How Tariffs on Chinese Products Are Affecting the Manufacturing and Retail Community
Now that the Trump administration’s $200 billion of additional tariffs have gone into effect on thousands of Chinese imports, the apparel and retail industries are figuring out what to do next. Covered in this round of tariffs are buttons, bobbins, yarns, embroidery, textiles, handbags and leather. Apparel is not part of the equation yet.
On Jan. 1, the 10 percent tariffs jump to 25 percent, and the Trump administration is threatening to impose another round of tariffs totaling $267 billion, which means just about everything imported from China will have a higher tariff.
We talked to several finance experts and factors about how their clients are dealing with tariffs and adjusting their business models to cope.
Darrin Beer, Western Regional Manager, CIT Commercial Services
The ongoing discussions over international trade and associated tariffs remain a major source of uncertainty within the retail industry. That is particularly true in regard to China, which is a major U.S. trading partner and a key supplier in the global apparel industry.
With the recent announcement of new tariffs and potentially more on the way, the conventional advice is for retailers and importers to seek new sourcing alternatives for their products. Executing such a strategy is not easy, however. When our clients have investigated alternative sourcing, they have often found it is a challenging and time-consuming process. It’s virtually impossible to shift sourcing overnight without risking quality, production schedules or both.
Consequently, the tariffs look like they could affect the apparel market, raising costs for clients and retailers. Those costs may eventually be passed on to the consumer in the form of higher prices. It remains to be seen whether consumers will accept those higher prices or lower their spending.
Beyond actively managing sourcing, concerned U.S. retailers and their suppliers should make their own decision on how to engage on the tariffs issue and whether to make their voices heard through their trade groups and directly through elected representatives.
Mark Bienstock, Managing Director, Express Trade Capital
In response to the pending tariff actions, many of our clients began the process of redirecting their production capabilities to other countries. China can no longer be the dominant go-to production country as a concentration in any business is not healthy for long-term success.
We believe the country that has the biggest potential windfall as a result of these tariffs is India. With a well-defined infrastructure already in place and a strong history in the apparel and related industries, India has all of the capabilities necessary to handle a significant increase in orders across many different product categories.
As far as retail is concerned, they already have their goods in place for this holiday season. However, they must look for vendors that have flexible and diversified sourcing-channel options at the ready.
Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal
While many apparel categories were, at least for the time being, left off the tariff list, the textile category was largely left intact on the list. And with the threat of more tariffs, no one knows what will or won’t be added. Not to mention the proposed increase in the tariff rate from 10 percent to 25 percent. It seems that at this point the domestic producers may feel the tariffs more acutely than the importers.
In fact, just this week we had several of our domestic apparel manufacturers advise us that they are bringing in the fabric earlier and in bigger quantities than usual to get them in before the tariffs take effect. This will increase their borrowing needs, which we can support, understanding the situation at hand.
For our import clients, the response to the tariffs—and threat of more tariffs—is by working their supply chain a little bit tighter. They are looking for better pricing and exploring alternative countries for sources of supply.
It’s unrealistic to think the burden of the tariffs would be borne solely by the factories. When it all shakes out, everyone will bear the brunt of the tariffs, depending on how much more the consumer is willing to pay. The higher-end brands with their higher margins will be relatively price inelastic, which is that demand won’t change much with an increase in the price. In this case, the consumer would bear most of the increase.
On the other hand, with the lower-margin and lower-priced private-label business, the price is more elastic. Therefore, demand would decrease further with an increase in the price. In this case, the factories and the importers will need to absorb the lion’s share of the price increase due to tariffs. This means there will be continued pressure to trim operating expenses to keep their bottom line in check.
Rob Greenspan, President and Chief Executive, Greenspan Consult
If your company is operating in the sectors that include textiles, handbags, yarns, embroidery, and leather and fur apparel, then the 10 percent tariffs will apply to your company. Therefore, you will be faced with paying 10 percent more for the cost of goods from China.
Over the past several months, companies have been seeking to find alternative sources of production from factories in non-tariff countries. Companies affected by these tariffs will continue to look for sources of production outside of China. Until that is accomplished, companies will be forced to pay the tariffs.
Companies will try to pass these additional costs along to the retailer, who will in turn, try to pass along these costs to the consumer. So the consumer will most likely bear the price increase.
When there are price increases, consumers will think twice about buying the product now or waiting until it is really necessary. The short-term effect to retailers could be less retail spending on products with tariffs attached. If tariffs are further raised to 25 percent, the effects on retail spending will probably be far more dramatic and problematic for all those producing goods, retailing goods and the ultimate consumers.
Sunnie Kim, President and Chief Executive, Hana Financial
Due to the Trump administration tariffs, many of our clients will be forced to pass on the increased costs to their customers, who in turn will likely resort to passing these increased costs on to U.S. consumers.
The reality is that most of the tariffs will not be paid by China but rather by American companies. Therefore, some clients may opt to look for alternatives sources that are not levied by tariffs or from potential domestic options, which would be the more desired choice for the Trump administration.
Regardless, due to anticipated increases in production costs, no matter who is paying, supply will likely be impacted, which could result in lower sales and profits for our clients and higher prices for the consumers.
The retail industry will likely be impacted in the same manner. Walmart recently advised the Trump administration that its latest batch of tariffs could make it more expensive for U.S. households to purchase many common consumer items. This situation becomes even more ominous as we enter into a holiday season with retailers gearing up for what many hope will be a robust holiday-selling season, especially in light of the last two or three tepid holiday seasons.
Robert Meyers, President, Republic Business Credit
All importers are facing a prolonged period of uncertainty as a result of the noise around the trade disputes. The tariffs will impact our clients differently depending on their category, reliance on Chinese suppliers and the actual price sensitivity of their customers.
China accounted for 37 percent of U.S. apparel imports and 56 percent of footwear imports in 2017. Assuming the tariffs remain around 10 percent, it is possible that most of the cost can either be absorbed by the importer or passed on to the consumer without much effect on the retail industry.
Most of the conversations assume tariffs are temporary in exchange for a future trade deal. However, its impact will increase should there be a reduction in consumer confidence after the holiday season.
Don Nunnari, President, Flintridge Financial Solutions
While some of my clients are not affected by this round of tariffs, most have been monitoring the situation without making any changes to their operations or buying patterns.
It’s been difficult for owners to plan, given the uncertainty. Those who are importing cotton, silk, furniture who are affected now are looking at the feasibility of shifting sources to Vietnam.
Depending on the availability and commodity nature of their inventory, leaving China for another Asian source takes planning and time to implement. Another response is to just pass on the tax to their customers.
However, my clients, who are generally small businesses, realize they will not have the leverage to pass on higher prices to all their customers, especially if they do significant business with the major discount chains.
How will this affect retail? Sarah Thorn, senior director of global government affairs at Walmart, was recently quoted on CBS’s “Money Watch.” I thought she summed up the impact on retail short and sweet. She said: “This round of tariffs could impact a significant number of common consumer items that are not easily replaceable. The immediate impact will be to raise prices on consumers and tax American business and manufacturers. As a result, either consumers will pay more, suppliers will receive less, retail margins will be lower or consumers will buy fewer products or forgo purchases altogether.”
Dave Reza, Senior Vice President, Western Region, Milberg Factors
The impact of existing and pending tariffs has varied. Some clients are trying to bring in additional inventories ahead of new levies. Others have already begun to shift production to other non-tariff countries.
Some are looking to begin producing regionally in Central America. All clients acknowledge that the tariffs will create added costs, capital and logistics requirements.
It’s too early to quantify the impact on retail, but it’s not hard to predict scenarios where the impact of tariffs is reflected in increased product costs borne by vendors, retailers and ultimately consumers.
Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance
Walmart has already gone on record saying that the tariffs will ultimately have a negative impact on the American consumer. While gross domestic product was running at a robust 4.3 percent through the second quarter of this year, retail sales began to flatten in August.
We’re really too early in the negotiation process to know what the true impact will be, but our clients are certainly monitoring the situation closely. We still haven’t seen tariffs directly aimed at apparel, but we have seen products such as handbags, backpacks and leather goods that will be impacted as things currently stand. Many of our clients have fairly diversified supply chains, but many are also still fairly concentrated with suppliers in China.
We remain in what still has to be viewed as a deflationary apparel market, so if tariffs come into play on a broad array of apparel categories, it would become inevitable that many companies would be forced to raise prices. In an environment where the consumer has so many options in terms of both bricks-and-mortar and direct-to-consumer channels, it remains to be seen whether the consumer will accept price increases.
We are beginning to see companies who have a large sourcing presence in Mexico and other Central American countries see an uptick in business. In a global economy, retailers will continue to have the option of shifting to vendors with alternative supply chains, but there is little doubt that China remains a very large percentage of current apparel production.
For reasonably larger companies, it’s not as easy as simply saying that they’ll shift production to other countries, so we continue to monitor the situation closely.
Ken Wengrod, President, FTC Commercial Corp.
I do not believe a current rise in tariffs will have a detrimental impact on the actual cost of the finished garment and the retail price.
The rising strength of our dollar—which will most likely continue due to the strength of our economy—should offset the rise in import prices and tariffs.
The stronger our currency, the greater purchasing power our importers have. This higher purchasing power allows them to spend fewer dollars for their buys, which balances the final price change.
It is interesting to note that in the midst of the tariff battle, the U.S. import prices, excluding duties, still dropped to a 1½-year low in August. Our strong dollar not only reflects our strength in the economy but also proves our continuing confidence in the consumer and that the U.S. is still a safe environment for investments.
In addition, the current trade battle should not erode the demand for apparel at retail as long as you have the right items. The prime example is the sale of iPhones. Apple is able to increase the price of iPhones far in excess of rising costs because of the demand for its product.
Consumers are shifting from fast-turn apparel to more valued-based products because they are cognizant of how inexpensive apparel negatively and dangerously pollutes waterways.
Consumers will ultimately pay for what they want regardless of the price. Moreover, corporations will find a way to absorb the increase in tariffs and offset the costs without blowing market prices. Caterpillar estimated the new tariffs will increase their raw-material costs by up to $200 million between July and December of 2018. Yet their vice president of projects, T. Fassino, stated that “their cost-cutting approaches have helped counter the financial impact of the tariffs.”
We have been telling our clients to run their businesses as efficiently as possible and don’t react to things they can’t change such as the political atmosphere between China and the U.S. The geopolitical risk of China in trade has caused the international credit-insurance markets as well as the U.S. government to cease its political coverage because of the fear that China can take steps to further impact goods and payments.
Companies need to utilize and invest more in technology so they can speed up the “creation-to-engineering” process by cutting down on sampling costs, improving yields on their raw materials and reducing idle times in transition, especially on the water.
The new trend for Chinese apparel companies is to set up U.S. facilities to reduce costs. In similar fashion, U.S. importers need to find alternative places of production within the U.S. and Latin America to reduce their cycle time.
Those who thoroughly understand their costs are already maximizing their model by actually manufacturing in the U.S. or in a closer market instead of focusing on tariffs.
The uneasiness of potential apparel tariffs should open business’s mindsets to welcome the change in environment.