The world’s two largest economies have been at war.
This dispute, however, between the US and China – two of the world’s superpowers – have been over the unfair trading practices and products unbilled for. Imposing tariffs on billions of dollars worth of each other’s goods, the US President Donald Trump accused China of intellectual property theft, placing tax of US$250 billion worth of Chinese products while Chinese President Xi Jinping has set tariffs on US$185 billion worth of US goods.
With neither willing to back down, the advent of this ongoing trade war has only risen boiling tension between US-China trade, with the potential to lead to a full-blown trade war. It has been stated that this could possibly erupt into the “the largest trade war in economic history to date.” Up till now, the total US tariffs applied exclusively to Chinese goods has been US$550 billion. From the other side, the total Chinese tariffs applied to US goods: US$185 billion.
A basic timeline of the recent US-China trade war
- August 23, 2019 – China announced US$75 billion in tariffs on US goods with Trump threatening a tariff increase on Chinese goods.
- September 1, 2019 – Tariffs come with force, with the US began implementing tariffs on more than US$125 billion worth of Chinese imports (list 4A). Goods affected ranged from footwear, diapers, and food products to smartwatches, dishwashers, and flat-panel televisions. China, in return, began imposing additional tariffs on some of the goods on a US$75 billion (list 1).
- September 2, 2019 – China lodged another WTO tariff case against the US, affecting US$300 billion of Chinese exports. This was the third lawsuit that China has brought to the WTO challenging US tariffs.
- September 5, 2019 – The two nations agreed to have the 13th round of trade talks in Washington DC in early October.
- September 11, 2019 – China unveiled a tariff exemption list for US imports, exempting 16 types of US imports from additional tariffs, including products such as pesticides, animal feeds, lubricants, and cancer drugs.
How the retail industry is affected by the US-China trade war
As the tariffs increase and the tension continues to grow in this ongoing trade war, those that are most impacted seem to be retailers. As a result, the SPDR S&P Retail ETF fell more than 3%, with large retailers such as Best Buy, Office Depot and Abercrombie & Fitch plummeting 10% after the news.
After September 1, American Apparel Association have noted that 92% of apparel, 68% of home textiles and 53% of footwear imports from China would be hit with a 15% tariff. The Retail Industry Leaders Association noted that that the new 10% tariff on Chinese imports mostly had a major impact on consumer products.
Department stores also began to fall under pressure to the tariff news, as Macy’s and Nordstrom both declined nearly 7%. While many apparel and footwear companies have attempted to move their sourcing out from China, approximately 10% to 15% of U.S. goods still continue to come out from China.
High-end US fashion brands decide to move
With China established as a manufacturing hub, high-end US fashion brands have become reliant on the nation over the years. However, with an increase in the trade war tariffs, a new study demonstrates how these brands may be largely affected.
Although basic apparel pieces such as t-shirts can easily be moved to production hubs such as Vietnam or Cambodia, China’s manufacturing of higher-value goods has made it an irreplaceable partner. For this reason, these high-end US fashion brands have no other choice but to deal with the increased tariff hike.
Even though several companies aim to lower costs, research indicates that other countries, further down the value chain, are unable to compete in quality. This makes China’s hold on the garment supply chain persist even though the price advantage has decreased over the early rounds of US tariffs. To give some perspective, the average retail price of clothing manufactured in China was US$25.7 per unit in the second quarter of 2018, yet it more than doubled to US$69.5 per unit within a year.
By the end of Q1 2019, the number of apparel items made in China for US clothing retailers’ inventories has reduced by more than two thirds. Yet, even so, China continued to dominate the US retail market as the largest supplier of new clothing items from 2016 to late April of 2019. According to an Associate Professor of Fashion and Apparel Studies at the University of Delaware, Sheng Lu stated,
Even though the tariff war will further reduce the price competitiveness of [goods] made in China, it will not fundamentally shift China’s overall competitiveness as a sourcing base, especially in the short-term. US retailers may quickly move sourcing orders from China to other suppliers for basic fashion items, such as tops, bottoms, and underwear. However, there seem to be much fewer alternative sourcing destinations for more sophisticated product categories, such as accessories and outerwear.
Although China continues to be the primary manufacturer for high-end apparel, it’s expected that vendors who supply for the US market will begin to accelerate their speed in shifting production facilities out of China.
Taking a popular US underwear brand as an example, 80 percent of its apparel was produced by a Hong Kong-owned company in Shenzhen. The company began to shift manufacturing to Vietnam four or five years ago. Last year, due to tariffs, it quickly expanded its investment in Vietnam.
A drop in Chinese retailer sales
When it comes to growth in retail sales, China has been feeling the effects of the trade war. Although it the country has risen roughly 8 percent in July from the same period a year earlier National Bureau of Statistics (NBS), compared to the 9 percent experienced in the month prior, China is not completely free from feeling the effects of the trade war.
Over the last decade, Consumerism has become the main driving force in the economy, with an increased range of middle-class disposable income and the average consumer open to spending more. For this reason, China has shown relatively great signs as a robust economy for retailers. But since the recent trade war, retailer sales have fallen by approximately 4 percent in July from a year earlier. This is an accelerated rate compared to that of a 3.4 percent seen in May, and 0.6 percent in April.
Ultimately, due to the slowdown caused by the ongoing US-China trade war, it’s expected that retailers will continue having a hard time with sluggish sales, as consumers will buy less with the hike in prices.
It’s in times like this, the use of AI-driven predictive analytics helps to solve the impending decline in sales by predicting consumer demand with greater accuracy, and better speeds. Retailers are at war with constant socio-economic fluctuations and in the oncoming future, the only way to combat this with full preparation is to trust in technology to create change.