The US-China dispute over trade and subsequent imposition and counter-imposition of tariffs is all set to disturb the global textiles and apparel industry, writes Subir Ghosh

The ongoing hostilities between the United States (US) and China can upset existing equations and force new alignments in the global textiles and apparel industry. Assuming, of course, both countries stick to their guns till the end of May when the new tariffs imposed by the Trump administration on Chinese imports set in, and the counter-tariffs of China come into play. Till then, the global textiles and apparel industry would have little to do but wait and watch the game of who-blinks-first.

This, however, is more than just an eyeball-to-eyeball confrontation, and had been expected-with varying certainties, of course-since Day One. US President Donald Trump's views about Chinese domination of global manufacturing was well known, but his assertive action has come more than a year after he took over the presidency. The US withdrawal from the Trans Pacific Partnership (TPP), nevertheless, had been immediate. But in case of China, Trump bid his time, preparing ground through jingoistic rhetoric. The first sign that the US would take China head on came in February. Thereafter, it was only a matter of time before the war of words would escalate into a trade war.

The First Salvo

President Trump on April 3 released a long-winding list of Chinese imports that his administration intended to target as part of a crackdown on what he believed to be unfair trade practices. The sectors covered by the proposed tariffs included products used for robotics, information technology, communication technology and aerospace.

The US Trade Representative (USTR), which announced the list, said it was targeting products that benefit China's industrial plans "while minimising the impact on the US economy." The tariffs were directed at Chinese policies that "coerce" American companies into transferring technology and intellectual property to local Chinese companies. The US was expected to levy tariffs on $50 billion to $60 billion of Chinese imports annually.

The official announcement underlined that the total value of imports subject to the tariff increase would be equal to "the harm caused by China's unreasonable technology transfer policies." The official note remarked, "The Trade Representative proposes an additional duty of 25 per cent on a list of products from China." The American list included over 1,300 imported products.

The Chinese reaction was immediate. The very next day, it announced additional tariffs on 106 US products. This was in addition to 128 other US export products that had been listed earlier by China. The effective start date for the new tariffs has not been announced, though China's ministry of commerce made it amply clear that the tariffs were designed to target up to $50 billion of US products annually. Though the American list had not included apparel and footwear, the sigh of relief that industry had heaved on April 3 did not last long-the Chinese list included cotton.

Inside America

Trump's decision went down well with his voters, but industry was not pleased. Certainly not the American Apparel and Footwear Association. Its president and CEO Rick Helfenbein reacted the same day, "We are pleased with the administration's decision to avoid adding tariffs to US imports of apparel, footwear, and travel goods from China. At the same time, we are concerned that the list includes tariffs on machinery used in our domestic manufacturing process. This would directly raise costs on domestic manufacturers and impact our ability to grow Made in USA."

This is where some of the catch lies-more than 80 Chinese products can be linked directly to machinery needed for apparel and textiles manufacturing. Broadly, the list includes textile printing machinery, carding machines for preparing textile fibres, textile spinning machines, machinery for producing textile yarns, weaving machines, circular knitting machines, flat knitting machines, embroidery machines, spindles and sewing machines; not to speak of spare parts of those same machines. In short, the cost of doing business would go up, and even though the US President harped on the job protection string, many believed that the additional tariffs would only push up costs of apparel for the average American customer.

American companies are already said to be scouting around for alternative sourcing hubs should tariffs be imposed on apparel as well, since domestic apparel manufacturing would become more expensive with the additional duties on machineries. Besides, changing sourcing partners overnight is not easy either. But right now, those are all contingency plans being slowly rolled out.

Yet, brands and retailers have reason to be wary. Just because apparel had not been listed the first time out does not mean that it would not make it to a subsequent list. In fact, as if on cue, President Trump continued with his China-bashing, announcing only two days later that he was considering imposing penalties on $100 billion in Chinese goods in addition to the proposed tariffs on $50 billion of imports that had already been announced. Since the President did not specify which goods he would target, the US apparel/retail industry remains on tenterhooks.

Taking it to the Fields

The impact on the apparel industry, however, paled into insignificance soon once China announced uncombed cotton and cotton linters from the US would face new tariffs. If the US strike was aimed at Chinese manufacturing, the retaliatory move was in many ways directed at agriculture/livestock. Apart from cotton, China proposed additional tariffs on soybeans and pork.

The National Cotton Council was understandably upset, because for the current 2017 crop year, China is the second largest export market with purchases of approximately 2.5 million bales of US cotton. Council chairman Ron Croft said, "I cannot overstate the importance of China's market to US cotton farmers and the importance of US cotton in meeting the needs of China's textiles industry. The cotton industries of the US and China enjoy a healthy, mutually beneficial relationship."

The NCC encouraged the two governments to engage in immediate discussions "that can resolve trade tensions and preserve this long-term collaborative relationship. The US cotton industry stands ready to assist the US government and our trading partners in China to find a resolution to this damaging trade dispute." So far, those pleas have fallen on deaf ears.

Not that the Trump administration had not been cautioned. The high-profile United States Fashion Industry Association (USFIA) had, in fact in March, even reiterated over an earlier statement, "In case we weren't clear the first time, while we support efforts to protect the intellectual property of brands and retailers, we will never support punitive tariffs based on the fiction that imports harm domestic jobs and growth. These new tariffs will not create more jobs in the United States, but instead, will harm the companies that already create thousands upon thousands of high-quality jobs in design, in marketing, in retail, in logistics, in compliance, right here in the United States."

Notes of Dissent

The confrontation with China is not the beginning; it is only an escalation. The first move had come on March 8 when President Trump imposed heavy tariffs on imported steel and aluminium which he argued were necessary to boost the US industry suffering from "unfair" business practices. He signed two proclamations that levied a 25 per cent tariff on steel and a 10 per cent tariff on aluminium imported from all countries except Canada and Mexico. The tariffs were to go into effect in 15 days. Other countries would have to negotiate with the USTR if they wanted exemptions from the tariffs.

The European Commission stung back, saying it would respond "firmly" to the proposed duties on steel and aluminium. It drew up a list of 2.8 billion euros ($3.46 billion) worth of US products on which it could apply a 25 per cent tariff. Those products included Harley Davidson (HOG.N) motorcycles, bourbon and Levi's jeans.

The USFIA too had reacted strongly, "These tariffs will be catastrophic for the US economy and jobs. While our members don't import a lot of steel or aluminum, these tariffs could result in disastrous consequences for them. Already, the EU is calling out a variety of industries, including iconic American denim and t-shirts, as potential targets for tariff increases of their own." The US apparel exports were estimated to be $88 million.

The US beat a retreat and suspended the tariffs on imports from the European Union as well as Argentina, Australia, Brazil, Canada, Mexico and South Korea. But China remained a target.

The invoking of Section 301 of the Trade Act of 1974 was criticised. Helfenbein, in a scathing article, wrote: "One could try to argue that targeting China for their $375 billion trade surplus by using an obscure trade law is an awkward way to resolve a thorny issue. Simply put, it won't work, and it will likely cause more harm than good. However, the president got everyone's attention and, perhaps, that's what the he wanted to do. Our apparel / footwear industries are already some of the most overtaxed, over-regulated and over-burdened groups that exist in America."

Helfenbein, on that occasion, had concluded, "Being upset with China for one infraction doesn't translate into taking it out on another. Trying to punish China with tariffs (that will ultimately be paid by American citizens) is just not practical. It's like telling your son he did something wrong and then punishing your daughter."

From the Ringside

As pundits speculate on what a post-confrontation world could look like, lists are also being drawn up of countries that could fill in the innumerable voids that would be created in the world trade theatre. Most items/subjects would be beyond the scope of this publication. Cotton/textiles/apparel would, however, can and should be looked at.

It is too early to comment on the possibility of apparel being drawn into the Sino-American conflict. Apparel manufacturing in China has been on a gradual decline for a few years now, with many Western companies shifting base to other Southeast Asian countries like Vietnam. But Chinese companies are known for back-door entries. By the time the flight of capital had started into Vietnam, many Chinese companies had already set up bases in African countries like Ethiopia.

 

Moreover, the domestic apparel market in China itself remains humongous and attractive enough for brands and retailers, and with a government crackdown on polluting units and an increasing shift away from manmade fibres, the demand for cotton by the Chinese textiles sector is likely to grow. The imposition of tariffs on American cotton will now render the situation fluid.

As of now, China produces about 32 million bales of cotton, but needs roughly 45 million bales; the shortfall is met by imports. China's cotton stockpile is expected to come down to around 15 million bales by the end of this year; much of that is reckoned to be of poor quality.

Among the initial reactions after the conflagration broke out were those from the cotton sector in India. Early speculations hovered over the possibility of India trebling its cotton exports to China. Atul Ganatra, president of the Cotton Association of India, told Reuters that India was looking to sell between 2.5 million and 3 million bales, each of 170 kg, to China in the next marketing season beginning October, up from around 800,000 bales of expected exports in the 2017-18 marketing year. This year China is scheduled to import 2.5 million bales of cotton from the US, with the other major suppliers being Brazil and Australia.

But for India to replace Australia, to start with, as the second largest exporter of cotton to China, Indian cotton will need to match that of the Australian variety. One reason why Indian cotton sells so much is because of discounted prices, and not quality.