NEW YORK, United States — Randa, which manufactures menswear accessories for brands like Dickies and Levi’s, was in the process of doubling the capacity of a belt plant in Guatemala when President Donald Trump announced the first round of tariffs on Chinese imports of last year.
Now, as the facility wraps up its expansion, Randa is really counting its blessings. Trump has since announced duties on new consumer product categories and proposed tariffs on an additional $325 billion of imports from China, including most apparel, footwear and accessories, which could go into effect as soon as June 24. Randa still operates a substantial portion of its production out of China, but the belts made in Guatemala will avoid the tariffs, which add 25 percent to the cost of affected imports.
“[The Guatemala factory] was kind of a favourable double-edged sword,” said Richard Carroll, senior vice president, marketing, at Randa. “We looked at it as an opportunity to move things out of China.”
Many apparel manufacturers haven’t been so lucky. About 40 percent of US clothing imports and 73 percent of footwear imports are made in China, according to data provided by trade organisations. The tariffs affect a broad range of brands, from fast-fashion chains like H&M and Forever 21 to accessible luxury players Ralph Lauren and Calvin Klein.
Our intentions are to cover as much of the margin impact as we can.
They face tough choices over whether to shake up their supply chains or raise prices. The longer the tariffs stay in place, the more it will rearrange fundamental aspects of how the fashion business operates.
“Our intentions are to cover as much of the margin impact as we can,” Samsonite Chief Financial Officer Reza Taleghani said earlier this month in an earnings call. “We do that with pricing, we do that with pressure on our suppliers and we do that with product reengineering, which has a little bit longer tail.”
Before the next round of tariffs go into effect, brands and retailers can take steps to prepare, from tweaking supply chains to taking their case to the public.
First the bad news: some companies stand to lose up to 20 percent of their net income with this new burden, according to Cowen analyst John Kernan, and it's too late to move production out of China in time to completely avoid the tariffs. Switching to a facility in India, Vietnam or Bangladesh takes months at best, and there’s no guarantee a new manufacturing partner will offer the same quality, cost and speed. There’s also a risk in jumping the gun and rearranging an entire supply chain, only for the US and Chinese governments to reach an agreement that cancels the tariffs.
Many apparel brands have been gradually moving parts of their supply chain out of China for years, in part because costs were already rising there. J.C. Penney has been “developing contingencies for sourcing our private brands” for years, and began looking for additional alternatives to China at “the first blush” of new tariffs, Chief Executive Jill Soltau said in an earnings call last week.
Large retailers like J.C. Penney have staff dedicated to finding the cheapest and highest-quality factories around the world, but smaller operations have options as well. They can begin the process of finding new suppliers at trade shows and networking events.
Most brands will look to other countries in Asia, but even fast-growing manufacturing hubs like Bangladesh and Vietnam don’t have the capacity to handle a mass migration from China, Kernan wrote.
The big advantage to local manufacturing is that tariff or no tariff, we can make inventory in real time, which is fast and there’s no excess.
Some companies are exploring US manufacturing, where expenses are higher, but goods can be shipped to customers faster. A McKinsey report last year made a case for local production as prices are rising in China and brands look for ways to quicken their delivery of products.
Gary Wassner, the founder of investment firm Interluxe and factoring company Hilldun, recently helped open a knitwear factory in St. Louis.
“What makes this kind of a knitwear factory viable today is its high tech and great equipment,” he told BoF. “You don’t have to fly merchandise in from China and [the factory] will create jobs locally .”
Suuchi, a manufacturing and technology platform with its own facility in New Jersey, works with 230 brands in apparel, shoes and accessories. Its tech platform digitalises every component of the supply chain so that vendors can follow the process from design, sourcing, production to shipping.
“The big advantage to local manufacturing is that tariff or no tariff, we can make inventory in real time, which is fast and there’s no excess,” founder Suuchi Ramesh told BoF. She added that the production capacity across Suuchi’s own factory and its 140 partner factories that use the technology is about 12 million units a year.
Find another “country of origin”
Brands that rely on manufacturing in China can still avoid the tariffs if certain steps in the production process occur elsewhere.
US Customs defines an item’s country of origin as the country “in which the most important assembly or most important manufacturing occurs,” which in some cases means the last country where essential production took place. For instance, if a sweater uses yarn from Peru that is knit China but sewn together in Vietnam, then the latter may count as the country of origin.
If you have an underwear company doing knitting, cutting and sewing in China, we’re helping you explore moving the cutting and sewing part to another country
“If you have an underwear company doing knitting, cutting and sewing in China, we’re helping you explore moving the cutting and sewing part to another country so that you may be able to argue that the country of origin is not China,” said Richard Mojica, a trade lawyer with Miller & Chevalier who has been counseling retail and fashion companies on the tariffs. “This is what’s called finishing operations, and can be done in Vietnam, India, etc.”
Mojica recommends that companies submit hypothetical supply chains to US Customs and receive a ruling on whether they must pay tariffs. These decisions are made on a case-by-case basis and will differ for each brand. Rulings are typically issued within 30 days.
Stock up before the tariffs kick in
Brands can avoid the immediate impact of the tariffs by pre-ordering shipments from suppliers before June 24. Whereas merchandise is typically shipped about a month before it hits shelves, retailers are now considering ordering supplies for the rest of the year from Chinese suppliers, according to Adam Winters, chief executive of factoring firm Merchant Financial Group, which extends short-term credit to fashion brands that need to pay for manufacturing.
We’re going to see goods in the water, in the air, for the next few weeks.
“A number of clients called us recently to try to help them bring all of their fall goods prior to June 24, but they’ll need an enormous amount of financial support,” Winters said. “We’re going to see goods in the water, in the air, for the next few weeks.”
Some companies are banking on this method alone, he added, hoping that Trump ultimately ease up on tariffs during an election year.
Share the burden
Another short-term solution is to work with factories and retailers to share the cost of tariffs.
For instance, if a brand typically pays a Chinese supplier $100 for a sweater but will now pay an extra $25 tariff at the border, it could ask the manufacturer to cut its price by $5, and charge department store an extra $5. In this case, the brand will still take a hit to its margins, but negotiations with partners can soften the blow.
I don’t think any one part of the supply chain process is absorbing it
“I don’t think any one part of the supply chain process is absorbing it,” said Meredith Travers, senior vice president, sales, at Randa. “Everyone is fighting very hard to not immediately pass this onto the consumer … What you’re seeing along the line is that everyone is realising this reality and want to be great partners.”
Boot Barn, a western wear chain with 234 US stores, is in talks with vendors and factories about how to reduce the tariff impact, from alternative sourcing to increasing supply chain efficiency, Chief Executive James Conroy said in a recent earnings call.
“We believe that whatever portion of the tariff that would get passed along to us, we most likely would be able to pass it along to our customer,” he added.
Explore a “First Sale” program
In a “first sale” program, apparel manufacturers sell to an intermediary, which then sells the same products to the American brand importing the goods. By being able to prove this multi-tiered distribution chain, the brand will save money by paying tariffs on the price of the first sale, rather than the marked-up price paid to the middleman.
Many apparel and footwear companies already have a first sale program in place, Mojica said.
But this is a high-risk tactic, he warned. “It’s heavily scrutinised by customs, and in light of the tariffs, they are examining this even more,” he said. There are three criteria that must be met to quality as a first sale program, he added. One, there must be a bona fide sale of the merchandise from the manufacturer to an intermediary; two, the goods must be destined for export to the US at the time of the first sale; and lastly, the manufacturer and the intermediary must negotiate "at arm’s length."
Brands should look to import lawyers and consulting firms to facilitate these setups.
"Importers that rely on first sale must maintain a documentation trail to substantiate each of the [three] requirements," Mojica said. "Accordingly, we generally recommend that importers confer with the [US Customs and Border Protection] about whether proposed arrangements with certain key vendors would qualify for first sale ahead of time."
Appeal to the Government
Companies can also submit comments to the Office of the US Trade Representative between now and June 17, when the agency will hold a public hearing.
Written commentary is a way for brands to argue against the strategy of applying tariffs generally, or for narrower carve-outs to spare certain corners of the industry or even specific businesses.
In the meantime, companies might have to run a tighter ship to weather a storm.
After Trump imposed tariffs on steel imports for instance, hundreds of companies requested exemption and succeeded. The Commerce Department approved tariff exemption requests from 370 companies, according to the Associated Press.
Companies voicing their objection also creates awareness and political pressure on the administration. Last week, a coalition of more than 170 shoe brands including Nike and Adidas penned a letter to the Trump administration calling the proposed tariffs “catastrophic.”
“I’m still hopeful a deal will get done, as both parties have such a vested interest,” said Winters, the factor. “In the meantime, companies might have to run a tighter ship to weather a storm.”