China Strategy Puts U.S. Retail At High Risk

USA importers are concerned. Fashion retailers are downright frightened.

Some say the China storm will pass.

Others say it hasn’t arrived yet.

Years of peaceful co-existence between the business side and the political side of the USA-China equation are crumbling fast. A recent Gallup Poll says that only about 15% of Americans still have a favorable view of China, and that number certainly gives retailers pause – especially with Capitol Hill simmering in anti-China rhetoric. As the temperature in Congress rises, China (for their part) should consider trying harder to calm the waters. Somehow, somewhere – between the spy balloon and TikTok, there must be room to soften the bombastic rhetoric. Truth be told – when negative sentiment reaches the average American (as seen in the recent Gallup numbers) – trouble is brewing. The flavor on America’s main street is switching (in movie terms) from: “The Russians Are Coming, the Russian Are Coming” to “The China Syndrome.”

USA fashion retailers continue to worry about the China trade situation simply because about 37% of all apparel imports still arrive from China. With the average American buying 69 garments per year (and 7 pair of shoes), where will the products be made if China becomes a lesser option? Brand name retailers, for their part, are also proclaiming the need to sell product into China to capture some of their 1.4 billion population. The realization for American retail is that the whole China situation might have a forked tongue somewhere, or USA retailers are simply driving themselves directly into the eye of a storm.

Three and a half years ago, former President Donald Trump tweeted that “Our great American companies are hereby ordered to immediately start looking for an alternative to China.” At the time, no one in the industry was exactly sure what to make of his statement but, needless to say, the former President rocked the boat and effectively gave notice. However, years later, nothing has changed. In fact, the fashion industry continues to be mesmerized by China.

Questions continue to pop up – as to why the (famous Trumpian) tariffs were bad for retail, and why they accelerated America’s inflation. The truth lies in the reality that American consumers care little about duty and tariffs. They know how much they are willing to pay for a garment, and that’s about it. Duty (tax) for apparel has been around for 90 years – since the Smoot-Hawley Act went into effect (before the great depression). Prior to the added Trumpian tariffs, the average duty rate for most products was 1.45% but, it was already at an 11% average for the fashion industry. When former President Trump was talking about adding 25% or 15% on top of the original amount of China imports, alarm bells quickly rang. In general, the tariffs for many items ended up at 7.5%, but that is on-top-of what was already being paid. These rates continue to this day, and (yet) the fashion inflow from China hasn’t slowed down a bit. Overall – looking at all imports from China to the USA – the numbers went from:

$432 billion in 2020 to

$506 billion in 2021 to

$536 billion in 2022

China and the fashion industry have worked together for many years. China truly understands the USA retail mindset and is consistently able to deliver great quality in a timely manner. So, with all the pressure to leave (and all the additional taxation), why is the fashion industry hesitant to vacate the China space? Well, for one view, the U.S. Government continues to send a mixed message on the “get out” part. It’s very easy for pundits to visualize an industry making all the apparel in the USA, but the reality check is that only 3% of the overall market is made in America – which means that 97% is still imported.

To exit China, companies would need to get a trade incentive that compensates for a lack of worker productivity. If, for example, a worker in China could sew 50 garments per day – another country might only be able to sew 10. Trade agreements were created to make up the difference – by offering the product free of any USA duty, but that doesn’t tell the whole story. Mexico, for example, operating under USMCA and Central America operating under CAFTA-DR are trade agreements that work well -but the factories in those countries prefer long runs of basic items – whereas China built its reputation on short runs of complex items. Another opportunity to escape the China-centric matrix, was an outreach to African manufacturing which flourished for a while under the African Growth & Opportunity Act (AGOA). Several companies established a base in Ethiopia and a civil war ensued. Unfortunately, the USA pulled the plug on the AGOA efforts in Ethiopia – leaving manufacturers to, once again, consider a prompt return to their China roots.

In addition to trade agreements, some manufacturers also utilized preference programs like the Generalized System of Preferences (GSP) to produce fashion accessories (like hand bags and back packs) outside of China – in places like Cambodia and Indonesia. Congress, however, failed to renew the program in 2021 – just as the industry was pulling away from China. Some manufacturers in these categories have already considered turning right around and heading back to China.

The reality is that while the U.S. Government may encourage fashion retail to exit China, they continually block the exit doors by not renewing or not seeking new trade packages that are seriously needed to compete. The Biden Administration likes to talk-the-talk about competing with China, but the industry needs to be mindful of the rhetoric. China, for their part, could do more to improve the relationship and to make it more positive. After all, fair competition and a good market experience for both parties – would certainly be welcomed by fashion retail.

However, time to deaccelerate the problem is getting short. The recent Gallup Poll (as previously mentioned) indicates that 84% of Americans view China in a negative light (45% very unfavorable view and 39% mostly unfavorable view). With seriously bad numbers like these, something needs to quickly change or, per Murphy’s Law: “if anything can go wrong, it will.”