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Why the Trade War is Bigger Than the US and China

The trade war between the U.S. and China—or more pointedly between Presidents Donald Trump and Xi Jinping—shows no sign of abating. And while the impact will be somewhat contained to their two countries, a worldwide ripple effect on stock markets will be unavoidable.

After 10 years of nursing international markets back to health from the financial crash of 2008, this is the last thing the global economy needs. And more specifically, a global stock market crash is the very last thing Brexit Britain needs.

Brexit supporters have long held out hope that a free—and fruitful—trade deal between the U.S. and U.K. could make up for the undoubtable economic pain expected to stem from leaving the EU and the Single Market.

But this would be seriously hampered by a global crash—and despite Trump’s promise to strike a good deal with the country where his mother was born, nothing concrete has been said, and the U.K. is looking vulnerable. In the past two years, the global trading atmosphere has been poisoned by a culture of insularity and mistrust, with a number of countries turning their backs on globalization and focusing on protectionism. In this increasingly isolationist world, casting off the EU’s old trade deals and winning new ones will be tougher than ever.

In the U.K. press, commentators are saying the U.K.’s import-heavy economy is more resilient to the impact of tariffs than countries such as China and Germany, who export more goods than they import, but this doesn’t take fashion into account. Exports from the British fashion industry rose by 10 percent last year, to 10.9 billion pounds ($14.2 billion), with the top three non-EU importers of British retail being the United States, Hong Kong and Australia.

Brexiteers are no doubt hoping these three countries strike quick and easy trade deals with the U.K.—although none have yet stated any concrete terms. However, the U.S.-China tariff war will be causing any British brand with a global supply chain more than a little anxiety, as the movement of their goods and cost of production is set to be seriously impacted.

As supply chains around the world start contracting, the cost for everyday goods will go up—this will be hugely detrimental to brands like Primark and Topshop that rely on their low-price credentials and part-make their goods in China. The British high street, more than its European equivalents, woos its customers through the promise of fast fashion. If consumers in the U.K.—already uneasy due to the negative press surrounding a potential no-deal Brexit—also have to face rising costs, they are likely to dramatically lower their spending.

Equally, a hit on the American consumer will negatively impact British brands. British brands export more of their goods to the U.S. than any other country outside of the EU, and anyone with a supply chain that includes China could see their profits fall.

As a result, British brands with an interest in the U.S. could move their production process to India, Bangladesh, Vietnam, Cambodia and Pakistan in an attempt to avoid tariffs. Brands like ASOS and New Look have pledged to bring up to 50 percent of their manufacturing back to the U.K.

However, moving the sourcing caravan won’t change the price in raw materials. Both the U.S. and China are imposing tariffs on cotton, with the impact of this move seriously affecting the industry. China has a cotton deficit, and as a result it often imports the raw material from the United States. This tariff war will have direct implications on China’s manufacturing costs—once again, urging British brands to move their sourcing caravan to new pastures.

Luxury brands, which tend to do their sourcing closer to home, are less likely to be impacted by this trade war—except when it comes to China’s flourishing gray market.

“When tariffs increase, demand for goods brought in by daigou sellers goes up,” said Elizabeth Flora, Asia editor of New York intelligence firm, L2, in reference to shoppers who bring luxury across borders for others. “The Chinese government knows this, which is probably why it’s cracking down so heavily on daigou sellers at customs right now. This crackdown has had a ripple effect across the luxury market after LVMH confirmed it has witnessed it happening, causing stocks to decrease for not just American companies like Tiffany, Tapestry and Ralph Lauren but also international companies including Burberry, LVMH, Kering and Estee Lauder.”

And although movements like “Made in America” are the spur for this trade war, statistics continue to prove that high-end consumers are more likely to be swayed by quality than the knowledge a product has been manufactured domestically.

“There is a lot of this “buy American” language coming from Trump, but luxury consumers from the United States generally care about country of origin of an item as it relates to craftsmanship, quality or sustainability and corporate social responsibility, and in these qualities, the U.K. scores very high,” Flora said. “Luxury consumers—and, in fact, most consumers—generally don’t care about the nationality of the brand for the sake of nationalism.”

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