden administration. Maybe you get a more serious look at the exclusions process…or manufacturing inputs (exclusions). I think it’s more of the same for a while. I think what everybody is looking, especially with this Vietnam 301 investigation is a process and an intuitive road map for trade again.”

Sourcing diversification

Offering an update on U.S. imports from China this year and how things changed over the course of the pandemic, Lamar, citing the latest imports numbers through August, said the trends are “only going to continue.”

For the first eight month of 2020 compared to the same period last year, U.S. footwear imports from China are down about 40 percent in value terms, he said, bringing China’s market share down to 42 percent compared to 50 percent in 2019 and 76 percent in 2010. For apparel, imports from China in the period are down around 35 percent from last year, with market share now at 27 percent compared to 30 percent last year and 40 percent in 2010.

“Going into the pandemic we were seeing historic diversification out of China due to the trade war,” Lamar said. “It certainly accelerated as a result of the Covid demand and supply chain shocks. There continues to be a lot of conversation among my members and the industry at large about diversifying out of China. That diversification is not just finished product, but people are increasingly talking about and increasingly executing on diversification of Tier 2 and even Tier 3 suppliers, looking to build those supply chains perhaps closer to home and maybe out of harm’s way if the U.S.-China trade relationship continues to face some rocky times.”

The two-year-old trade war has led to significant import declines from China and diversification of where U.S. brands and retailers source their goods.

“It’s been like a one-two punch for most of our clients,” Sorini said. “Diversification started with the trade war, making it more difficult to find alternate supply.”

Trade policy

As for how the election could change other trade initiatives, Sorini noted that former President Barack Obama had as a major initiative the Trans Pacific Partnership (TPP), which was signed and negotiated between 13 countries, and was killed on Trump’s first day in office.

“TPP was a big initiative and companies planned around it and huge investments were made,” Sorini said. “Obama wanted to start to get people less dependent on China. I know people think Biden would be the savior. I can’t imagine that Biden would even want to think about or mention TPP in his first term.”

In the end, Iacopella said the industry could certainly benefit from a more “larger, strategic trade policy.”

“If you’re going to expect us to be agile, and jump from China to Bangladesh to Vietnam, and we have to vet these factories that we never vetted them before, that’s going to take time,” he said. “As we get this burden of compliance, our customers have to choose their partners better.”