The United States and Canada may have yet to agree when it comes to the North American Free Trade negotiations, but trade leaders from each country are united around one notion: The trade war won’t work.
In recent months, the U.S. has kicked off a tariff war, levying new duties on its NAFTA trading partners, the European Union, and China most of all. Its actions have fueled a flurry of retaliations in the form of reciprocal tariffs — which, in some cases, have been met with even more tariffs.
And all of that has begged the question: Are tariffs the new normal in trade?
The answer may be a resounding yes.
During Monday’s fireside chat at the opening of Canada’s Apparel Textile Sourcing show, which was streamed via Facebook Live, Julia K. Hughes, president of the United States Fashion Industry Association (USFIA), said, “From a U.S. perspective, I think it’s a bit of a new normal.”
Once countries start pointing to national security concerns as the reason for implementing new tariffs, the door opens for making a case that nearly anything could be considered a national security threat, Hughes explained, noting a concern that the world could be in store for ongoing bouts of U.S. protectionism expressed in tariff form.
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Canada on the other hand — which doesn’t currently pay any duties on manufacturing imports, like fabric, since its government eliminated them to facilitate trade — has its arms wide open for multilateralism and no interest in protectionism.
“Forty-nine percent of the GDP in Ontario is related to just the U.S. We can’t live in a world like that, it’s not a good thing,” said Bob Kirke, executive director of the Canadian Apparel Federation. “Over time, we’ll have a different constituency in Washington and things will change. This is not — I hope it’s not the new normal.”
For now, however, tariffs are on the table, and their presence threatens to reshape sourcing and put companies in predicaments they may or may not have been prepared for.
The impact on business
If U.S. companies suddenly see 25 percent tariffs on imports from China take effect in October or November as the Trump administration has alluded to, they’re not going to be able to change or cancel orders they’ve already committed to, which means they’ll be coming out of pocket to cover those new duties.
The impact falls to brands and retailers that will have to decide whether to raise prices on consumers who they know are resistant to those increases, or just take the hit until they can come up with other alternatives.
“That’s the key,” Hughes said. “It’s at least six months before you start to see an impact at retail because most companies are not passing on the increases that they’ve seen so far because no one wants to be the first to do that. Even talking to companies who have a lot of market power, they’re not taking that action.”
If the additional tariffs on China do take effect, Hughes continued, it won’t bode well for the holiday season at retail.
The great wall between the U.S. and China
While China bears the brunt of the United States’ trade wrath, the country is positioning itself to invest in other emerging nations to find different distribution channels to the U.S.
And while some have wondered whether the Sino-U.S. rift would see factories in China shutter, Hughes doesn’t see it that way.
“I think for China it may be a reset button for looking at domestic and sourcing with the rest of the world that’s going to make it, long-term, even more difficult for U.S. sourcing execs,” she said.
From Kirke’s perspective, it’s the Western factories that may in fact shutter.
“If you’re operating a factory in Montreal, making suits and 20 percent of your total is coming out of that factory, you’re already operating at a much higher cost than in Vietnam or China… and if you have more duties on China, you could see people shutting those factories because you’ve got to tighten your belt and your costs are out of line locally,” Kirke said, adding that companies may instead opt for doing more in Vietnam or China. “So I keep saying that these tariffs don’t help anybody.”
Once the impact trickles down the supply chain, the tariffs won’t help consumers either, as they’re expected to end up footing the bulk of the bill. Most consumers, however, haven’t grasped or felt the impacts yet.
“It’s businesses who are seeing the impact first and some don’t really want to tell their customer how bad it is,” Hughes said. “They’re trying to see how they can make it work.”
Hearings on the Hill Monday regarding tariffs, saw organizations like the National Council of Textile Organizations (NCTO) appealing to the U.S. again to add apparel end products to the list of tariff targets, so both the conversations on the topic and the potential impacts for the industry remain far from resolved.
“Tariffs are a simple answer to an extremely complicated reality,” Kirke said. “We can put tariffs on and, according to Donald Trump, you make money doing it and the tax payers and everyone’s winning. It’s absurd but that’s where we are.”