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What Trump’s Tariffs Could Mean for Sourcing

Though the world once looked to the United States as a leader in free trade, what it’s now getting, more often than not, is surprise and alarm—and an increasing familiarity with the who-knows-what’s-coming-next kind of trade environment.

President Trump’s recent barrage of tariffs has sent the world into a frenzy, with many questions looming about what’s actually going to happen and what the resulting impact will be.

Effects of the 25 percent tariff on steel imports and 10 percent on aluminum set to take effect from Friday for countries other than Canada and Mexico, plus the possible plans to impose tariffs reaching as high as 45 percent on goods imported from China in an effort to quell the country’s intellectual property problems, will likely have varied impacts by sector. But for sourcing, the industry could soon be facing higher prices for apparel and footwear.

And more than that, retaliations from major trade partners could hit U.S. manufacturers in areas beyond the bottom line.

The tariffs on steel and aluminum have been imposed under Section 232 of the Trade Expansion Act of 1962, a mechanism that allows the president to impose tariffs on the basis that steel and aluminum imports have threatened U.S. national security.

The impending tariffs on China, however, are garnering the greatest ire in the apparel and footwear industries. The Trump Administration has said it may slap tariffs on as much as $30 billion worth of Chinese imports, employing Section 301 of the U.S. Trade Act of 1974 as his defense. A Section 301 investigation would allow the president to impose the tariffs without approval from Congress if it’s deemed that China’s intellectual property impropriety has burdened or restricted U.S. commerce.

And so far, it’s looking likely that these tariffs will go forward. The White House has said it will make an announcement on the tariffs Thursday.

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“There’s pretty good evidence, pretty good intelligence that they’re going in and that tariffs could be pretty far reaching,” Steve Lamar, executive vice president for the American Apparel & Footwear Association, said. “…And those tariffs could include apparel and footwear.”

Whether it fuels trade wars or damaging retaliations, so far seems to be of little concern, as President Trump has said trade wars can be a good thing.

As Senate Finance Committee Chairman Orrin Hatch (R-Utah) said this week in staunch opposition to Trump’s plans, “…if this is the start of a trade war, the only casualties thus far appear to be American manufacturers, American farmers and ranchers, American families and America’s allies.”

What’s going to happen to prices? 

The first concern for manufacturers in the face of these tariff announcements has been: how will this affect prices for apparel and footwear?

To put it plainly, Lamar said, “Whenever you raise tariffs, you are passing on a hidden tax to consumers.”

Companies will pay taxes at the border for tariffed goods they’re bringing in, which will make the products a little bit more expensive, and consumers will most often pick up the tab.

Steel and aluminum show up in a lot of different parts of the economy and the apparel industry, like lab equipment that’s used to inspect product.

“So it’s even going to show up in higher service charges,” Lamar said. “And that does have the ability to raise prices.”

The scenario isn’t one an apparel industry already operating on razor thin margins for most goods can afford, and as Nicole Bivens Collinson, president of international trade and government relations for trade law firm Sandler, Travis & Rosenberg explained, the imposition of a potential additional 35 percent to 45 percent tariff on goods made in China will certainly impact prices.

“There is no way the manufacturer nor the brands can absorb that high of a tariff,” Bivens Collinson said. “While the entire 35 percent may not be added on to the cost of an item, we can anticipate that at least some may be added to the cost of apparel and footwear.”

The expectation from the White House, however, is that companies won’t pass the full scope of the cost increase onto consumers.

“The White House view is that the companies should be able to minimize any negative impact to consumers and as any cost to them was offset by the tax break/reform,” Bivens Collinson explained.

Whether things actually go that way, though, will remain to be seen.

Regardless, concerns remain high in the footwear industry in particular, where duties are already among the highest paid—nearly 11 times higher, on average, than those paid on other goods, according to the Footwear Retailers & Distributors of America (FDRA).

With shoe tariffs reaching as high as 67.5% and an industry that’s reliant on China for as much as 71 percent of its footwear, FDRA president and CEO Matt Priest says the question begged now is: how much is enough?

“How much is enough when it comes to taxing American footwear consumers? How much is enough when it comes to increasing costs on families that can least afford it? How much is enough when it comes to tariffs that stifle innovation and American job creation? We adamantly oppose this potential action and call on the Trump Administration to explore other ways to combat intellectual property concerns in China and around the world,” Priest said.

For apparel, China accounted for 41 percent of all goods imported to the U.S. last year, a substantial amount considering how high the tariffs could reach.

In a letter to President Trump sent Tuesday, U.S. apparel and retail organizations said, “Because duty rates in these product categories are so high and because China is such a dominant supplier, U.S. imports from China already account for most of duties collected by the U.S. Government. In fact, duties on U.S. imports of these consumer products from China already represent more than 22 percent of all tariffs the U.S. collects from all countries on all products. And to be clear, such duties are paid by U.S. workers, U.S. consumers, and U.S. companies—not China.”

What’s going to happen to U.S. manufacturers and retailers?

With the potential tariffs in place, the expectation is that American manufacturing will suffer—an effect in stark contrast to what President Trump has promoted as part of his America First mission.

Before Trump settled on enforcing the metal tariffs, the European Union threatened to retaliate with tariffs of their own, targeting American staples like Levi’s jeans and slapping a 25 percent tariff on imports of the product from the U.S.

Were that to actually take effect, Lamar said it would hurt U.S. production, not U.S. branded items that are made and sold overseas.

“If Brand X sells blue jeans that are made in Mexico and ships them to Europe and Europe imposes an extra tariff on those blue jeans, Brand X’s production in Mexico is not put in peril,” Lamar explained. “But if Brand X also makes production in the United States, that is put in peril. Especially if they’re talking about high duty rates, we could see U.S. manufacturing, U.S. production take a hit as a result of those higher tariffs. Many times it’s already hard to pass the costs through and then that would result in lower sales, lower exports from the United States.”

That also means sourcing from the United States will be impacted.

“Why that’s important is the stuff that we make here we tend to sell abroad…we have pretty important markets,” Lamar said. “We don’t want to see any reason why those markets might be restrictive to our exports.”

Adding to that, Bivens Collinson said, “I would assume that Levi’s will look to alternative suppliers outside of China in the face of increased tariffs on Chinese goods, so ultimately, those countries would increase production and exports.”

Retail could also be hard hit as consumers only have so much disposable income to spend—especially when faced with costs that are climbing and salaries that aren’t.

“If prices go up, total sales will decline. Shoppers who had only $50 to spend will now buy three garments rather than four or five,” Bivens Collinson said.

Organizations representing U.S. brands and retailers have been vocal with Trump and the Administration on their feelings about the adverse impacts these tariffs—particularly those on goods from China—could pose.

“While we support efforts to protect the intellectual property of brands and retailers, we will never support punitive tariffs based on the fiction that imports harm domestic jobs and growth. These new tariffs will not create more jobs in the United States, but instead, will harm the companies that already create thousands upon thousands of high-quality jobs in design, in marketing, in retail, in logistics, in compliance, right here in the United States,” the United States Fashion Industry Association (USFIA) said in a statement Tuesday. “And these tariffs will absolutely harm American consumers, who will face higher prices on the clothes, shoes, home products, and other essentials.”

Will these new tariffs wipe out savings from the recent tax reform?

Though U.S. brands and retailers may recently have had cause to celebrate with corporate taxes coming down to 21 percent from 35 percent as part of the Trump Administration’s tax reform, new tariffs could see those savings vanish as quickly as they came.

“Tariffs raise prices and tariffs are inflationary,” Lamar said. “We just gave consumers, called tax payers, a big tax break…but if we then turn around and create a mechanism through tariffs that will raise the prices on them, directly and indirectly, then that more disposable income that they have will not go as far. You could say we’re giving them a tax break with one hand and taking it away with the other.”

While the White House may view the tax break as “room” to absorb any increased tariffs, if companies do push the increase onto consumers, they’ll be using any extra money in their pockets to pay for the increase in goods from China.

“We should note that the Congress/Administration may believe that apparel is a product which has many sources, not just China and that an adjustment to the sourcing matrix is overdue,” Bivens Collinson explained. “This action (301 tariffs) will force buyers to look elsewhere and there are many countries that could fill the vacuum of production.”

The Trump Administration might also argue that sewing is a more easily movable industry from a capital investment and quick manufacturing perspective, and as such, Bivens Collinson explained, “The administration may hope that the action will ‘encourage’ manufacturing to move out of China, which is potentially one of the ultimate objectives of the president. Similarly, if production does move out, the trade deficit will decrease, which is clearly a president’s objective.”

How likely are we to face a trade war?

Talk of trade wars have been ongoing for months, and well ahead of Trump’s tariff announcements—though since those surfaced, tensions have certainly escalated.

The European Union, Canada, Mexico and Brazil have all said they’d put retaliation measures in place in light of the metal tariffs, and China has promised to push back on both the metal tariffs and any placed on the import of its other goods.

The likelihood that China will retaliate is high. However, it is not clear that China would pursue the tariff route,” Bivens Collinson said.

Trump’s steel and aluminum tariffs followed his tariffs on washing machines and solar products in January, also aimed at curbing imports from countries like China and South Korea. After that, China initiated an antidumping/countervailing duties case on U.S. exports of sorghum used for sweetener and livestock feed, Bivens Collinson explained, so China could be looking to levy other similar non-tariff barriers against the U.S. in response.

“If China were to do so, it could appear to be operating ‘within’ WTO rules, while the U.S. might be viewed as operating ‘outside’ the WTO rules,” Bivens Collinson said. “We don’t really know. And can one say there is a trade war when the 301 action is limited to only China? It could be a trade dispute with China, but depending on what China does in response it may not be a ‘war’ or a ‘tariff war.’”

Should it set off a trade war, however, the U.S. is poised to deal with it, and it’s not at all spooked.

“We need to be prepared to act in US interests to defend free and fair and reciprocal trade,” Treasury Secretary Steven Mnuchin said this week. “There is always a risk that people reciprocate …but we are not afraid of getting into a trade war.”