Tariffs are the new Choking Hazard

Photo by Erik Odiin on Unsplash

Recent trade developments are making it increasingly difficult for fashion companies to breathe freely. With a whipsaw of trade changes coming fast and furious, companies must continue to find opportunities to stay ahead of the news and respond strategically to these developing trade actions.

Here’s a summary of the most recent changes and some on the horizon as we head into the third quarter:

There has been much happening in the China trade dispute. Effective for goods exported on or after May 10 (unless entered before June 15), the “List 3” tariffs were raised from 10% to 25%. List 3 covers a wide variety of consumer goods, including cosmetics, handbags, hats, gloves and also fabrics. On the somewhat good news front, the United States Trade Representative (USTR) announced that an exclusion application process might open up soon for List 3 products. Stay tuned for details, as they have not been issued as of this writing.

Then, on May 13, the USTR issued a proposed “List 4,” which now proposes to impose additional tariffs of “up to 25%” on “essentially all” Chinese products imported into the U.S. that were not covered by previous Section 301 pronouncements. This includes all apparel and footwear and anything else that escaped the last three lists.

Because Section 301 tariffs are imposed on top of regular duties, apparel and accessories made in China may face astronomically high duties of between 40% through 60% of the value of the product if the Administration goes ahead with these duties. A final list, including the duty rate to be assessed, is expected at the end of June or early July.

European Union
The trading focus for fashion companies in the first half of the year was mostly in the Far East. In April, however, the USTR published a preliminary list of Harmonized Tariff Schedule codes on which the USTR may impose future additional duties of “up to 100%” in connection with products imported from the EU.

Like the additional duties imposed on China products, these duties would be imposed under Section 301 of the Trade Enforcement Act of 1974 and is in retaliation against the EU’s subsidies of their aircraft industry. The list of proposed tariffs includes many fashion items including leather handbags, cashmere sweaters, men’s wool suits and outerwear. A decision as to the level of tariff and the final list is expected sometime this summer.

As of this writing, President Trump has threatened to impose a 5% tariff on all imports from Mexico. If actually imposed, the tariff will increase by 5% each month, up to a limit of 25%, until the U.S. is satisfied that Mexico has taken steps to stop the illegal immigration.

What should successful companies do to stay competitive?
From a risk management perspective, the two most important lessons to learn from the current round of trade wars has been to diversify the supply chain and understand the trade rules.

There are creative and legal means to avoid or minimize these duties. Successful companies have strategically reclassified their articles to more favorable tariff provisions by carefully reviewing the tariff rules and, in some cases, by making relatively minor design alterations. Other winning companies have found avenues to move all or in some cases, small aspects of, the production operations offshore to change the origin of their products to a country other than China.

Still, other successful companies have used customs valuation strategies to lower the impact of the 301 duties, which in addition to China’s currency devaluation, have allowed them to stay competitive while continuing to use their existing China supply chain.

With the Trump administration now threatening to hit apparel products from China, EU, and Mexico with punitive tariffs, fashion companies will need to be more thoughtful and creative than ever in their approach to sourcing.

Peter W. Klestadt
599 Lexington Avenue, 36th floor
New York, NY 10022

Kevin W. Leonard
599 Lexington Avenue, 36th floor
New York, NY 10022

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