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Trade in the Time of Trump: Why Duty Preference is too Important to Ignore

In today’s environment the opportunity to cut costs, without cheapening the product is too important an opportunity to miss out on.

Today’s apparel companies are certainly facing a slew of difficult choices. The industry is already subject to some of the highest duties charged in the U.S. (as high as 32 percent) for any imported products, and now it’s potentially facing the threat of further punitive tariffs for more than 42 percent of the products they source.

If President Trump carries through on his threat to extend duties to an additional $200 billion (or more) worth of imports from China, it will be virtually impossible to do so without including apparel and textile products.

More than $27 billion worth of apparel came into the U.S. from China in 2017, according to OTEXA, and despite the efforts of many brands and retailers to reduce their dependence on China (China + 1 or 2 or more), it is still the largest supplier by far for most companies. In fact, in certain categories China’s dominance is so overwhelming that it’s hard to imagine the possibility of replacing the production for the foreseeable future.

As such, the only thing that a trade action of this nature could do is hurt sales at retail, which in turn, could devastate the U.S. economy.

In the U.S., retail sales account for upward of 25 percent of our GDP, so while the Trump administration can insist that punitive duties against China will hurt them more than it hurts us—because they export so much more to us than we do to them—it leaves out the considerable role that retail sales play in our economy.

To protect themselves and mitigate the possible risk; it is time for apparel brands, retailers and importers to take a second look at some of the free trade agreements and preference programs that are in place and unlikely to be threatened by the administration.

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While we continue to hear threats that the U.S. will pull out of the North American Free Trade Agreement, which could further harm apparel companies, we don’t hear such rhetoric about the Central America Free Trade Agreement, the U.S.-Jordan FTA, Haiti HOPE/HELP, the African Growth and Opportunity Act, or the Egyptian QIZ program. These free trade agreements and preference programs are unlikely to be derailed by this administration for a variety of reasons, from geo-political concerns to the fact that we maintain a trade surplus with these partners. Both Haiti HOPE/HELP and AGOA do not expire until 2025 and the QIZ’s from Egypt never expire, and goods enter the U.S. under the U.S.-Israel FTA.

While these agreements have been in place for some years, many companies have neglected the opportunities, considering the programs too onerous to comply with or not worth the additional effort required to make use of the potential savings. Given the present environment, however, it may be just the right time to reconsider these options.

Savings of up to 32 percent are too valuable right now for companies to overlook, and a strategy that incorporates some usage of duty free programs will be key.

It is time for a strategic analysis of sourcing that fully considers the tariff rates for each product; as well as lead times, fabric sources and delivery requirements.

To start, it’s worth looking at the items with the highest duty rates and working backward from there.  Of note: Haiti, AGOA and the U.S.-Jordan FTA don’t require the use of regional fabric, and they are not subject to the “yarn forward” rule of origin, so companies may even be able to continue using the same fabrics as what’s currently in use and still save the duties.

Yes, there will be additional compliance issues, but none that really add significantly to your burden. U.S. Customs and Border Protection always has the right to request documentation on your imports going back five years, even if you are not claiming preference (duty savings). So, in reality, a similar level of document verification and retention is required regardless. It is necessary, however, to fully understand and comply with the rules of origin and other compliance requirements that may vary from program to program and be able to provide the necessary backup documentation.

All in all, this is an excellent time for companies to re-examine their sourcing protocols and consider initiating a more strategic plan.

Gail W. Strickler is the president of Global Trade for Brookfield Associates, LLC., a consulting group that helps organizations, governments and businesses develop and coordinate their global trade policy.