For those who hoped Trump would change his mind on his proposed 25% tariffs on $200 billion of goods imported from China…
News flash: he didn’t.
Now, many parts of the fashion and accessories industries who manufacturer in China are grappling with these new tariffs, which went into effect today on everything from handbags to hats. Chief executives from major retailers like Walmart, Target, Gap Inc. and Best Buy, have already upped their warnings that price hikes are unavoidable, according to reports. These new duties are set to kick in at 10% through the end of the year, but will rise to 25% on January 1, 2019.
China is already aiming to retaliate with tariffs on $60 billion in U.S. goods, escalating the trade war further, with Trump making additional escalation claims that such retaliation would spur new duties on another $267 billion in Chinese imports, according to Bloomberg. If the president makes good on that threat, U.S. tariffs would cover all goods the nation imported from China last year, risking an escalating conflict that could upend the supply chains of multinational companies.
Buckle up, it’s going to be a bumpy ride.
While some brands will be forced to pass along price hikes to retailers and thus consumers, others will eat the difference (or try to split it with their factories) to help maintain those retail relationships. The initial 10% tariff and resulting shrunk margins might be partially offset by rising consumer confidence through the holidays, but come the full 25% hike next year, there will be a reckoning. Needless to say, tempers and fears are high.
HANDBAGS TO FEEL THE PAIN
When it comes to handbags, the tariffs will hurt an already hurting industry. “Handbag business has been challenging for the last few years. New tariffs are going to be crippling to our industry and our retail partners, especially at popular price points,” notes Steven Hedaya, President of Mondani Handbags, the manufacturer of Mondani, Zac Zac Posen and London Fog handbags. “Companies will rush to divert production to factories outside of China, but there’s no way that new sources could immediately take on the capacity that China has built up over nearly four decades. They have scant local materials, untested skill sets, huge logistical obstacles and compliance enforcement problems. It will take years not months to overcome.”
And who will absorb the increase? Surely not retailers who already placed their orders. “Christmas product were all purchased [by retailers] months ago and are leaving Asia over the next few weeks,” says Hedeya. “What choice do any of us have?”
Fashion designer Rebecca Minkoff said on CNBC’s Closing Bell that while her fashion and accessories company is feeling the effects of President Trump‘s tariffs, she’s also going to absorb price hikes for her Made in China items to avoid “inflicting pricing pain” on her customers. “We’re not looking to raise prices. I think we’re willing to take a hit because it’s not fair to pass off this punishment to our customer,” she said. Over the summer, Minkoff had testified in Washington, D.C. at the public hearings held by the Office of the U.S. Trade Representative.
If and when brands start passing along price hikes to retailers, they will ultimately get passed down to consumers.
“Handbag business has been challenging for the last few years.
New tariffs are going to be crippling to our industry and our retail partners, especially at popular price points.”
– Steven Hedaya, President of Mondani Handbags
While many people in the industry called Trump’s bluff or remained in denial, manufacturer Urban Expressions was proactive about the upcoming tariffs. “The tariffs are going to have a much bigger impact than people realize, especially on the suppliers,” said Farbod Shakouri, co-founder of Urban Expressions, Moda Luxe and Sol + Selene. “When people started talking about this back in July, we projected that it would happen, and front-loaded Q1 core merchandise that’s now in our warehouse to be delivered to retailers without this tariff.”
Shifting production outside China won’t be so easy, either, admits Shakouri. “Many countries have longer lead and transit times because they first have to import the raw materials from China. That doesn’t make sense for our fashion business model.”
WHAT DOES THIS MEAN FOR BRANDS?
The Accessories Council, led by President Karen Giberson, has been active in trying to stop these tariffs and is a good source of information and advocacy. “We were disappointed that our products were not exempted from this tariff. We will continue to advocate for our companies by working with the AAFA, NRF and our outside Council.” The most important thing, notes Giberson, is to have a Plan B. This could mean diversifying that manufacturing portfolio over factories in various countries, or figuring out how to manufacturer items in a different, less costly, manner. The latter, could mean design is impacted.
And categories that dodged the bullet this time, like jewelry or footwear, are still vulnerable. Who knows if and when Trump can change his mind?
So what does a $200 billion tariff look like for those in the industry and the consumers who purchase these products? NBC News compiled a list of all import categories targeted to date, along with their value from 2015-2017, to show the extent to which tariffs will impact Americans’ pocketbooks.
As with all things governmental, these tariffs are confusing and can seem arbitrary (i.e., Tilapia fish). For example, looking at the subset “Hats And Other Headgear, Knitted Or Crocheted, Or Like Fabric, Other Headwear Not For Babies, Not Braid, Of Man-Made Fibers, Less Than 23 Percent Wool,” the import value from the 2015 to 2017 period rounded up to $965 million. Combining the categories of “Handbags,With Outer Surface Of Leather, Composition Leather, Or Patent Leather, Valued Over $20 Each” and “Handbags,With Outer Surface Of Plastic Sheeting” totaled during that period $3.84 billion. Add 10% (or 25%) starting in 2019, and the numbers start to take shape.
For a full list of products to be hit, click here.
Small to medium-sized brands have the most to lose, as they don’t have the leverage to influence the government or to renegotiate factory terms to save money. “These are not huge companies. Many of them struggle to make minimums as it is,” says Giberson. Her advice? “Become a student of tariff law!” There might be ways to circumvent some or all of the tariffs by readjusting components and assembly programs.
Brands are also looking to move some or all production out of China, but of course this can’t happen overnight. “We are working aggressively to figure out what we’re going to do to move things elsewhere,” Minkoff said. “It’s going to take us a little bit of time to figure that out.”
The National Retail Federation (NRF) banded with 80+ other trade groups across American industries to oppose the tariffs with a new coalition called Americans for Free Trade. “Every time this trade war escalates, the risk to U.S. consumers grows,” NRF CEO Matt Shay said in a statement. “With these latest tariffs, many hardworking Americans will soon wonder why their shopping bills are higher and their budgets feel stretched. … We cannot afford further escalation, especially with the holiday shopping season right around the corner.”
Not surprisingly, tempers are high.
“At the end of the day,” adds Hedaya, “it will be the middle and lower income consumer that will pay higher prices for handbags. The manufacturing jobs that Trump talks about bringing back home will just end up in places like India and Cambodia, while thousands of high-paying American jobs as designers, sellers, marketers and distributors are threatened.”