President Donald Trump’s proposal this month to raise tariffs on clothing and footwear imports from China is shaking up supply chains in the country as businesses worry about the potentially devastating impact of a 25% increase on the sector.
Chinese manufacturers are feeling increasingly uncertain over how the ongoing trade war with the United States will affect their factories. And with negotiations expected to resume at the G20 in Kyoto, Japan, in June, many in China are rethinking the deployment and structuring of their production plants and are drafting contingency plans.
“Uncertainty kills,” said Louis Chan, assistant principal economist at the Hong Kong Trade Development Council, a statutory body that works closely with the mainland. “Not knowing whether they’ll be caught in the crossfire, manufacturers are becoming more conservative over the orders they’re taking and accepting. It’s inevitable. No news is worse than actually having to face a potential hike in duties. They’re preparing themselves, but in the meanwhile, they are being prudent — reserved even. That’s actually what’s hindering business right now.”
The setback has yet to challenge China’s stronghold on the footwear supply chain, however. As of 2017, nearly 60% of U.S. footwear imports came from China, according to a World Bank report, indicating that the country’s prime status remains intact despite the fact that its price advantage has dipped slightly compared with other manufacturing hot spots.
For Sheng Lu, associate professor of fashion and apparel at the University of Delaware and author of a recent study on the tariff war in the apparel sector, that’s due to the fact that China’s competitiveness is simply still hard to beat — at least in the short term.
“China doesn’t have as available figures and stats as the U.S., but from the most recent analyses, and deducting from the trade data available in the States, it’s clear that footwear production has remained stable,” Lu said. “American companies haven’t flocked away from Chinese manufacturers. The volume of exports is gradually declining, but it’s not as dramatic as some might assume. China is a ‘balanced supplier’ — it’s reliable, from sourcing and cost to compliance risk. Brands can’t just walk away from that. Not so soon.”
Vietnam and Indonesia — China’s two main manufacturing competitors — aren’t as sophisticated or advanced when it comes to those same categories, which is why moving supply chains to those countries might not be a viable alternative for shoe retailers. They also don’t have the same availability of raw materials, meaning they can’t help but raise their prices to cover sourcing and imports.
To that end, American companies might be stuck with the choice of paying either higher tariffs to work with China or higher prices to produce elsewhere in Asia. “Footwear has a very unique positioning,” Lu explained. “It’s both capital- and labor-intensive. Unlike apparel, which can be sourced from a number of countries, footwear is very concentrated in terms of production facilities. So there have to be certain conditions before a drastic shift can truly take place.”
If and when that shift comes, Chinese manufacturers are readying for it. “Many producers have been adopting the so-called ‘China plus one’ strategy, diversifying their operations by adding another location in Asia,” Chan said. “By doing so, they can reduce operating costs as well as access new markets and become less vulnerable to supply chain disruptions like those the trade war is bringing. It gives them temporary flexibility and the chance to try to iron out the problem in different ways, either by reshuffling their productions lines or moving orders out of the country.”
Manufacturers are also expanding their export market for footwear. According to Lu, in 2007, 32% of China’s shoe exports went to the U.S., while in 2017, that number dropped to 25%. Meanwhile, its exports to the EU and, notably, Asia, have been steadily growing. “Simply put, China is no longer putting all its eggs in one big American basket. If the tariffs come into effect, local businesses and production facilities would be partly covered because of these other outlets,” said Lu.
If the footwear tariffs are implemented, American brands — and eventually consumers — might be the ones left with the shorter end of the stick. Matt Priest, president and CEO of the Footwear Distributors & Retailers of America, has been particularly vocal in expressing concern about the outcome. “Footwear brands already pay much higher duties than other retail sectors,” he said. “The consequences of a 25% spike would no doubt fall on businesses here.
“If companies can move, they’ll try to move some of their production out of China,” he added. “But that can’t be done for everything, at least not that quickly. Companies will have to absorb some of the cost, but they’re going to totally crush their margins. And inevitably, the price will be pushed on the consumer.”
Still, Chinese footwear manufacturers are reassessing and recalibrating their structures and being cautious in planning for the coming months.
“It’s hard to prepare for something so unclear, but if there’s one thing on suppliers’ and buyers’ minds, it’s the long-term effects of this dispute,” Lu said.
“If the overall tension persists, the more significant impact will be on future investments — both from American and Chinese sides,” he added. “The question everyone is asking themselves is: ‘Where should I place my production?’ Ethiopia might be a good contender. The Caribbean, perhaps. But moving factories and supply chains takes time and a lot of logistics. I believe that’s what the sector might be most preoccupied with at the moment. The reality is, there are no winners, just losers.”
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