Retail Industry Hammered By The Feds

Given the opportunity, the retail industry should ask the Biden Administration to appoint a retail Czar in Washington, D.C.

The job description would allow an individual to guide the federal government towards a better understanding of how their current policies are hurting retail and the U.S. consumer. Plus, given that two-thirds of America’s GDP is based on consumer spending, someone on Capitol Hill should be listening as well.

Retail pain is just gripping the industry, and no Czar is even close to being appointed. Congress and the Biden Administration are not paying enough attention to retail, and the industry is on track to be hammered into the ground – like a tent-peg sheltering before the big storm.

Interest rates that finance retail inventory continue to rise, credit is harder to get, sourcing away from China is beyond difficult, and wages have become a significant bottom-line issue. Many retailers simply are being forced to re-think their future and lines are forming at bankruptcy court. In fact, almost every month since the start of this calendar year, we have seen at least one major bankruptcy including retailers as diverse as Party City, David’s Bridal, Serta Simmons, Tuesday Morning, and Bed, Bath, & Beyond.

The war on retail probably started when Macy’s pushed back against (then) candidate Donald Trump for disparaging Mexican immigrants. In fact, Macy’s threw Mr. Trump’s clothing out of the store, soon to be followed by Nordstrom – who vacated daughter Ivanka’s fashion lines.

This, of course, was long before former President Trump’s famous tariff’s – that clearly raised the cost of apparel, footwear, and accessories. Remember when they said that China was paying the tariff bill? Well, that wasn’t correct – the consumer was (and is) paying the tab.

After tariffs hit the retail pricing structure, America was eventually overrun by COVID and what did the Government do to the retail industry? If you carried food in your store you could stay open. But if you were Macy’s & Nordstrom (with no food) – you had to close. Meanwhile, if you were a retailer who sold guns, or had a liquor store, or ran a shooting range – it was okay to remain open.

As everyone knows, when the COVID closures progressed, inbound ships and products started to back-up at the ports – in what eventually became a massive supply chain debacle. Only then did the public begin to realize that in-bound goods were travelling in ships that America doesn’t own, into American ports that we don’t control, regulated by federal agency that couldn’t really fix the problem.

This, of course, preceded cries to make more product in America – which is all well and good but, for fashion retail, only about 3% is made in America. So, as some domestic garment manufacturers sought to expand – they tried to keep their factories busy by seeking additional production under a federal statute called “The Berry Amendment” which requires U.S. federal uniforms to be manufactured in the USA. Soon, they learned that the federal government was actually doling out orders to factories staffed by inmates in federal prisons – under a federal program called UNICOR – instead of giving the domestic contractors a better chance to compete for the production.

As COVID subsided and business picked up a bit, the next retail disruption started with some help from the U.S. Congress.

The widely popular GSP (Generalized System of Preferences) and MTB (Miscellaneous Tariff Bill) programs were not renewed by Congress in January of 2021. While most American consumers are probably not be aware of these programs, brands and accessory importers are.

GSP was designed to help developing countries increase their business by offering duty free access to the USA market. MTB’s offer the same duty-free benefit for items that were not manufactured in the USA, and are often used as components to assemble products in the USA. Sadly, Congress neglected to renew these programs – but this was after importers had already moved production to countries that had them in place – only to learn that the duty had been suspended (by non-renewal). The manufacturers/importers/brands were now forced to pay duty (even though they might be re-imbursed in the future).

Then, as trade tension increased on Capitol Hill, word came that retailers and brands should probably de-risk by considering to decouple from China – even though China was the best possible place to buy. So, brands & retailers started looking at alternatives for production. First, they thought – let’s look at AGOA (African Growth & Opportunity Act) and see what can be manufactured in Africa. Some companies set up in Ethiopia – just in time for the USA to pull the plug on the duty free) benefits under AGOA – due to a civil war in the country.

With the AGOA door suddenly in question, other retailers rushed back to China. Then, of course, the Uyghur Forced Labor Prevention Act (UFLPA) came into force. To be clear, retail highly supports UFLPA because it is against forced labor. The problem is that it targets cotton, which is hard to trace in terms of origin. Uyghur cotton comes from the XUAR region of China that produces 80% of China’s cotton and 20% of the world’s supply. Because of UFLPA law, retailers have added cost to provide tracing to their supply chains and some retailers are being inadvertently stung because they have difficulty proving the origin of the raw material. While it’s appropriate to target forced labor, one has to seriously consider the reality of targeting a raw material (cotton) that is very difficult to trace.

At the same time that the government began to stop full containers at the border (checking for Uyghur cotton) – they also accelerated an inadvertent free pass that they gave (by law) to anyone who ships less than $800 per-person per-day direct from China (or from anywhere outside the USA) to an American consumer. While some retailers are struggling to get their full containers to pass inspections and must pay the required duties and tariffs, other retailers have figured out how to legally beat the system. The other retailers are shipping product direct-to-consumer in the USA under a law referenced as section 321 de minimis – which avoids inspection, tariffs, and the added duties – if the shipment is under the $800 threshold (per-person per-day).

As recently appeared in the media, brick and mortar retail companies like GAP continue to lay off employees, while fashionable direct-to-consumer specialists like TEMU and SHEIN are doing quite well. If the government can’t figure out how to fix the de-minimis program, the least they could do is allow companies that hold inventory in American based Foreign Trade Zones (FTZ’s) to have parity with the offshore direct-to-consumer shipping facilities. Right now, goods held in a USA based FTZ are required to pay the duty and tariffs when shipping direct-to-consumer, so they continue to operate at a significant disadvantage.

It’s pretty clear that (in general) the Biden Administration seems allergic to international trade. The on-going mantra from Capitol Hill and from shareholders of public companies is about over reliance on China sourcing. In fact, China is quite adept at understanding the American Supply Chain and also quite excellent at product execution. However, shareholders and government officials are asking about the amount of product exposure that companies maintain with China. This has become a problem.

China factories continue to be highly productive. That means that the units per operator per day in a given factory are generally significantly higher than counties that have lower wages. To level the playing field, and have companies exit from China production, it becomes necessary to seek opportunities that are offered under preferential trade deals or free trade agreements. Given that this type of arrangement is not a Team- Biden priority, retailers have sought some very risky alternatives. It just seems, unfortunately, that wherever the sourcing component of the retail industry turns of late – to achieve some degree of competitive parity – the door closes for some geo-political reason, and lonely eyes quickly return to China.

In the absence of a Czar in the administration, there is little that the industry can do except try to have their voice heard on Capitol Hill, or just stand by and watch the leaves fall off the tree.

Clearly, the word Czar is of Russian origin, and it indicates a person of power or influence. In more recent times it refers to an individual who advises or exercises influence on important subject matters in a specific area or specific industry. America has had drug Czars and even milk industry Czars. Franklin Roosevelt had 11 Czars, Barack Obama had 38 Czars, and even former President Donald Trump had Czars.

One Czar of note during the Trump Administration was Department of Homeland Security cybersecurity expert – Christopher Krebs, who was the Election Security Czar. Unfortunately, he was fired shortly after issuing a statement saying that the 2020 election was the safest in American history.

Truth be told, there may never be a retail Czar and, as demonstrated by Christopher Krebs, a Czar’s power may be limited by the Administration that they serve. It would, however, be enlightening for retail – if a Czar could be appointed. It’s just very difficult for American retailers right now.