A Cease-Fire in the Trade War Has the Apparel Industry Wondering What Will Happen Next

The recent lull in the trade war between the United States and China was good news for U.S. retailers, clothing manufacturers and importers who have seen their bottom line eroded by a 10 percent tariff on certain goods imported from China.

Those 10 percent tariffs on items including fabric and handbags were scheduled to be raised to 25 percent on March 2, but President Donald Trump recently called a trade-war cease-fire while U.S. and Chinese negotiators hammer out some kind of solution that will put a halt to these punitive tariffs.

“Right now, the immediate reaction from importers is cautious optimism that we’re going to navigate this without a full-blown trade war,” said Julie Hughes, president of the U.S. Fashion Industry Association in Washington, D.C., whose members are U.S.-based brands, retailers, importers and wholesalers doing business around the world. “But we’re not out of the woods yet.”

On Feb. 24, Trump said in a tweet that he was going to delay the deadline to increase tariffs on $200 billion in Chinese imports that has been in effect since last September. The Chinese retaliated by putting tariffs on 5,207 American products worth $60 billion. Earlier in the year, the Chinese slapped a 25 percent tariff on U.S. uncombed cotton.

Currently, apparel imports are not subject to tariffs, but Trump had threatened to add $257 billion worth of Chinese products to the tariff list down the road, and that would have included apparel.

The tariff on Chinese-made fabric has been a financial drag on fabric importers such as Steve Barraza, chief executive of Tianello, which manufactures its women’s and men’s tops made primarily from silk or Tencel near downtown Los Angeles.

With the tariff, he is currently paying close to $11 a yard for his silk. One year ago, he was paying $9.30 a yard on silk that normally enters the country duty free.

He said a potential 25 percent tariff on silk made him postpone ordering any more fabric until he was sure what was going to happen. “I’m just starting to place my orders now,” he said.

Sourcing shift

For months, the recent heated trade war has been reverberating through the apparel industry because China provides about 34 percent of all the clothing imported into the United States.

Even though no tariffs are immediately seen for clothing, major apparel corporations have been reevaluating their exposure to Chinese production and making adjustments to their sourcing strategies. Some have been looking to Vietnam, which is now the second-largest producer of clothing to the United States. But industry observers note that all the good Vietnamese factories are booked up.

With a trade-war reprieve in sight, there is the question of whether U.S. apparel manufacturers will keep their production in China. “I haven’t heard anybody say that they are going to change their China plans, and the China plans they have been talking about are moving out of China,” said Steve Lamar, executive director of the American Apparel & Footwear Association, a Washington, D.C., trade group representing some of the country’s largest apparel manufacturers and importers. “What they need to keep in China they will keep in China. That means local production for local Chinese consumers or production for Europe.”

For years, apparel companies have been tossing around the idea of moving out of China as labor costs grew more expensive. But the efficiency of Chinese factories and the long process to find good factories in other countries where transportation runs smoothly is arduous. “In the last year I’ve heard people tell me that for the last 10 years they have been thinking about getting out of China,” Lamar said. “Now they are going to do it. I haven’t heard anyone say that now that tariffs might be delayed or lifted I will put my business back into China.”

Still, the U.S. apparel and textile industries are nervous about whether Trump’s optimism toward a trade truce and a tariff reduction is a bluff, a negotiating strategy or the real deal.

On Feb. 27, a broad coalition of American trade associations against tariffs sent a letter to the Trump administration commending the progress made in the trade negotiations and asking that a tariff hike be avoided on March 2.

The Americans for Free Trade coalition emphasized that in November alone U.S. businesses paid an additional $2.7 billion in tariffs, a massive year-over-year increase from the $375 million in tariffs paid on the same products in November 2017.

At the same time, the coalition pointed out that U.S. export growth hit its lowest level in 2018, thanks in part to a 37 percent decline in product exports facing China’s retaliatory tariffs. “Due to these costs, American employers are eager to see trade negotiations conclude as soon as possible and for all tariffs to be lifted,” the coalition said in the letter.

The letter was signed by more than 140 associations, including the California Retailers Association, the Los Angeles Customs Brokers and Freight Forwarders Association, the Fashion Jewelry & Accessories Trade Association, the American Apparel & Footwear Association, the National Retail Federation, and the U.S. Fashion Industry Association.