Survey Says: Trade Wars Are Wreaking Havoc on Sourcing Optimism

Whether it’s fleeing China for its regional counterparts, rising sourcing costs across countries are leaving companies at a loss for how to deflect them.

And that’s bringing on depressed optimism among sourcing executives at the apparel industry’s biggest brands and retailers.

In its sixth annual Fashion Industry Benchmarking Study released Monday, the United States Fashion Industry Association (USFIA) said just 64% of those surveyed are optimistic about the outlook for the next five years. That’s down 20 percentage points from the 84% who said as much last year.

“That is a bad sign,” USFIA president Julia Hughes noted in the study.

While staggering, the numbers hardly come as a surprise.

The findings, Hughes said, “reflect the impact of uncertainty and the threat of trade war on the fashion industry. … There are 301 tariffs on China that include many consumer products like hats, leather and accessories. And there are Chinese tariffs on key U.S. exports including cotton. There are the threats of more trade cases with fashion products appearing on new retaliation lists. And there is the uncertainty of how the Congress and the Trump Administration will work together to approve the U.S.-Mexico-Canada Agreement (USMCA).”

The compounded uncertainty has given rise to climbing costs — and that’s what’s keeping sourcing executives up at night these days.

“The industry concerns about rising costs, and the fact that the government data is already showing substantial price increases from many suppliers, is very concerning,” Hughes told Sourcing Journal. “This needs to be a wake up call to the Administration that it is time to find a solution to end the trade war with China. The survey was conducted before the tariffs rose to 24% for Tranche 3 products like luggage, accessories and headwear. The concerns and the disruption are worse today.”

Cost concerns

When noting the fashion industry’s biggest challenge in 2019, nearly 40% ranked increasing production and sourcing costs among their top two concerns, with the protectionist trade policy agenda in the United States coming in a close second.

Some of the cost increases can be attributed to imposed tariffs on imports from China, but what’s perhaps of greater concern for the industry are the rising costs in countries they’re looking to in order to scale back their China sourcing.

“Not just costs in China are increasing, but the costs to source in the main alternatives to China — especially Vietnam, Bangladesh and India — are also soaring,” Hughes said. “And the uncertainty seems to also affect logistics and transportation costs.”

More than 85% of respondents expect their production or sourcing costs to rise this year, and nearly half expect those costs to climb “modestly” at worst and “substantially” at best.

“In response to the supply chain disruptions and heightened market uncertainties caused by these tariff threats, many U.S. fashion brands and retailers have had to switch to suppliers that are more expensive or pay extra to move around their products,” the Benchmarking study noted, finding that as many as 63% of respondents saying U.S. tariffs on China increased their company’s sourcing costs in 2019.

The increases may be inescapable.

“There is only so long that companies can bear the burden of tariffs,” Hughes told Sourcing Journal. “For many companies they are in the middle — with contracts in place with their Chinese suppliers and also contracts in place with their customers.”

Asian suppliers, and Vietnam in particular, have been the biggest beneficiaries of the U.S. trade fallout with China, which has seen it dole out tariff blows as a negotiating tactic. In fact, nearly all of the top 10 most utilized sourcing destinations in 2019 are in Asia: China, India, Vietnam, Indonesia, Cambodia, Bangladesh, Philippines, Sri Lanka, Jordan and Pakistan.

“This result suggests that in response to the escalating U.S.-China trade tensions, U.S. fashion companies are actively diversifying their sourcing bases within the Asia region,” the study noted.

China and Vietnam combined now account for roughly 40% to 60% of apparel companies’ total sourcing value or volume.

“Notably, while China remains the most utilized sourcing base, the country is no longer always the top supplier for U.S. fashion companies. In fact, around 25% of respondents indicate that they source more from Vietnam than from China in 2019, an emerging trend important to watch.”

Compared to three years ago, USFIA said just 46% of respondents reported sourcing more than 30% of their value or volume in China (versus 61.5% in 2016). Looking at Vietnam, 41% now report sourcing more than 30% of their production, in value or volume terms, from the country, which marks a record high since the survey began in 2014.

Nowhere to turn

Ongoing talks between President Trump and Chinese President Xi Jinping have seemingly made little headway and more tariffs are far from off the table, albeit that they’re presently “on hold.”

But with costs climbing in the key “plus” countries in companies’ China-Plus strategies, sourcing executives are hard pressed for how to build a tariff-proof sourcing strategy.

In the first five months of the year, the unit price for U.S. apparel imports increased by more than 10% year on year, according to the Benchmark.

“Notably, apparel exports from Bangladesh, Vietnam and India have seen the most significant price increase — all by more than 20%,” the study noted, adding that the finding isn’t surprising. “Restrained by the limited labor force, infrastructure, supply of raw material and production capacity, garment factories in these countries are undergoing cost pressures in the face of surging sourcing orders from U.S. fashion companies, which are eager to find China’s alternatives.”

What’s perhaps of greater note, price increases for “Made in China” product have been more modest, ticking up 3.3% in the first five months of the year.

“Around 50% of respondents say their Chinese vendors actually ‘lowered their price to keep sourcing orders’ amid the tariff war,” according to the study. “However, such a pricing practice may not be sustainable in the end as China is no longer regarded as a ‘cheap place’ to make garments and some major cost factors, such as wage level, have been rising quickly in the country.”

Whichever way the industry’s supply chain diversification shakes out, rising costs will pose an ongoing concern.

“At this point it is impossible to predict how high prices will rise,” Hughes said. “The consumer products affected by the China tariffs have been deflationary for decades. And companies are looking for alternatives to mitigate the higher costs. But the increases in sourcing costs and supply chain costs will be felt by consumers.”

Editor’s Note: This story was reported by FN sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.

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