The Tariff Scare Keeps Apparel and Textile Companies Hopping
President Trump launched a trade war in March by imposing a 10 percent tariff on aluminum and a 25 percent tariff on steel coming from countries around the world.
Soon after, China retaliated by imposing import taxes on a number of U.S. products, including wine, almonds and pork.
The president’s next battle plan was to slap on more tariffs by drawing up a list of Chinese-made goods that he believes should be subjected to import taxes.
Fortunately, President Trump decided to keep clothing and footwear off the list of Chinese goods that would be taxed. But it was still a warning sign that tariffs could still be a possibility in the ever-changing trade world. Tariffs were placed on machinery used in apparel and textile manufacturing.
With this in mind, the California Apparel News talked to several financial experts about how possible U.S. tariffs down the road could affect the clothing industry. We asked them this question: What kind of contingency plans should clothing companies be putting in place in case tariffs are imposed in the future on Chinese-made apparel, and how would tariffs affect importing apparel companies’ financial health?
Darrin Beer, Western Regional Manager, CIT Commercial Services
Apparel and footwear imported from China were not among the categories recently announced for U.S. tariffs. Even so, the potential for future tariffs remains. China is unquestionably a force to be reckoned with in the apparel industry. Clothing companies that import apparel from China should be taking steps to create contingency plans in case tariffs are imposed in the future.
The nature of fashion makes it virtually impossible for clothing importers to stockpile significant merchandise ahead of any potential tariffs. Some companies have already taken steps to diversify their supply base by utilizing production in Vietnam, Indonesia, Latin America and domestically in the U.S. Apparel companies with a geographically diversified vendor base have the flexibility to mitigate the risk of future price increases resulting from tariffs, currency fluctuations or inflation.
Even with all these measures, China’s dominance as an apparel maker means it would be virtually impossible to avoid importing Chinese-made goods entirely. If a 25 percent or greater tariff were to be imposed in the future, the higher costs would likely be shared by the supplier, importer and direct consumer, as retailers would likely try to pass along most or all of the price increase.
While apparel and footwear have been spared in this latest round of tariffs, trade talks between the U.S. and China are ongoing. Those in the apparel and footwear industries are well-advised to watch developments closely, make their voices heard and be ready with contingency plans for potential future tariffs.
Mark Bienstock, Managing Director, Express Trade Capital
In light of both the potential tariffs and trade war with China, we are suggesting to our clients that they revisit opportunities in Bangladesh and India for sourcing new products.
Bangladesh has a major advantage in the area of labor pricing. India, which during the 1980s and 1990s was a major apparel exporter, has the infrastructure and capacity to take advantage of this potential opportunity.
At the end of the day, the consumer would be the big loser if any trade war with China develops. This is a case where cooler heads need to prevail for the entire world’s best interest.
Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal
It’s a good idea for all businesses to have contingency plans for any disruption that could affect their business. There are contingency plans for weather-related issues, system-related issues, and tariffs or increases in any production cost are no exception. Apparel companies should routinely investigate alternative production sources, even if within the current country, to be sure they are receiving good pricing for the quality they receive.
With the potential increase in tariffs, those who import from China should consider manufacturing in other parts of the world—whether that means shifting to India, Pakistan and the Middle East—or to the Western Hemisphere—Mexico, Central America, etc.—or even bringing some production back domestically. It’s imperative that the country’s infrastructure be in place to manufacture the specific type of apparel needed so as to not incur costly production delays, quality or port/shipping issues.
The current proposed tariffs would most likely affect private label more than brands. The brands are in a better position to pass along the increase, or some portion of the increase, to the consumer, who would be more willing to pay increased amounts for the brands they want.
Gino Clark, Managing Director, Originations, White Oak Capital Finance
Trump’s proposed tariffs on Chinese-made goods are dominating conversations across the political and financial spectrum. As such, it’s no surprise that apparel importers are watching this situation closely.
The apparel industry’s ever-changing landscape is nothing new. In my experience, apparel companies are generally well prepared to deal with sudden changes, whether it be weather conditions, consumer demands and/or, in this case, potential government regulations. Adept apparel companies with strong management teams can overcome most challenges.
For apparel companies, flexibility starts by ensuring profits are retained in the business and access to liquidity is maintained. This allows them to not only develop contingency plans for dynamic situations but also to implement those plans.
The potential situation with China is an important reminder of the need for the apparel companies to expand their supply sources. It is common for apparel companies to source goods from many countries—including China, Cambodia, Vietnam, Guatemala and Mexico—as well as domestically. This type of diversification helps companies compete on price as well as on quality and delivery times.
Ultimately, increased tariffs can lead to increased consumer prices. However, if apparel companies remain flexible and maintain diversified supply sources, they can minimize the impact of the proposed tariffs on Chinese-made goods.
Ron Friedman, Partner, Marcum LLP
I think everyone needs to be thinking long term as to the changes that a company may need to make. Most companies cannot change quickly as to where they will be sourcing product from.
Our clients have been in China for many years, and they have developed relationships over this period of time. To move production to other countries will not be easy.
At Marcum, we are suggesting our clients think about slowly diversifying their sourcing to other countries that can meet their needs. It takes time to plan and get the quality production from new sources.
Manufacturers will also be considering bringing back some production to the United States. Local production has the advantage of quick turnarounds from the time the order is received to shipping the merchandise.
It will be difficult to predict how the apparel industry might be impacted by new tariffs as this may just be a big poker game being played by world leaders.
Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.
While new tariffs on Chinese imported apparel have not yet been decided, it is anybody’s guess if they will be. But waiting for something to possibly happen without having a plan is a mistake that should not be made.
What apparel importers should be doing is thinking about finding other sources and locations of production that will not be affected by these tariffs. This could mean looking for some domestic production, production from Mexico or other NAFTA (North American Free Trade Agreement) countries or moving production to factories in other Asian countries not impacted by any new tariffs.
While this sounds simple, moving production from country to country, factory to factory is not so easy. Apparel importers should start with small steps in diversifying their production and building up from there.
This is a process that could take a number of months to work through. The important issue is not just keeping the price of your garments competitive but, more importantly, making sure the quality of your goods doesn’t suffer if there is a transition in production.
I have been told some Chinese factories are seeking to open new factories in countries that will not be affected by potential tariffs. So you might be able to stay with your current supplier, but their factory might now be in other countries besides China.
Lastly, if tariffs are imposed and you are not able to move production, will you be able to pass these costs on to your customers? If your competitors have been successful in moving production to non-tariff countries, you will be stuck with having to absorb these costs. The impact on your gross profit margin and your net income could be significant. So planning ahead and having a contingency plan is critical.
Sunnie Kim, President and Chief Executive, Hana Financial
China generally imports raw materials and unfinished products, assembles the inputs, and exports the finished goods. Should such tariffs be enforced, U.S. apparel manufacturers will be impacted. However, the extent of this impact is premature to measure at this time, as we would need to determine the current cost of an imported material compared to the cost of the same domestic good and then factor in the amount of tariff. What we do know is that the retail environment has been challenging due to changing consumer behavior with respect to the growing e-commerce competition and decreasing foot traffic in the past few years.
U.S. clothing manufacturers should prepare for the worst, and we expect the possibility of many to reduce the volume of Chinese imports should such changes come into practice. Nevertheless, we foresee the possibility of U.S. manufacturers continuing to purchase raw materials from China but shifting away from the traditional practice of allowing these partners to assemble finished goods that result in importing directly from China. Raw or unfinished materials may be channeled to other neighboring countries, such as Cambodia or Vietnam, to avoid higher costs, which could potentially impact end consumers in the U.S. in an already challenged retail environment.
Dave Reza, Senior Vice President, Western Region, Milberg Factors
Tariffs not only impact the revenue/income stream of a company but compel a shift in resources, sourcing patterns and inventory management. These changes could dramatically affect profitability, balance sheets and cash flows.
Importers need to anticipate these changes and establish contingency plans as part of the process of working in a higher-tariff environment. Shifting production to countries not subject to a tariff is one solution. Considering local U.S. production is also an option. However, whichever road is taken, the impact will not simply be a higher cost of goods/lower gross profit.
A change in production locale brings with it possible new regulatory restrictions, terms/credit requirements, logistics issues and the normal new-vendor quality snafus. Historical inventory levels may no longer be relevant or prudent if there is significant consumer uncertainty. All of these dynamics combined can significantly alter an importer’s historical working capital requirements and cash-flow patterns and financial outlook.
Any importer would be well served to prepare for the unexpected by taking time to understand how changes in sourcing and/or higher product costs/lower sales will change their profitability and, more importantly, their short-term liquidity. By doing this, they can work with their factor/lender to project out timelines for production and cash-flow support requirements and have approved over-advance or letter-of-credit facilities, if needed, in place ahead of time.
As with other changes in the world of apparel manufacturing and importing, those companies that can stay ahead of the curve with resources, anticipating customers’ needs and embracing the changes will live to fight another day.
Ken Wengrod, President, FTC Commercial Corp.
Buckle your seat belts and hold on for a bumpy ride. Let the trade negotiations begin between the U.S. and China. President Trump never proposed tariffs on Chinese-made apparel goods. The tariff list, “totaling more than $50 billion,” will include largely high-technology things.
However, the potential apparel tariffs should be a wakeup call to U.S. importers. In actuality, the real pressing matter is the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA), which was recently implemented and is already affecting all U.S. importers. The Enforce and Protect Act (EAPA) was also incorporated within this act, which establishes a formal procedure for investigating and enforcing antidumping or countervailing duty (AD/CVD) allegations of evasions against U.S. importers.
These acts grant comprehensive authorization to U.S. Customs and Border Protection to ensure a fair and competitive trade environment. This means that CBP may aggressively pursue and hold U.S. importers liable for its suppliers that are using forced labor—zero tolerance—and/or declaring undervalued goods, and/or manufacturing counterfeit goods. The CBP has a special task force reviewing shipments from China specifically to investigate potential AD/CVD violations. U.S. importers should already be scrubbing their bad suppliers. They need to keep reevaluating their entire supply chain.
U.S. importers need to focus on how to be more efficient in manufacturing, inventory turn, reducing sampling and preproduction costs. They need to have strong strategic partnerships with their foreign makers, freight forwarders and U.S. custom brokers. Instead of waiting for something to happen, U.S. importers should be more proactive and develop a long-term goal. Their supply chain needs to be more responsive when any adverse market conditions occur.
Adam Winters, President and Chief Executive, Merchant Factors Corp.
Some companies are being proactive and have started sourcing goods in other countries such as Bangladesh, India and Egypt. That process will take time, however.
No other country in the world has the infrastructure that China has, which makes it the best at producing apparel. The Chinese have invested enormously in technology and have a banking system that supports manufacturing. China has the most advanced manufacturing capabilities to produce quality product at competitive pricing.
I think it is smart for apparel companies to explore how they can diversify their sourcing, but the reality is that for the time being most of your product will need to be produced in China.
The administration does have legitimate issues to review with China regarding intellectual property and investment practices, but I am cautiously optimistic that the current discussion of tariffs are a negotiating tactic and that the rhetoric will soften over time. Our economies are intertwined, and there would be repercussions to both sides if we were to have a trade war.