US-China Trade Talks Decoded

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Trade talks between U.S. negotiators and their Chinese counterparts are set to resume on July 30, 2019, in Shanghai. Seeing that this on-off trade war bears more semblance to a middle school relationship than effective trade policy, these negotiations are met with a mix of apathy and pessimism by Chinese and U.S. business and government officials. The retail industry is particularly anxious because of its close relationship with China. While this week’s meetings only plan to address small, goodwill measures on behalf of both countries, it’s important to note the success or failure of these talks can have big implications for the global economy.

After the collapse of trade talks in May, the Trump administration levied tariffs on $200 billion worth of Chinese goods. Following retaliatory tariffs instituted by the Chinese government, President Trump threatened additional tariffs on another $300 billion worth of Chinese goods. Included in this new proposal were demands to add an extra tariff of 25% on Chinese-made apparel, footwear, and accessories. Of course, China would suffer from these increases, but two other groups would really feel the heat: U.S. retailers and consumers.

Retail already bears a considerable burden when it comes to tariffs. In 2018, the sector was paying nearly 40% of collected tariffs in the United States despite only representing 6% of the country’s imports. Adding to this stress was the concern that tariffs would disrupt the fashion supply chain without offering enough time for U.S. retailers to diversify their manufacturing outside of China.

Since retailers would be forced to continue using Chinese suppliers in the short-term, they would have to sell their goods at a higher cost or risk severe losses. The National Retail Federation released a report in June predicting that consumers would pay $4.4 billion more each year for apparel and $2.5 billion more for footwear if Trump were to follow through with his threats. Plus, as consumers purchase less, retailers might have to consider potential lay-offs.

Recognizing the gravity of the situation, the fashion industry opposed these new measures with an impressive display of camaraderie. The American Apparel & Footwear Association and the Fashion Designers of America organized a letter detailing the catastrophic effects the tariff increase could have on the struggling retail sector. The letter was signed by big, small, high-end, and low-end brands ranging from Gap Inc. to Diane Von Furstenburg.

While lower-end brands are looking to countries like Bangladesh and Vietnam to fill their needs, high-end fashion brands don’t have the same luxury. China is considered the industry standard for high quality, high quantity production at a low price point. Simple goods such as t-shirts and undergarments can be easily outsourced from China to less technologically advanced factories. However, there are huge deviations in quality when it comes to more complex products like outerwear and accessories.

Not to mention, there is a slew of factors that make it incredibly difficult to find alternative supply sources. Language barriers and resource restraints pose a significant challenge to retailers looking to shift away from an established supplier.

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U.S. retailers aren’t the only ones hurt by this shift — China is reeling from the effects of this tit-for-tat trade war. Chinese factories are still producing, but their biggest client, the United States, isn’t buying. The result is mounding piles of unpurchased goods as Chinese factories struggle to find new buyers. The New York Times reports that China’s exports to the United States fell by 8.5% for the first half of 2019, while their exports to the rest of the world only rose by 2.1%.

Only time will tell what happens next in this ongoing conflict. When asked about the negotiations, President Trump said “I don’t know if they’re going to make a deal… I don’t care.” He continued to reiterate the U.S. government “taking in tens of billions of dollars” as a result of these tariffs. Trump neglected to mention this profit is directly at the cost of U.S. consumers and businesses.

There are low expectations for a deal to come from these talks in Shanghai, but many consider it a step in the right direction to have communication channels re-opened. Meanwhile, parties from both countries are trying to make lemonade out of lemons. China and the United States are trying to see this trade war as an opportunity to diversify from their respective dependence. One thing for sure, both will feel some major growing pains in the short term.

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