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China’s Fashion Industry Shrugs Off Trump’s Tariffs

Importers of Chinese-made footwear and apparel are staring down the barrel of a 25 percent tariff. Why is the response from China so muted?
Collage by BoF
By
  • Sam Gaskin,
  • Zoe Suen
BoF PROFESSIONAL

BEIJING, China — Executives from Adidas, Under Armour, Reebok and more than 160 other companies urged US President Donald Trump to remove footwear from a proposed 25 percent tariff on Chinese imports in an open letter shared this week.

The authors of the letter said the tariff "would be catastrophic for our consumers, our companies, and the American economy as a whole." Adidas alone works with 128 different suppliers and contractors in Chinese cities such as Ningbo, Fuzhou and Dongguan, and made around 18 percent of its footwear in China last year.

In China, however, responses to proposed tariffs on apparel and footwear have ranged from stoic to curiously optimistic.

Alibaba's Executive Vice Chairman Joe Tsai said he “could not think of another company” in a better position to benefit from the trade war than his. He said efforts to address the trade deficit, US President Donald Trump’s ostensible motivation for the conflict, will only drive more American businesses to the Chinese e-commerce giant.

Valued at over $27 billion, more than a third of the apparel the US imports comes from China.

“We are the platform of choice for global producers of products and brands selling into China,” he said on the company’s news site, Alizila.

When trade negotiations broke down in Washington earlier this month, Trump raised tariffs from 10 percent to 25 percent on everything from frozen sea cucumbers to railway sleepers, including fashion industry staples such as leather, textiles, handbags and luggage.

The US has also started a formal process to slap 25 percent tariffs on an additional 3,805 tariff lines, worth $300 billion annually. The new targets include not only manatees and fire extinguisher parts but finished fashion products in some shoe, apparel and accessory categories.

Valued at over $27 billion, more than a third of the apparel the US imports comes from China. China also provides 72 percent of America’s imported footwear and 84 percent of its imported travel goods, which include wallets, backpacks and handbags.

"The tariff increase entirely indicates the unilateralism of the United States and is brought about by political factors," says Chen Dapeng, president of the China National Garment Association and the Shanghai-based international fashion trade fair CHIC.

"This impacts the stability of trade and the cooperation of the industry between the two countries. It does not meet the expectations of the international community, and not only harms the interest of both sides, but also harms the interests of Chinese companies and US consumers," he adds.

Despite such high stakes, some manufacturers in China seem largely unconcerned about the threat of hefty tariffs.

“All the big guys already shifted to Southeast Asia,” says Gerhard Flatz, managing director at KTC, which has manufactured sportswear in Guangzhou Province's Heishan city since 1981. A dozen other factories have come and gone from Heishan over that period, he says, with the last of them closing down about two years ago.

Under Armour footwear | Source: Under Armour

These days, plants in Laos cost Flatz a third as much to run as those in China. Because Chinese manufacturers can no longer compete with Southeast Asia on the price of labour, those that remain have largely upgraded to more high-tech or nimble manufacturing.  Meanwhile, many lower end Chinese manufacturers simply opened factories abroad in low-cost manufacturing centres across Asia and Africa.

“What remains in China, they can’t produce anywhere else,” Flatz says. That means the cost of the tariffs will likely be passed on to brands and US consumers. “It’s basically a tax and not a duty,” he says.

Sabrina Finlay is the chief executive of Otabo, which has helped dozens of US fashion brands make their products in over 50 Chinese factories. She says while moving production to countries like Cambodia, Indonesia and Vietnam has been happening for years, those countries still specialise in very specific types of production.

“Because the infrastructure in those countries isn’t developed the way China is, those industries aren’t as adaptable or flexible,” says Finlay. They’re not dexterous or responsive enough to produce different product lines and new styles when brands need them, which these days changes at social media speed.

“If you start cutting off American brands from [manufacturing in] China, there isn’t another place they can do this,” she says, and the ramifications will be broad and long lasting.

As prices go up, sales go down, jobs get lost.

“For me the conversation isn’t about what’s going to happen in the next six months or the next two years but what happens in the next 10-20 years. This decision drastically hinders America’s ability to grow manufacturing, companies, brands and talent within the [US].”

The notion that America will pay for the tariffs on China squares with research by Goldman Sachs that found the cost of Trump's China tariffs have thus far been "entirely" passed on to US businesses and consumers.

How much of the 25 percent tariff US consumers are willing to pay remains to be seen. Rick Helfenbeim, president and chief executive of the American Apparel and Footwear Association, says when it comes to footwear, “even at the high end, there is little price elasticity.”

“As prices go up, sales go down, jobs get lost,” says Helfenbeim.

A survey conducted by The American Chamber of Commerce in February found that 54 percent of American companies operating in southern China lost market share to competitors, compared with 33 percent of Chinese respondents and 20 percent of respondents from other countries.

According to Wells Fargo analyst Ike Boruchow, large US companies that could be most negatively impacted include Steve Madden, Skechers USA Inc., Gap Inc. and Urban Outfitters Inc. As BoF has previously reported, brands such as Ralph Lauren and Calvin Klein — whose diffusion lines are made in China — and digital-native brands such as Away, Everlane, Allbirds and ThirdLove, are also at risk.

Small US businesses are likely to be hit even harder. Dan Harris, a partner at US law firm Harris Bricken, which gives advice on China law, says, “I am always shocked at how many smaller companies still have their clothes and shoes made in China, in large part because they don’t really know how to have them made elsewhere.”

Away Lookbook | Source: Courtesy

Since the announcement of tariffs, he says, “we have brought on two business specialists who focus on Vietnam, Thailand, the Philippines, Malaysia, Cambodia and Indonesia, and they have gotten very busy the last few weeks helping companies make this move.”

While not all Chinese fashion manufacturing is high tech, lower end manufacturing is not especially vulnerable to the tariffs either, claims Nikko Chen (also known as Chen Xin), Managing Director of Chinese conglomerate Fosun Fashion.

“There are still quite a few factories producing low end products in China but they’re more serving the Chinese market [than export markets],” he says. “There’s definitely going to be an impact at the very low end, for instance for products in Walmart, but I don’t think there will be an impact on the rest of the industry.”

The Chinese apparel manufacturers that BoF reached out to supported Chen’s assessment. Most had little to say about the US tariffs, they said, because they now manufacture mostly or exclusively for the domestic market.

There's definitely going to be an impact at the very low end... but I don't think there will be an impact on the rest of the industry.

Even Orolay, makers of the so-called 'Amazon Coat' that went viral in Manhattan last winter, responded with considerable equanimity. "I think this policy will have a [small] degree of impact on all industries," a spokesperson said.

Another explanation for the lack of outcry over the tariffs in China is Chinese companies’ extreme aversion to speaking out publicly on issues that the government is watching closely.

“It’s quite a sensitive topic,” says a close collaborator of the China National Garment Association, who wishes to remain anonymous.

Indeed, Chinese manufacturers may suffer more from the proposed 25 percent tariff than they have so far let on. But given how much China has already started turning away from the US market, such pain may not be as great — or last as long — as Trump expected.

“The Chinese government has done a lot of things such as emphasising the One Belt One Road policy, to increase trade between China and non-US countries,” Nikko Chen says. Earlier this month, for instance, the China National Garment Association announced it was organising a Sino-Italian Fashion Summit, which will take place in Hangzhou from June 24 to 26.

In the long term, Alibaba’s Tsai holds that China’s growing middle class will more than offset any decrease in exports to the US. “Over the last five years, while China lost 14 million manufacturing jobs, the economy added 70 million service jobs that drove real disposable income growth and consumption,” he said.

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China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to zoe.suen@businessoffashion.com.

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