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The impact of trade battle between the US and China on apparel industry

This trade war between the US and China, the two biggest economies will affect the global economy in a big scale.

Ashfaque Ahmed, MSc. (University of Manchester), MBA (IBA- University of Dhaka), Director, Promoda Textiles Ltd.

China and the United States are the two biggest economies in the world. In 2010, China toppled Japan to become the world’s 2nd largest economy.

trade battle between the US and China on apparel industry
Figure 1: The trade battle between China and the US is hurting the world and themselves.

According to the Center for Economics and Business Research, China is expected to take over the US as the world’s largest economy. Thanks to China’s comparatively cheap labor and government policy that helped the economy to tremendously grow after its entry in globalization in 1990. At that time, the US supported China’s inclusion in the WTO (World Trade Organization).

Today the US is thinking that it was a wrong decision to help China. After the economic turndown in 2008, the Obama administration had taken various steps to recover it. United States’ huge spending to fight terrorism in Afghanistan, Iraq, Libya, and in Syria made things too difficult. That is why in the election campaign President Donald Trump announced to take measures to increase the productive development in the US.

A new tariff on the Chinese goods might cause inflation in the US, however, at the same time commentators expect a rise in American jobs specifically in high tech industries.

As quick responses to the US impose of the tariff, China has also announced of implementing a tariff on the same value of American goods for China. This trade war between the two biggest economies will affect the global economy in a big scale.

It is for certain that whatever two governments are doing is good for neither the general people for each country nor for the related industries in each country.

What the US and China think about it?

President Trump promised to levy against China over intellectual property concern. Based on that on 29 June the US implemented $34 billion worth of tariffs on Chinese imports.

Another $16 billion tariff was already in the pipeline. This will include solar panels, refrigerators, washing machines, etc. No sooner the announcement was made China also imposed a tariff of equal $34 billion worth of goods coming from the US to China.

Robert Lighthizer, US Trade Representative expressed with anger that was done without any legal basis or justification. In a statement, Lighthizer said, “As a result of China’s retaliation and failure to change its practices, the President has ordered USTR (United States Trade Representative) to begin the process of imposing tariffs of 10% on an additional $200 billion of Chinese imports. It is the appropriate response under the authority section 301 to obtain the elimination of Chinese harmful industry practices”.

In response, the Chinese Minister of Trade said, “It is totally unacceptable for the US to publish the tax collection list in an accelerate upgrade. We express of solemn protest. This behavior of the US is hurting China, hurting the world, and hurting themselves. In order to safeguard the core industry of the country and the fundamental interest of the people, the Chinese government will, as always, have to make the countermeasures.”

What are in the $200 billion tariff list?

The list is available in USTR’s 195 pages report includes the bulk of what consumers would buy from the supermarket plus much of the raw materials that go into what they would buy to wear. Cotton and all the things related with textile production (cotton yarn, cotton sewing thread, cotton woven fabric, and cotton waste) will face 10% of tariffs for companies that would bring the goods from China. Nylon yarn, polyester yarn, viscose, jute, hemp, and pulps of cellulosic materials are also in the list.

trade battle between the US and China on apparel industry
Figure 2: Products those are imported by the US from China.

In addition, coconut and other vegetable fibers companies are turning it into the sustainable raw material alternative. Laccases dyed fabric across most raw materials, non-woven, terry fabrics, lace, tulle, and leather are on the target list. Apparel and clothing accessories made of plastic, plastic vulcanized rubber, fur skins, and cellulosic fibers will also face new tariffs.

As far as accessories, handbags, sports bags and travel goods like suitcases and vanity cases will face tariffs. There will also be tariffs for shoelaces, hooks, eyelets, and polishes for leather goods. Furthermore, brands and retailers will pay for the packages they import too, Collie, garments label, folding cartons, boxes, packing consultancy, etc. on the list.

Why the US wants to put a tariff on Chinese goods

There are several reasons that the US put a tariff on the Chinese goods. It is a big part of the election campaign of President Trump to reduce the trade gap between the US and other countries by restricting imports and increase US’s own productive sectors.

Though it was announced almost two years from President Trump’s presidency but this aggressive announcement was not a surprise. It was the first effort to reduce a $337 billion trade deficit between US and China. The initial part will impose a 25% tariff on $50 billion of Chinese goods, which are said to be, “industrially significant technology” [The Guardian, 29 May 2018].

The Western world was believed to lead the research and development for the whole world and lead the world with new technologies and advancements. The new tariff will cover goods related to “Made in China 2025” program that the Trump administration believes to harm companies in the US and around the world. The policies included forced technology transfer that can be got from licensing at less than regular price, Chinese government’s acquisition of ‘strategically sensitive technology and cyber-theft’.

Trump administration believes that many US jobs were lost due to globalization and unfair play by many countries including China. It was his main manifesto that saw him winning the 2016 presidential election against the big time favorite Hilary Clinton. Most of the commentators said that it was bluster. However, Trump administration is adamant to put on swinging tariffs on Chinese goods and pull the US out of as many trade deals as possible.

President Trump’s position was strongly supported by his trade advisor Peter Navarro who is the co-author of the book “Death by China”. Navarro later made it into video documentary to show China’s rise has suffered US economy.

In the 21st century, China’s export has grown by seven times today than that at the beginning of the 21st century. It is at present world’s biggest exporter of goods with a value of nearly $2 trillion a year [Andrew Walker, BBC Economics Correspondence, July-12, 2018].

Implications of trade battle

Due to the imposing of new tariff lines on Chine goods by the US, the result will be significant for the apparel and footwear industries. There will be a general increase in price all through the supply chain. There is expected to be inflation on consumer products in the US Unfortunately, this has to be paid only by the American consumers.

It is estimated that more than 84% of the US travel goods are imported from China. This will potentially affect the apparel, footwear, and accessories brands for being expensive and struggle in the US market for being expensive. The items under the apparel section were added in the latest round of tariffs. This came after a public comment period.

It is of no surprise that a certain group of the US citizen believes that though there will be an increase in retail price but it would potentially bolster the domestic industry capable of making clothing and fashion.

NCTO (National Council of Textile Organizations) appreciated the announcement of additional tariff and has suggested Trump administration to add more categories of finished textile and apparel into next tariff list.

On the other hand, retailers are not happy with Trump’s latest tariff move. They think that this crazy strategy would account for $200 billion worth of China products subjected to a tariff that could potentially hit back to harm US families and workers. Again, the Chinese retaliation could destroy ‘millions of US jobs, hurt farmers, a local businessman, and entire community’.

The tariff battle and Bangladesh apparel industry

Today, we are living in a global economy. A fair trade between the countries must serve the best interest of everybody. John Divine, Senior Investing Officer at US News and World Report describes the US economy in the light of tariff war ‘as Pandora is out of its box’.

With added tariff on Chinese goods and when it comes to apparel, the landed price for the China made goods will be higher compared to others. In that area, the next countries can compete to take as much as from those are lost by China. Therefore, it is not difficult to understand with such tariff on Chinese apparel the export and price of Bangladesh apparel is expected to increase.

Apparel industry will take a big hit in the light of US’s $200 billion in tariffs on China. Due to globalization, no country has the internal capability to match global efficiency for the production of goods and services.

Therefore, when we can avail ourselves of the global efficiency then it is comfortable for the people of a country to get something easily at a low cost. For example, due to the cheap labor cost in Bangladesh, a T-shirt is much cheaper in Europe than a burger. For the same reason, hi-tech telecom and internet services can cheaply be provided to the people of Bangladesh in a free trade economy. With an added tariff on Chinese goods and when it comes to apparel, the landed price for China-made goods will be higher compared to others. In that area, the next countries can compete to take as much as from those are lost by China.

Therefore, it is not difficult to understand with such a tariff on Chinese apparel the export and price of Bangladesh apparel are expected to increase.

At the same time, when Chinese garment factories will lose business then Chinese textile mills have surplus raw materials such as yarn, fabrics that will be sold in Bangladesh at a more competitive price as a result of competition among Chinese mills.

Therefore, there is a slight chance that the woven fabric mills and denim mills in Bangladesh may face a little more competition but with the transfer of fast fashion category, they may assume to be stronger.

If Chinese producers making for the US are hurt they will aggressively seek for new markets in Europe, Latin America, Australia, Far East Asia, etc. where suppliers from Bangladesh will experience a little more difficult.

Now question is that in the event of growing landing cost of the Chinese made apparel- will Bangladesh be able to catch those orders rebounded from China.

With no preparation Bangladesh would most likely start to daydream, however, substantially will not be able to get any benefit from there. Just look at the US business at present in Bangladesh. Walmart, Sears, JC Penny, GAP, Levi’s, Phillips Van Heussen, etc. all these businesses are being controlled from the business hub in India. Therefore, Indians are getting most of the benefits out of these US retailers.

Apart from these most of the US importers want to buy in a LDP (Landed Duty Paid). Bangladeshi exporters do not want to accept this payment system. It is true that they can go for secured payment under LC and shipping term FOB. But if we do not try to be competitive by accommodating customer’s term then we slowly lose the US market which consumes two-third of the world economy.

Bangladesh government and BGMEA must start negotiating with the US to qualify for FTA (Free Trade Agreement) and start preparing financial package so that our manufacturers can work under LDP/ Cash on Delivery as secured as FOB/ LC at sight.

Otherwise, there will still be an influx of US orders being controlled by Chinese and India importers. Those orders will have no price because most of the margins will be taken away by importers in their pocket.

 

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