If you are trying to figure out what the ongoing trade dispute with China means for you and your business, you are not alone.
I have rewritten this piece at least four times in the last weeks, updating it each time with the latest developments. In reality, it could very well have been left exactly as it was because the uncertainty that has been created with the threat of tariffs is almost as troubling to markets as actual tariffs.
In fact, looking at what is happening on Wall Street, uncertainty may be worse than reality.
Let’s look at the “truce” with China—if, in fact, there is one—as a 90-day reprieve to try to mitigate the potential damage of further uncertainty or actual tariffs. At some point, the only hope is that the administration realizes that their tactics aren’t working and the industry never faces additional tariffs on apparel, which, as anyone reading this knows, are already subject to some of the highest tariffs on imports into the U.S.
Between the recent announcement that GM will lay off 15 percent of its workforce, at least in part due to the punitive tariffs on imported steel, coupled with increased regional value content and minimum wage requirements in NAFTA 2.0, and a trade deficit that is the worst since October 2008, the administration has to realize that hitting consumers harder will not be the answer.
In my opinion, apparel, as well as the remaining $267 billion of goods imported from China, are unlikely to be subjected to additional tariffs.
The last $267 billion of Chinese imports represent large numbers of consumer sensitive-products—including iPhones, laptops and apparel, as well as items that were granted exclusions—that to date, have been spared the Section 301 tariffs. Additional tariffs on these items would not be lost in the small, less noticeable increases such as a few cents more for a can of beer or a few dollars more for a washing machine. These increases, while they affect consumers, are less noticeable to the average American than when their favorite jeans or their daughter’s school uniform suddenly costs $5 more than the last time they purchased it.
As such, it’s likely the administration would want to avoid following through on the threat to add 25 percent tariffs to the remaining Chinese products.
In the interim however, companies have been rushing to find alternatives to Chinese manufacturing, leading to increased demand, and thus price increases for goods made in Vietnam, Bangladesh and Indonesia, among others. Even if the tariffs are never put in place, we are already feeling pricing pressure in the apparel sector as a result. Chinese companies are accelerating their investments in Vietnam and elsewhere outside of China in order to provide their products without a “made in China” label. This will provide some relief, but will not be fast enough or sufficient to mitigate the damage.
Companies should be using this 90-day period to reevaluate, rethink and renew their strategic sourcing to protect themselves going forward.
The threat of existing duties of up to 32 percent combined with an additional 25 percent should serve as a wakeup call to incorporate strategies combining tariff engineering and duty-free sourcing alternatives into all apparel importers’ strategies. Additional investments in CAFTA, including a new polyester fiber plant opening in Honduras, Ethiopia and other duty-free sites will grow capacities, increase competition, and offer new opportunities to reduce exposure and realize savings. Now is a good time to relook at these locales.
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.