U.S.-China Trade at a Crossroads

By Stephen Lamar

This article was first published in the 11th Edition, Volume 4, Number 1 of The Brand Protection Professional (BPP) on 20 March 2019.

What’s going to happen next on China? That’s a question I get several times a day and one with no easy answer.

If we look at China wearing our sourcing hats, we are extremely frustrated by the chaos and costs that President Trump’s tariff actions have exacted on our supply chains. China accounts for approximately 80 percent of all travel goods, 70 percent of all footwear, and 40 percent of all apparel. Not only do tariffs imposed on the U.S.-China supply chain directly raise costs there, but China’s dominance means this supply chain inflation will be exported to other countries as well. As companies seek to leave China, they will bid up costs in those other sourcing countries, such as Vietnam, as demand for factory space is put at a premium. Similarly, other countries will find the sudden increase in Chinese costs creates room for them to raise their own prices as well.

Punitive tariffs of 10 percent were levied last September on a tranche of about $200 billion in U.S. imports from China, including travel goods, textiles, hats, gloves, and other fashion accessories. Since then, these importers have been living under the threat that these tariffs could rise to 25 percent. Those extra duties cost travel goods importers an extra $200 million last year, completely offsetting the gains of other legislation that had recently taken effect that eliminated the duties for certain travel goods imports such as backpacks and purses.

Although apparel and footwear executives escaped 2018 without seeing tariffs imposed on most U.S. imports of clothes and shoes from China, the president’s constant threats to impose a tariff on all imports from China created considerable unease, which lingers to this day. Moreover, China did levy tariffs on many of the industry’s articles and inputs (components, materials, etc.) that are exported to China. This means that articles in some supply chains – leather wearing apparel, for example – get taxed several times when the input is exported to China and then when the finished product is exported back to the United States.

But when we don our brand protection hat, a different perspective materializes. There is a consensus that China doesn’t always play by the same rules as the rest of the world, and that any effort to ensure that China does so is long overdue. For our industry, this is probably best seen through the lens of intellectual property (IP) rights.

Annual statistics from Customs and Border Protection regularly point to China as the source of most IP seizures, with Hong Kong (presumably for goods routed through there from China) as a close second. With apparel, footwear, travel goods, and fashion accessories leading the tally of the most counterfeited goods that are seized, any effort that improves IP practices in China is welcome. Indeed, addressing China’s IP practices is one of the stated reasons the Trump administration gave when it levied tariffs on China. Of course, the administration is pursuing a host of other goals with China: stopping forced technology transfer, addressing the trade deficit, seeking greater market access, and so forth.

The problem is that the path to these goals—namely tariffs—is creating considerable economic turmoil in both China and the United States. Indeed, many members of Congress share this view, welcoming the ends yet decrying the means (i.e., tariffs) to those ends. The Trump administration brushes aside these concerns, urging Americans to withstand a little pain for greater gain. Indeed, it has tried to dampen the pain felt by American farmers with an agricultural aid package of payments designed to replace lost revenues. But even farmers who have received these benefits are beginning to grumble that they are insufficient to keep them whole, and the American Farm Bureau Federation regularly notes that regaining markets is much harder than losing them.

But the pain is real, and the gains may be elusive. This is especially the case for our industry. The Trump administration is trying to improve Chinese IP practices—such as stopping the theft of trade secrets—that may have only a secondary impact on anti-counterfeiting efforts, which is our main IP concern. We could see an overall improvement in the brand protection environment in China, but it is more likely that brands will have to continue fighting this war in partnership with the e-commerce platforms. Frustratingly, that IP war is raging behind the scenes while the more public trade war—ostensibly designed to stop that IP war—makes the headlines.

So, what happens next? Here are several thoughts:

First, despite the Trump administration’s protestations otherwise, it is unlikely that any trade deal will break significant new ground. While the use of tariffs at this scope is indeed unprecedented, it is doubtful that those tariffs have had more than a marginal impact in leading to direct negotiations, which the Chinese have been pressing to start for some time. A longer-term trade truce could lead to some short-term improvements in the U.S.-China partnership. But it could also lay the basis for longer-term flare-ups if either side believes the agreement is not being properly enforced, a narrative that has dominated U.S-China trade politics for more than 25 years and will likely do so for 25 more.

Second, there is no question that China is, and will continue to remain, a valuable supply chain and retail partner for the industry. It has an unparalleled advantage in meeting the fashion’s industry’s needs in terms of skills, materials, delivery, quantity, quality, and, until recently, price. Moreover, Chinese consumers are growing more numerous and more affluent with each passing year. Fashion companies cannot succeed and be globally competitive today without viewing China as an important sourcing hub AND market. Among other things, that means keeping production in China for the Chinese market. That partnership also means continuing robust anti-counterfeiting efforts because increasingly sophisticated Chinese consumers relying upon quickly evolving technology unwittingly create additional opportunities for counterfeiters as well.

Third, while China will remain dominant as a sourcing hub, a lasting effect of the trade tensions will be an unmistakable exodus of some business out of China. Indeed, many companies are actively looking to shift production for the U.S. market out of China to shield their supply chains from direct tariff costs. In many respects this is nothing new, with diversification having long been identified by many sourcing executives as a goal. But with real and threatened tariffs and their uncertain future, these plans are becoming reality in what many believe will be the biggest sourcing shift in decades, rivaling the post-quota shift that cemented China’s dominance for the past 15 years. If counterfeiters follow sourcing executives to new production hubs around the world, the long-term impact on patterns of legitimate and illicit trade could become even more complicated.

Fourth, tariffs as a trade tool are nothing new. But prior to the Trump administration, they were rarely used in modern negotiations except for threats or negotiating chits to reduce other nations’ tariffs. The Trump administration has broken new ground—and in the process collected billions of dollars—that politicians are beginning to eye for their own purposes. And the Trump administration has a terrible track record of removing tariffs that it has previously imposed, even when the deal that prompted the tariffs has been consummated. A painful glance at the persistent steel and aluminum tariffs still levied on Canada and Mexico months after they reached a deal to replace the NAFTA is only one recent example. Will the Trump administration or future administrations continue to avail themselves of this tool in China and elsewhere? That prospect is daunting for an industry that already pays 40 to 50 percent of all tariffs collected by the United States.

With U.S.-China trade at a crossroads, brand protection and sourcing professionals can expect a busy couple of years in China and around the world.