How the US-China Trade War Is Affecting the Fashion Industry
If you were not fully aware of the trade war between the US and China, I believe when TikTok existence in the United States became threatened, you probably heard about it. This whole TikTok situation is just the last chapter of a trade friction that has been happening between these two superpowers since 2018. And believe me when I say that when the two largest economies in the world enter a trade war, every other nation gets affected by it.
This conflict, which some are calling the ‘New Cold War’, became even more intense with the proximity of the US presidential elections. But if fashion companies were already suffering from the trade war even before the Covid-19 outbreak, after the pandemic exploded the fashion industry suffered even further. If you want to know how the trade war is affecting fashion and who is loosing most in this conflict, that’s exactly what I am trying to explain this week. So here we go.
Friction Between the US and China Is Nothing New
To understand the trade war happening nowadays, I will go back to when this all started to shape up. China and the US re-established diplomatic relations in 1979 and since then the countries had some disagreements. Most of these frictions were political, but some spilled up into their trade exchanges, especially after 1989. In 2000, the US president at the time, Bill Clinton, signed the US-China Relations Act of 2000, normalizing trade between the two countries and paving the way for China to join the World Trade Organization in 2001. Between 1980 and 2004, the US-China trade rose from US$5 billion to US$231 billion. In 2006, China surpasses Canada as the United States’ second-largest trade partner, just behind Canada. However, at that time, China was still an emerging economy and the United States still was a worldwide economic leadership.
In 2008, the situation started to change. Just before the financial crisis that would tremble the US and world economy, China became the largest holder of US debt, surpassing Japan. This, followed by the financial crisis, made evident the financial interdependence between the United States and China. In 2010, with many countries still battling against the financial crisis, China became the world’s second-largest economy and was on the track to overtake the US as the world’s number one economy.
In 2012, tensions between the two countries started to rise due to the increasing US trade deficit with China. In the same year, the US, the EU, and Japan tried to negotiate some specifics about the exportation of rare metals that were forcing multinationals to move to China due to its competitive quotas. Over the next years, small frictions between the two largest economies of the world did happen, but when it comes to trade, the scenario remained just competitive.
And then Trump and his “make America great again” slogan were elected.
The China-US Trade War
The infamous slogan of Donald Trump’s campaign is a summary of a lot of ideologies. One of them was surely the desire of bringing the US to supreme economic leadership again, a position they slowly had to learn how to share with China’s impressive economic growth. Trump would often talk about bringing factories back to the US territory, creating jobs for the country’s citizens. With Trump winning the elections, soon the policies to attempt to fulfill these promises started. Even though in 2017 both countries signed an agreement to expand the trade of products and services, the very next year, the relationship between them quickly changed.
In 2018, The Trump administration announced sweeping tariffs worth at least US$50 billion on Chinese imports. To justify the measures, the White House alleged China was stealing US technology and intellectual property. The tariffs impacted the Chinese exporting of many goods, such as technology, clothes, leather goods, and fabrics. As a form of retaliation, China also imposed tariffs on many products coming from the US. The back and forth of tariffs on each other’s goods continued throughout the year of 2018, with other conflicts involving the giant Chinese tech company Huawei and serious accusations towards China from the Trump Administration.
In the year 2019, the trade war intensified, with the United States constantly increasing tariffs on up to US$300 billion worth of Chinese goods, which kept being retaliated by China. However, in January 2020, the trade war seemed to have come to an end with both countries signing a trade agreement. The agreement decreased some tariffs and included other changes and measures. It seemed like the trade war had started to walk towards a resolution when, suddenly, the Covid-19 pandemic changed the whole international scenario.
The Covid-19 started in China, but the country that most had its image affected by it was the United States, with its ineffective measures to contain the virus. The Covid-19 situation made the United States resonate as incompetent when trying to contain the virus, while China managed to contain cases more effectively. Amid this scenario, the tension between the two countries increased, due to issues such as trade, technology, Hong Kong’s national security law, Taiwan’s future, territorial rights in the South China Sea, and human rights in Xinjiang. China’s foreign policy posture, known as “Wolf Warrior diplomacy”, clashed more than ever with Trump’s administration hawkish positioning. In July this year, the US Secretary of State Mike Pompeo announced the end of the era of engagement with the Chinese Communist Party. This took away the hope of solving the trade war involving the world’s most important bilateral relationship.
How the Trade War Is Affecting the Fashion Industry
I already mentioned taxes on Chinese goods such as clothes, leather goods, and fabrics, which obviously affected the exportations of China to the US. The new tariffs increased costs for US fashion companies that depended on Chinese manufacturers. But when the two largest economies of the world enter a trade war, the effects spill to the whole world. For example, with the Chinese exports of fabrics to the United States dropping 22% in 2019 due to the new tariffs, Vietnam fabrics exports to the US increased by 9.6%. The US demand for fabrics kept existing and the now more costly production from China was substituted.
But this was in 2019 when demand for fashion products was still normal. Now, in 2020, fashion retailers and manufacturers are struggling more than ever with the Covid-19 impact on their businesses. In this scenario, the intensification of the trade war is making their businesses even more challenging. As the American Apparel and Footwear Association President Steve Lamar explained to BoF:
“When you are dealing with this unprecedented, existential crisis like Covid-19, [then complying with the added tariffs and sanctions that have been put in place it] is an extraordinarily difficult undertaking.”
The trade war is no good news for the fashion industry of both sides. When tariffs started increasing, Levis reduced its Chinese manufacturing from 16% to just 2% of its products commercialized in the US. While a large share of exports of Chinese garments manufacturers goes to the United States, US apparel and footwear companies are extremely dependent on the supply chain in China and have a considerable share of their revenues coming from the country. Nike, for example, has 20% of its global sales being made in Greater China and 25% of its goods being produced there too.
On the other side, Chinese fashion brands are more likely to be focused on their domestic market. Therefore, in the fashion industry, the trade war is impacting more US fashion players than their Chinese counterparts. Even after the deal made in January, which reduced some of the tariffs, most of them, such as footwear, remained. The footwear industry is extremely dependent on Chinese manufacturing, creating a challenging scenario for brands. For example, the US footwear retailer Steve Madden still manufactures 85% of its products in China. According to its Chief Executive Edward Rosenfeld, even if the brand reduces this figure, it is unlikely the number would go below 60% in the short-term. Many other fashion companies are and will still be affected if these tensions between both countries keep increasing, but some players in the fashion industry are suffering more than others.
Tech Is the Big Target
Since the beginning of the US-China Trade War, technology companies have been the main targets. This is due to Chinese tech companies’ well-established global ambitions when compared to other sectors, making them get disproportionally caught in the crossfire.
The targeting of tech started to be a major issue in fashion when a new bill was passed by the US Senate. This bill made any company at the US stock exchange that hasn’t been inspected by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years to be delisted. The problem is that this requirement is impossible for US-listed Chinese tech giants such as Alibaba, JD.com, Pinduoduo, Secoo, and Bilibili, once the Chinese Government states the PCAOB inspection would violet state secrecy laws. However, if the goal was to just aim at China, this new measure backfired. US fashion and beauty brands are extremely dependent on the Chinese tech giants’ e-commerce and social platforms to sell and market their products to the Chinese consumer. Therefore, this bill would affect US brands’ businesses in China.
Recently, Trump communicated executive orders that would force the Chinese tech platforms WeChat and TikTok to sell their US operations or risk being restricted from operating to US users, companies, and other “entities”… and they had an extremely short deadline — 15 September. While TikTok shutdown would be an inconvenience for US fashion marketers, the main concern is to be cut off from WeChat. Why? WeChat is one of the main e-commerce and social media platforms of China and not being able to sell through it would be a great issue for US brands that depend on the enormous Chinese consumer market. As Lamar explained:
“When the administration talks about banning WeChat, they are really focused on… privacy and whatever control they believe the Chinese government has on that platform, but there doesn’t seem to be a deeper [consideration] of the way in which American businesses depend on WeChat for their communications in China and other parts of the world. Or, more importantly, the extent to which American businesses depend on WeChat to make sales in China.”
WeChat is one of the main selling channels for US brands such as Coach, Michael Kors, and even Walmart. To give you numbers, Wechat is responsible for 30% of Walmart’s sales in Mainland China (which represents 9% of Walmart’s global revenue).
Is This Conflict Close to an End?
I believe it became clear how much the trade war has been impacting the fashion industry. The unfortunate thing is that most specialists think this is just the beginning of this trade war between the two largest economies in the world. The problem is that when two countries enter this type of conflict not only them but the whole world loses a lot with it. This type of conflict brings instability, slows global trade, and decreases confidence in investments. In other words, it is bad for everyone involved and not involved in it.
Many are calling this the ‘new Cold War’, which I have my reasons to respectfully disagree ( this article explains very well the differences). But I believe that this name may bring some overconfidence to the US, once they already won one ‘Cold War’. As Columbia University’s Adam Tooze perfectly explained:
“For Americans, part of the appeal of allusions to Cold War 2.0 is that they think they know how the first one ended.”
For now, it is not possible to know how this situation will evolve or even if it will. What we do know is that the fashion industry players who are in the middle of this trade war should prepare for further tariffs, restrictions, and other measures. The important thing to do in unstable situations is to prepare for the worse possible scenario and hope you don’t get there. In many instances, the right move is to don’t take sides, just take the needed measures to keep business as close to usual as possible — because perhaps this may be the ‘new usual’.
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