What Consequences Would Raising Tariffs Have on the Apparel Industry?

Finance

As of Friday, April 1, 2016

In the whirlwind of election-year debates, some politicians have been taking a protectionist attitude and threatening to raise U.S. tariffs and erect trade barriers.

This is contrary to previous administrations that have started down a long path of negotiating free-trade agreements to make U.S.-made goods and financial services cheaper to overseas buyers and to benefit U.S. consumers who pay less for products manufactured in foreign countries.

The talk of higher tariffs comes at a time when the 12-member Trans-Pacific Partnership has wrapped up negotiations as the nation’s largest free-trade agreement. It now must be approved by Congress.

If tariffs are raised, how will this affect the apparel industry, and will it drive more companies to produce their clothes domestically?

California Apparel News recently spoke with finance-industry executives and factors about how this would affect their clients.

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Mark Bienstock, Managing Director, Express Trade Capital

Mark Bienstock, Managing Director, Express Trade Capital Inc.

Increasing tariffs on imported items has always been an election-year issue that is intended to raise the spectrum of “Made in America.”

However, it is still not practical from all perspectives to shift the level of production in the apparel industry from overseas to the U.S.A. The fact of life is that it is much cheaper to produce in such countries as China, Bangladesh, Vietnam, etc.

As prices are ultimately dictated by the retailers, importers and manufacturers will continue to try and squeeze cost savings where possible. However, the cost of doing business in the United States will still greatly exceed the cost of importing, even if there is a slight tariff increase.

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Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

Depending on the amount of the increase in the tariffs, any prudent business owner will need to do an analysis of alternative sources of supply, be they domestic or overseas, to be able to maintain cost controls. Once the analysis is complete, they can decide the best course of action.

Retailers are hesitant to increase prices to the consumer, unless the product is branded and selling well. For basics and private label, the retailers are basically dictating the price, so prices won’t rise unless someone is willing to sell it to them at the current price. It will be the manufacturer/importer that will need to produce more efficiently so they can absorb the increased cost.

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Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

Raising tariffs on imported apparel is an interesting question. Based on my knowledge of tariffs, the effect is to raise the cost of imported goods so that similar domestically made products can be price competitive. Anytime there is a price increase, for whatever reason, it seems the price increase is usually pushed to the ultimate consumer. In the short term, I would think we would see consumer prices increase for imported apparel as the cost would try to be passed through.

But as we all know the apparel industry, overall, is very price sensitive. Anything that increases prices will also have effects on the retail market and to consumers who could slow down their spending and cause retail pushback.

The bigger question is whether this could push more companies to manufacture in the United States. The tariffs would have to be raised significantly to make the U.S. prices competitive to those offshore. Is that going to happen? I think the likelihood of tariffs going significantly higher, driving more people to manufacture in the U.S., is probably low, especially in the moderate to budget price-point categories. That said, some companies might consider doing more “quick-turn” production domestically if the tariffs are large enough to have an impact on pricing and gross profit margins.

Sunnie Kim, President and Chief Executive Officer, Hana Financial

This is definitely an important issue that will have a major impact, not only on the apparel industry but the U.S. economy as a whole.

The immediate impact would be that prices would increase in order to offset the cost of the tariffs as manufacturers would have to pass those fees along to their customers.

Therefore, consumers would find other alternatives. The fact remains that U.S. companies with foreign manufacturing sites that are subject to tariffs when they bring goods into the U.S. would be unable to compete with foreign manufacturers providing similar goods due to free-trade agreements. This would continue to hurt the apparel industry as well as the U.S. economy as a whole.

It is also uncertain whether the desired effect of bringing jobs back to America would be achieved. Many companies could decide that the imposed tariffs might be less than the cost of labor to produce domestically and therefore continue to manufacture outside of the U.S.

We might also find domestic companies moving to foreign countries that have free-trade agreements with the United States in order to circumvent the tariff issue, which would provide even fewer jobs in our industry, as we have already seen in other industries.

Therefore, other alternatives require consideration, such as tax incentives, reduced regulations and an economic environment that supports domestic production.

John La Lota, Division President, Factoring and Trade Finance, Sterling National Bank

Sterling has been providing the apparel industry with factoring and banking services since 1929, so over the years we’ve seen our clients navigate through many economic cycles.

Back in the 1980s, the apparel industry was one of the first to move production offshore, which created cost savings that could be passed along to consumers.

There were some challenges, however. We helped many of our clients open letters of credit to secure purchases from factories that were new and had little experience. Communication was difficult, and they didn’t have the luxury of today’s technology. A little over 10 years ago, the government used quotas on certain categories of goods. While the proposed tariffs are being positioned as a way to balance trade, to allow domestic producers to better compete and to create jobs, they will ultimately increase the price of imported goods.

As with any other increase in the cost of goods, such as when fuel prices soar or significant currency fluctuations take place, it is usually passed along to consumers.

The industry has proven to be resourceful, finding ways to innovatively deal with the challenges that have come their way. The proposed tariffs would have to be weighed against the initial investment and ongoing expense of bringing manufacturing back to the U.S.

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Louis Mastrianni, Managing Director and Head of Apparel Commercial Banking, JPMorgan Chase & Co.

Lou Mastrianni, Managing Director and Head of Apparel Commercial Banking, Chase

I suspect this would have a modest impact on the U.S. apparel industry initially, given that these jobs left long ago due to competition from overseas, low-cost producers. Long term we could see some effects on domestic sourcing and prices depending on the countries impacted and the amount of tariffs.

We may see some production return because of the way retailers are buying goods and managing their own inventory much closer to the season.

For example, if they order less inventory and then need to reorder and want it faster to meet higher demand than anticipated, buyers may look to domestic sources that can turn production and deliver the goods more quickly even though it may come at a higher price.

Dave Reza, Senior Vice President, Milberg Factors

If the next administration in Washington introduces higher tariffs, it would probably lead to increases in consumer prices.

What is uncertain is whether or not domestic production could quickly be ramped up to meet new demand. U.S. textile and apparel ‎production capacity and infrastructure have been seriously impacted by the move to offshore manufacturing.

Also, a generation of skilled and experienced textile/apparel workers has exited the industry. Hence, even with the benefit of a protectionist environment, a quick move back to domestic production is hard to predict.

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Lou Sulpizio, Marketing Manager, Capital Business Credit

Lou Sulpizio, Senior Vice President, Capital Business Credit

An increase in tariffs on imports will undoubtedly have an impact on the apparel industry, and consumers will see a price increase.

Margins will be affected, and there is a strong potential for increases in consumer pricing. Consumer confidence is a driving force behind our global economy, and there is a strong possibility that the retail markets can be negatively impacted.

Companies will need to be sharp on their purchasing by negotiating with suppliers for better pricing to offset increased tariffs. Profits are made on the buys and not necessarily on the sales.

Increased tariffs could also force businesses to seek alternative sourcing as well. I doubt if these increases are going to shift a majority to produce domestically, unfortunately. The costs in Asia continue to be low compared to stateside.

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Ken Wengrod, President, FTC Commercial Corp.

Ken Wengrod, President and Cofounder, FTC Commercial Corp.

If the United States initiates the increase of tariffs on certain imported goods, it would start a petty trade war, and, even worse, other countries could retaliate and potentially go tit for tat.

For the last 30 years, the U.S. has been part of free-trade agreements such as the North American Free Trade Agreement (NAFTA) with Mexico and Canada, the Dominican Republic–Central America Free Trade Agreement and a free-trade agreement with Israel.

No free-trade agreement is perfect, but each agreement has ultimately benefited U.S. interests. Unions have been claiming that millions of jobs have been lost because of NAFTA. I would only agree with the unions that the industries with one workforce such as the automotive sectors in the Detroit area were largely affected by NAFTA. But a good percentage of the job loss actually went to Asia for production and includes other industries as well.

International commerce will continue to grow with or without the United States’ involvement. If we want to maintain our leadership in the global economy and make sure our environmental, labor and intellectual-property standards are up to the world’s standards, we need to lead the way on international trade deals and level the playing field. We must leave the rhetoric behind and find ways to expand and compete in the global open market, especially when the U.S. is changing from a manufacturer to an IP and service giant. Raising tariffs will not achieve any of this.

Because the U.S consumer is so important and exports are so vital to countries in Asia, even if the U.S. raises tariffs, foreign exporters can find other ways to reduce the impact of the raised tariffs by engaging in near-shoring and transshipments.

Their foreign countries can also use currency manipulations to ultimately devalue their currency, including monetary easements and negative interest rates that would make their exports less expensive to the end buyers.