How Trump Tariffs Are Affecting the Footwear and Apparel Sectors

Posted by Eurofins | BLC

A new set of tariffs have been imposed on Chinese imports by United States President Donald Trump, which includes footwear, equating to $112 billion. The US government also has plans to impose additional tariffs on 15th December 2019 which they claim will protect US consumer spending(1). However, China has also retaliated and imposed $75 billion of tariffs on imported goods from the US(2).

Both the American Association of Footwear and Apparel (AAFA) and the American Chamber of Commerce in China have voiced concerns over these latest actions. More than 200 footwear businesses are increasingly concerned over the on-going tariff war which could increase the cost of footwear to US consumers by up to $4bn each year. The latest set of US tariffs could add to existing tariffs of up to 67% on some imported shoes from China(1).

The continuing trade war is likely to have a significant impact on US consumer household spend, increasing it by as much as $800(1). However, early steps towards a resolution to the situation could be imminent as the 13th round of high-level trade talks between the US and China are set to commence in October 2019(2).

In the following article, we will explore how ‘Trump tariffs’ on imported goods from China, Mexico and Europe are affecting footwear and apparel organisations throughout the supply chain as well as consumers.

As the majority of consumer products are made outside of the United States, the Trump Administration feels that this is impacting on the economy and job security of American citizens. So, in a bid to increase the manufacturing output and ultimately create jobs, President Donald Trump has been enforcing a series of taxes on imported goods since January 2018.

The value of US apparel and footwear imports stood at $129 billion in 2018(1), with approximately 40% of clothing and 73% percent of footwear imports ($11.4 billion) coming from China(2,3). The average import duty is 1.8% on all goods however the latest Trump Tariff will see an additional 25% added onto the existing tariffs for Chinese imports(3).

In addition, there have been further tariffs planned for Europe, specifically targeting leather handbags with a value of over $20(USHSLA) due to a dispute over aircraft subsidies(4). The USHSLA have raised concerns over this potential tariff and its impacts on the leather, hides and skins industry, claiming that the US exports over 95% of total domestic production which is shipped to key markets, including the EU, who then sell finished goods back to the US(5). In 2018, leather handbag imports were valued at $917 million and due to the nature of this supply chain, the effects of this tariff would ultimately affect US businesses who retail foreign goods using US-based materials. While the USHSLA comments have been supported by a number of EU leather industry bodies, the EU have since considered retaliatory tariffs upon US leather handbag imports(5).

For Mexico, an additional 5% tariff per month could be added to US imports until it reaches a 25% limit in October in response to immigration issues. However White House Trade Adviser Peter Navarro, has stated that it is likely that full effect of this tariff will not be implemented due to the on-going negotiations with the Mexican government(6). Mexico is regarded as a significant manufacturing hub for apparel and footwear destined to be retailed in the US. Mexico is the 8th largest supplier of apparel and 7th largest supplier of footwear to the US(7), which currently imports $691 million of men’s and boy’s blue jeans from Mexico(8), equating to 35% of imports(7).

How do the Trump Tariffs affect US Consumers?

US consumers rely heavily on purchasing imported clothing and footwear which currently carries the benefit of lower manufacturing costs from countries such as China and Mexico, giving brands and retailers the opportunity to attract price-driven consumers.

In 2018, US consumers paid $3 billion in duty on Chinese goods however under the proposed 25% tariff, consumers will pay over double at $7 billion(9). Similar increases could be expected for imports from Mexico. While clothing and footwear are regarded as staple items, consumers may be subjected to price increases of up to 70% on some footwear brands(3). Hikes will be particularly stark for products with more complex supply chains, meaning that consumers may bear the brunt of multiple sets of tariffs. The most concerning aspect of the price hike is that it also applies to children’s shoes, of which nearly 100% are currently made in China and imported to the US(9).

Average increase estimates in footwear types after proposed new tariffs:

Footwear Type	Current Price	Price Under New Tariff
Hiking Boots	$190.00	$248.56
Running Shoe	$150.00	$206.25
Basketball Sneaker	$130.00	$178.74
Canvas Sneaker	$49.99	$65.57

Source: Mat Priest, President and CEO of Footwear Distributors and Retailers of America (FDRA) interviews on Fox and CNBC (3,9)

Price rises

Source: Footwear Distributors and Retailers of America (FDRA) in BBC(10)

How are Brands, Retailers and Manufacturers Affected by the Trump Tariffs?

The Trump tariff increase will affect all brands from high street to luxury(2), and while some will absorb the increase cost through design, materials and operational efficiency, others will pass on the responsibility to consumers. It has been suggested that the effects of tariff increases on imported footwear and apparel will affect consumer behaviour and therefore the profitability of brands retailers by as much as 30%(2). In some cases, consumers that are governed by price will switch to more affordable options, indicating a change in brand, retailer or even shopping habits.

While the vision of the Trump Administration theorises an increase in sales of American brands through the implementation of tariffs(11), the reality is more complex and does not guarantee an increase in manufacture in the US. Difficulties are particularly apparent in supply chains where US-manufactured materials are then shipped to tariff-affected regions, manufactured into finished articles, then shipped back to the US to be retailed to consumers. Therefore, a number of top retailers are urging President Donald Trump to remove footwear (and apparel) from the tariffs and to revise options(12).

China: The Global Manufacturing Powerhouse

China is seen as the global capital for footwear and apparel production. A number of major global footwear sports brands produce between 15% - 21% of their footwear in China, so simply switching operations to avoid the tariff is not simple. Within the supply chain, companies source not only the manufacture of finished goods but also parts and raw materials from the country, including:

Chemical products
Glues, adhesives and enzymes
Raw hides and leather
Silk
Wool and animal hair products
Cotton
Flax
Man-made textiles
Other textiles products, rope, twine
Fabrics
Various metal products
Industrial and retail machinery
Furniture, bedding and mattresses(13)

However, Trump Tariffs are also impacting on many US fashion brands who rely on the manufacturing capability and expertise that China, Mexico and Europe have to offer, inadvertently increasing their vulnerability to additional tariffs(14). As a reaction to the tariffs, some brands already reduced their inventories of Chinese-made apparel by more than two thirds at the end of the first quarter of 2019(13).

While the exact deadline for the implementation of the 25% Trump Tariff on China remains unknown, brands and manufacturers are preparing for the potential long-term effect. Planning the use of alternative manufacturing facilities in other Asian countries such as India, Vietnam and Bangladesh is one of the options being evaluated but moving an entire footwear operation to another country will be complex(2,9). China has become a magnate for the manufacture of high-end goods in large qualities at high quality, therefore the manufacture of wardrobe essentials such as t-shirts, will be the first types of operations to be moved to other countries(14).

Some companies have found other ways to temporarily circumvent the tariffs such as rerouting exports to the US through Vietnam, accounting for a 40% increase in the country’s exports in the first quarter of 2019. There have even been allegations of fake labelling of Chinese-made goods to avoid the tariffs, however this only affects a small amount of exports(15).

But there could be some hope on the horizon for the footwear sector. In a letter to the Treasury Secretary Steve Mnuchin, Matt Priest, President and CEO of the FDRA outlined a number of concerns with the 25% Trump Tariffs. In an interview with Fox news, Matt indicated that there could be some exemptions for certain types of consumer goods however it is not definite(9).

Matt also spoke about the revival of the Trans-Pacific Partnership(9), which was a signed trade agreement in 2016 that was not ratified but served the purpose of strengthening trade between several countries in the South and North American continent as well as a number of countries in Asia including Vietnam, Singapore and Malaysia(16).

Increased Traceability in the Supply Chain – An Unexpected Gain?

Despite the seemingly bleak outlook on manufacturing, there are some benefits to the Trump Tariffs which can reverberate throughout the supply chain. While the Trump Tariffs are seen by many industries to be potentially hugely disruptive, they are forcing brands, retailers and manufacturers to scrutinise their supply chains.

Some companies have explored the option of manufacturing garments and footwear in the US and found that while expenses increased, the speed of delivery to customers was quicker, making a case for local production(2). There are other advantages too such as increased supply chain visibility, reduced carbon footprint and reduced transport costs given that raw materials, components and manufacturing would be sourced from a handful of suppliers within a single country.

The global supply chain is complex and built on a number of tiers including manufacturers, suppliers of parts and components, and suppliers of raw materials. Manufacturers and suppliers could be sourcing from a number of other countries, each with their own set of standards in social and animal welfare, environmental pollution and regulation that the brand and retailer further downstream may not be aware of.

In addition to the benefit of increased traceability, brands and retailers can also utilise the message of high standards of animal welfare within the US leather industry. There are a number of cattle production hubs such as Texas, which contains many large-scale feedlots making bi-products from the meat industry such as hides and skins, readily available. Brands and retailers can be provided with assurance of animal welfare standards and ethical manufacture, which can be communicated to the consumer. In fact, some consumers will pay a premium for footwear and apparel that is ethically made. Generations Y and Z (16 to 35-year-olds) are the strongest target market and are dubbed as being the most environmentally and socially aware consumers to date(17).

Are you considering moving manufacturing operations or sourcing new suppliers to beat the tariffs?

If your business is considering moving manufacturing to a different country or on-boarding new suppliers, we can help.

At Eurofins | BLC, we work with a wide range of businesses throughout the materials supply chain. Our technical experts work with leading global brands and household names, as well as their manufacturers and suppliers located around the world.

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At Eurofins | BLC, we can give your business access to key information enabling you to make informed decisions about the manufacturers and suppliers from which you intend to source. Our supply chain mapping service can provide you with insights that allow you to interrogate and visualise your entire supply chain through our custom-built tool. You will be able to objectively assess the prevalence of potential sustainability risks such as animal welfare, deforestation and modern slavery, in addition to any accreditations such as LWG rated tanneries and traders. This information can be displayed within a supply chain map which clearly defines each tier of your supply chain, so you can also see who supplies your manufacturers.

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We can provide a wide range of physical and chemical testing for finished products, materials and composites. If you are looking at changing supplier or are moving operations, testing can provide your business with independent third-party verification of product quality and compliance with various chemical standards.

There may also be an amount of uncertainty when selecting a new supplier. At Eurofins | BLC, we provide auditing services covering a range of manufacturing and laboratory inspections such as leather quality inspections, LWG environmental audits, chemical management audits, chrome VI audits, in-house laboratory audits and accreditation.

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