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China and the US Signed a Trade Truce. Who Now Benefits?

Yesterday's deal doesn’t signal an end to the trade conflict. While some fashion players will get a reprieve from tariffs, others will not be so lucky.
Collage by BoF
By
  • Casey Hall,
  • Zoe Suen
BoF PROFESSIONAL

SHANGHAI, China — Surrounded by the pomp of a White House ceremony, a trade delegation from China and US President Donald Trump's top negotiators signed a 94-page "phase one" trade deal yesterday.

Divided into eight chapters, covering areas from technology transfers to intellectual property, the deal, as expected, includes a commitment from China to purchase $200 billion in US goods over two years, including $40 billion in agricultural products and about $78 billion in manufactured goods.

Under the phase one accord, which was first announced by President Trump via Twitter on December 13, 2019,  the $162 billion in new tariffs planned for Chinese imports that were due to go into effect on December 15 have been suspended.

Matt Priest, president and chief executive of the Footwear Distributors and Retailers of America (FRDA) says the phase one deal has concrete positive outcomes for his members, with almost half of them (47 percent) receiving a reprieve from an additional 15 percent tariff that was due to be implemented in December.

“What phase one has accomplished is doing away with duties for [footwear products on the] 4B list [as classified by the Office of the United States Trade Representative], which is talking about mass retail, not necessarily branded products, [but] products sold to working families and so that is helpful and good,” Priest said, though he added that he failed to see how higher duties on more than half of the footwear products manufactured in China and sold in the US was “a positive for American consumers.”

Donald Trump at Louis Vuitton's new factory in Texas, October 2019. | Source: Getty Images

A decade ago, 90 percent of footwear in the American market came from China. Today that number sits at 68 percent, meaning a significant percentage of shoes retailing in the US will continue to attract higher duties than they did before the trade war.

According to figures from China’s customs administration, export growth slowed to a three-year-low in 2019, growing only 0.5 percent in dollar terms last year, compared to 9.9 percent the year before. It is hoped that the phase one deal will ease that export decline. Towards the end of the year, as the prospect of a deal became more likely, bilateral trade between US and China began to improve.

“Our US imports started to recover in November and December,” Zou Zhiwu, vice-minister at China’s customs administration, said at an end-of-year briefing, pointing to December’s 9.1 percent year-on-year increase.

Though the first phase of a deal has now been signed, this doesn’t mean the trade war, which will mark its second anniversary in March, is over. The tariffs remaining still cover products worth $360 billion that have been subject to tit-for-tat tariffs on both sides. As a direct result of trade war tariffs, China has fallen behind Mexico and Canada to become the US’ third largest trading partner. Before the trade war, it was number one.

American retailers are dependent on selling fashion imports since few such products are made domestically. China now comprises 41.6 percent of all apparel imports, according to the US Commerce Department's Office of Textiles and Apparel, making US retailers vulnerable to the prices of Chinese-made clothing.

More than nine out of ten apparel imports are subject to higher duties than when the trade war kicked off almost two years ago.

Prior to the signing of the phase one deal, 91.6 percent of Chinese apparel imports had been subject to additional tariffs; this means that, even if some of these duties are rolled back as part of the newly-signed deal, more than nine out of ten apparel imports are subject to higher duties than when the trade war kicked off almost two years ago.

Indeed, rather than banishing tariffs altogether, the signing of the phase one agreement appears to have cemented tariffs as a more permanent and accepted part of the $700 billion worth of goods traded between the world’s two largest economies for the foreseeable future.

“I think the most important thing to know about the phase one agreement is that both sides are agreeing to agree to disagree,” said John Evans, Founder and Managing Director of management consulting firm TractusAsia, who has spent 20 years advising companies on doing business in China.

“The structural issues [between China and the US], whether they’re on cyber security or intellectual property protection, there’s a whole long list of those, they are much harder to negotiate and they will take a lot longer. With this agreement, I don’t see that a lot will change,” he added.

Global fashion companies – including Levi's, Calvin Klein and Tommy Hilfiger –famously moved part of their manufacturing base out of China after President Trump's inauguration.

As part of an earnings announcement in 2019, one of the world’s largest supplier of consumer goods, the Hong Kong-based Li & Fung Ltd., said it is actively helping its clients – which include some of the biggest retailers in the world – to move sourcing away from China to other regions. It helped one American retailer to reduce its reliance on China to 20 percent from 70 percent within two years.

But this doesn’t necessarily mean the movement of apparel, textiles and footwear manufacturing away from China was caused by the trade war; rather experts say a better description would be that the trade war has exacerbated the existing trend for offshoring from China.

Machinery in a textile factory on the outskirts of Bangladesh | Source: AP Photo/A.M. Ahad

“For a variety of different reasons having nothing to do with the Trump administration, we were moving away from China anyway – labour shortages, labour wage increases, currency – all [the things that factor into] the decision to diversify out of a country,” Priest explained.

Other broader trends include cheaper and increasingly high-quality sourcing options in Southeast Asia and beyond, as well as Chinese government policies aimed at lessening its economic reliance on mass market manufacturing, shifting to domestic consumption as the major driver for (slowing) growth.

June Cui, Managing Director at A&C International, a sourcing and supply chain management company, says that even before the trade war, apparel and textile manufacturing in China was undergoing a structural shift up the value chain, necessitating a change in the way factories worked to accommodate smaller and more customised production.

“I think the trade war really impacted the mass market, because we are working with the higher end we are less affected, but it’s getting tougher everywhere,” she says, adding that much of China’s manufacturing infrastructure was built around big orders for major global retailers, meaning a shift to smaller production runs and higher tech factories is an expensive and time-consuming undertaking, one not every manufacturer is going to be able to survive.

“Some of my factories have shut down, the costs were already getting higher and then they are being squeezed by the trade war [on top of that], but also by local government regulations that have been hard for small dye mills and the like. It’s quite hard in the fashion business here right now,” Cui explained.

Though her business currently comprises of 70 percent sourcing and supply chain for Australian designers (including Zimmermann and Alex Perry) Cui sees a bright spot on the horizon in the shift to manufacturing for the domestic market, which remains one of the world's most promising consumer markets.

The days of a single country – namely China – being the world's factory for a vast array of consumer products are over.

“This domestic market won’t replace the export market totally, but it will compensate something from the loss of the overseas market,” she said.

Tariffs or no, trade war or not, the days of a single country – namely China – being the world’s factory for a vast array of consumer products – especially fashion products – are over. Current efforts to lessen, suspend or even eliminate tariffs will not bring mass market apparel, footwear and textile manufacturing back to China in significant numbers.

Vietnam, Bangladesh, India, Indonesia, Malaysia, Mexico, Thailand, and to a lesser extent Ethiopia have all been beneficiaries of the move of the manufacturing of fashion products away from China, but none of these markets can individually match the mix of cost, quality human resources and infrastructure that made China the world’s factory for so long.

“Long before the trade war we saw our clients looking at where you go globally to be near market and setting up smaller, more technically-advanced operations in terms of garments, a more efficient operation, that can then supply to a nearby market,” Evans explained.

“So, you might invest in Eastern Europe for Europe, Southeast Asia for Southeast Asia and export, South America and Latin America for the North American market, and a lot of that predated the trade war for sure.”

Both winners and losers have already emerged out of the protracted US-China trade war and the phase one agreement will similarly benefit some more than others.  It is not yet clear how the next phase will evolve but what is more clear now than ever is that China's importance lies much less in the supply chain and much more in its consumer power as the world’s largest fashion and luxury market, a crown it certainly won’t relinquish anytime soon.

时尚与美容
FASHION & BEAUTY

Inside Shiseido's new innovation space | Source: Shiseido

Shiseido Taps China’s Start-Up Ecosystem

For the 147-year-old Japanese beauty giant, it isn't enough that China is its biggest global market — the company also wants the mainland to become its innovation hub. On January 8, Shiseido opened up a social space in Shanghai's WeWork, aimed at providing a space for collaboration, research and development between consumers, entrepreneurs, experts and commentators. The outpost also features the brand's incubator for local businesses, through which it has inked partnerships with the likes of gene tech skincare brand Uniskin. Many fashion and beauty giants from Estée Lauder to LVMH have launched or taken part in incubators to harness the power of up-and-coming technology, but Shiseido is the first to flag the mainland as a R&D hotspot for their global business. (Christina Yao for BoF China)

Chinese Streetwear Icon Bets on Childrenswear

Since launching Violet Mignon last year, Edison Chen — the co-founder of fashion label Clot and the brains behind Shanghai's annual Innersect extravaganza — has applied his streetwear smarts to childrenswear. Take his latest move, a collaboration with leading baby clothing brand YeeHoo, which launched in Beijing this week and targets Chinese shoppers searching for hip, well-made wares for their little ones. While Chen's entry into the segment was borne out of personal reasons — he created Violet Mignon for his daughter, Alaia — China's kidswear market isn't child's play. While childrenswear sales in 2018 only accounted for around 10 percent of the country's overall apparel market, double-digit year-on-year growth (a rate of 16.7 percent from 2017 to 2018) has outperformed both womenswear and menswear. (BoF China)

Urban Outfitters Delays China Entry

Following attempts and retreats by the likes of Topshop and Forever 21 to win over the mainland market, Urban Outfitters — the owner of Anthropologie, Free People and its namesake chain — is postponing its plans to break into the world's largest fashion market. On the back of a disappointing holiday season, the group announced that Free People's mainland debut and Urban Outfitters' flagship store opening (which were originally slated for 2019) will likely be realised in the next one or two years. The group's shares sank more than 8 percent (the most in seven weeks) after it missed the mark thanks to a share slump that affected a host of retailers such as Kohl's Corp., J.C. Penney Co. and L Brands Inc. (Weixin, Bloomberg)

科技与创新
TECH & INNOVATION

WeChat payment | Source: Shutterstock

WeChat Invests Big in E-Commerce

In allowing users to access other apps within the WeChat 'super-app' infrastructure, mini programs have long been an integral part of the platform's ecosystem. But they're about to get bigger. Last week, WeChat launched updates including tools for customer reviews, brand protection and shipping, as well as a consumer protection platform — signalling a major move into the world's biggest e-commerce market (which accounts for over 50 percent of global transactions). WeChat is hardly ill-equipped to build a vast online marketplace, given its impressive user base (1.2 billion monthly active users as of September, according to parent company Tencent's third-quarter earnings report, compared to 693 million for the same quarter on Alibaba's e-commerce apps), existing network of apps already using its mini-program features, wealth of user data and advertising operations. But it will take time before the company can challenge Alibaba — which holds a 55.9 percent share of China's e-commerce market as of 2019 — where WeChat has yet to be named one of its top ten players. (Technode)

Following its 2019 Success, TikTok Lures Big Brand Budgets

Though tech giant Bytedance has denied reports by local media outlets that it reached last year's performance goals after exceeding annual revenues of 140 billion yuan ($20 billion), the Douyin and TikTok owner is set for a big year ahead. Despite controversies exacerbated by months of volatile Beijing-Washington relations, Douyin and global version TikTok were the second most-downloaded apps (after WhatsApp) across Apple and Google app stores in the fourth quarter and the full year of 2019 according to data from Sensor Tower. The figures mean that Bytedance was ranked the world's third most popular publisher by downloads in 2019 following Facebook and Google. Looking ahead, the app is also developing a curated feed (similar to Instagram's Explore or Snapchat's Discover pages) to display popular posts and ads, which could help maximise the company's revenue potential. The move could help combat advertisers' concerns that paid posts would be featured alongside controversial content and create a safe stream for branded content. (Financial Times)

Xiaohongshu Lowers Bar for Seller Accounts

Hit social e-commerce app Xiaohongshu is doing away with strict requirements that limit vendor accounts applicants to trademarked brands. The new go-to social media app for beauty brands from Gucci to Estée Lauder is opening up its platform to merchants of all sizes in hopes of further monetising its user base — over 85 million monthly active users who review products and services across fashion, beauty and lifestyle categories in 3 billion posts a day. Though Xiaohongshu kickstarted its e-commerce efforts early on (unlike apps like Instagram), developing a scalable monetisation roadmap remains its biggest challenge. Following this update, companies will be able to create merchant accounts on the app as long as they have a valid Chinese or foreign business operating license. (36Kr)

消费与零售
CONSUMER & RETAIL

The ground floor of Harmay's Beijing boutique | Source: YiMagazine

A Boutique Layout that Encourages Smarter Shopping

In Beijing's Sanlitun, a recently-launched two-story multi-brand store has been designed to make customers reconsider the way they shop for beauty products. On Harmay's spacious, industrial-chic ground floor, the focus is on curation: recommended products in the form of samples (or xiaoyang) from Dior, Chanel, Tom Ford and YSL are lined up on a single curved table, encouraging visitors to purchase trending hit items as they move around the space without committing to full-sized items. The second floor, however, resembles a boutique's stock room, grouping skincare and make-up brands' full-sized collections in a dense, supermarket-like format to appeal to seasoned beauty shoppers that know what they are looking for. Harmay is no stranger to the beauty space: the company started on Taobao in 2008, later launching storefronts on Tmall and WeChat mini programs, and predicted that samples would be a unique brick-and-mortar offering (alongside Beijing, it operates stores in Shanghai and Hong Kong). Judging from the crowds of shoppers flocking to its newest outpost even on weekdays, the strategy is paying off. (Aijing Wang for BoF China)

Could Opening Ceremony Make a Comeback in China?

On January 13, Off White and Palm Angels owner New Guards Group (NGG) acquired American clothing brand and retailer Opening Ceremony with plans to take over production of its in-house line and close its four retail stores in 2020. But could the brand land a physical presence in China? Though Chinese consumers have trouble purchasing Opening Ceremony-branded goods, the alternative multi-brand retailer has loyal fans on Chinese social media platforms like Xiaohongshu, where jet-setting users post images of the brand's 'It' items, from tote bags to logo T-shirts. As NGG parent company Farfetch strengthens its foothold in the mainland and brands like Off White continue to make waves among local shoppers, an Opening Ceremony outpost in Shanghai could position the group to become the country's authority on new luxury. (Jing Daily)

World’s Second Largest Jeweller to Shutter a Fifth of Hong Kong Stores

The Chow Tai Fook Group has announced its plans to pull out of prime shopping districts in Hong Kong as ongoing pro-democracy protests weigh on the city's retail and tourism sectors. The political unrest — which has seen protestors occupy major malls and target mainland-owned businesses — caused local retail sales to fall 23.6 percent in November for the tenth consecutive month. The jewellery giant will review the performance of more than 40 outlets with leases set to expire in the 2021 financial year, and is set to shutter up to 15 points of sale. It currently operates a total of 3,789 stores, including about 80 in the city, and planned to open about 600 more in China in the financial year ending March 2020. (Xueqiu)

政治、经济、社会
POLITICS, ECONOMY, SOCIETY

Cargo freight containers at Hong Kong's sea port | Source: Shutterstock

Chinese Export Growth Slows to Three-Year Low

Weighed by the Beijing-Washington trade tensions and a global economic slowdown, China's export growth slowed to a three-year-low in 2019. According to China's customs administration, exports grew 0.5 per cent in dollar terms last year — the lowest figure since 2016 and down from 9.9 percent the year prior. But things are looking up as trade tensions thaw: Zou Zhiwu, vice-minister at China's customs administration, said bilateral trade between US and China began to improve at the end of the year. "Our US imports started to recover in November and December," he said at a briefing, pointing to December's 9.1 percent year-on-year increase. The news will soon be followed by China's gross domestic product data (set to be released on Friday) — analysts are expecting 6 percent growth in the last three months of 2019. (Financial Times)

Amid Unrest, Hong Kong Pledges $1.3 Billion in Economic Relief

Chief Executive Carrie Lam has pledged HKD $10 billion ($1.3 billion) to boost the city's economy, after seven months of strife pushed the financial hub into recession for the first time in a decade. Hong Kong's elderly, unemployed and low-income residents will receive cash handouts among other benefits, and the government plans to increase statutory holidays from 12 to 17 days. Lam joined other government officials at a financial forum on Monday to dissuade concerns, saying Hong Kong's "strengths and resilience, just like our financial systems, have not been undermined despite (the fact) that we experienced considerable social unrest and challenges." (Reuters)

Internet Praises Tmall’s Same Sex Couple Ad

In a country where representations of its LGBTQI community in the media are few and far between, Tmall's latest advertisement featuring a gay man introducing his partner to his family as part of its Lunar New Year promotion has been praised as a big step in the right direction. The 20-second clip has raked in views and supportive comments on local social media sites, but some local LGBTQI activists are reluctant to hail it as major progress considering related content and discussions are often censored by the government. For others, the marketing move is worth celebrating regardless. "In recent years, it has become increasingly difficult to see LGBTQ+ representation in the Chinese media, regardless of whether that's film or the news media, so every instance is very important," said Yang Yi, media officer at a local non-profit. (South China Morning Post)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent casey.hall@businessoffashion.com.

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