Wednesday, June 19, 2019
Volume 2, Issue No. 11

Tariffs: What Retailers Need to Know

Confused by what’s happening with tariffs? You’re not alone.

Import duties have been top-of-mind for the footwear industry since May 5, when President Trump announced on Twitter that he would impose 25 percent duties on $325 billion worth of Chinese imports — including footwear, apparel and consumer electronics — that had been excluded from previous tariff announcements.

It was the latest escalation of a dispute that has been brewing since mid-2018, when the White House said it was imposing the duties to pressure the Chinese government to stop what the U.S. characterizes as widespread and pernicious intellectual property theft. It was met on June 1 by retaliatory tariffs from China of 20 and 25 percent on a large portion of American-made items flowing into the country.

The duties on China-made goods aren’t the only ones currently at issue: This week, India announced it was imposing tariffs on US-made agricultural and chemical products in retaliation for the end of its favored trade status, and earlier this month a potential duty on Mexico-made goods was shelved, at least for the time being. But no other proposed actions have the wide-ranging impact — especially for the footwear industry — as the proposed duties on Chinese goods: In 2018, 69 percent of the shoes sold in America were manufactured in China.

At a townhall at the Outdoor Retailer tradeshow, the Outdoor Industry Association said its data said that outdoor companies and consumers paid an additional $1.1 billion due to the new tariffs from their institution in September 2018 and April 2019. The group predicted that The data also found that the proposed increases and additional tariffs could cost the outdoor industry an extra $1.5 billion every month.

This week, public hearings on the duties kicked off in Washington, D.C., where stakeholders (including representatives from major footwear firms) will testify about the expected impacts to their business. But what comes next? And what does it mean for footwear independents? We asked Matt Priest, president and CEO of the Footwear Distributors and Retailers of America, and Nate Herman, SVP of the American Apparel and Footwear Association, to break down just what these proposed actions mean for retailers.

1) How soon could these tariffs be applied?

The short answer: As early as the days just after the July 4th holiday. While Priest and Herman both pointed out that the power to apply tariffs is one the president can exercise immediately, in practice, there’s a prescribed process being followed. After the close of the public comment period on June 10, hearings began on June 17 and are expected to continue for two weeks, where stakeholders, including footwear companies, can testify as to what effects they expect should the duties be imposed. After the hearings conclude, there will be a 7-day period for stakeholders to offer comments, at which point the tariffs could be applied at any time, likely after the Independence Day holiday. President Trump is scheduled to attend the G-20 Summit June 28 and 29 in Osaka, Japan. The Dow soared more than 300 points at mid-day June 18 after the president tweeted that he had “very good phone conversation” with China’s Premier Xi Jinping and would meet with him at the summit. A likely tariff timeline, if there is to be another round, would emerge in the wake of the gathering and the meeting between the two heads of state.

2) How much are prices expected to rise?

Any and all shoes that list China as its country of origin are already subject to duties that range wildly depending on the kind of shoe they are and the materials they are made of: Men’s leather-upper dress shoes have a 8.5 percent duty, athletic shoes have a 37.5 percent tariff, and plastic shoes for kids are already tariffed at 67.5 percent. The new duty being discussed would be on top of the existing tariffs — not in place of them. For athletic shoes, for example, the new tariff would be 52.5 percent. According to the FDRA’s estimates, a $150 performance running shoe would spring to $206.25; a $140 workboot would rise to $165.45; and a $50 canvas sneaker would rise to $65.57.

3) Which categories will be most affected?

“Most companies are going to be impacted in some way,” Herman said. While there’s been a concerted effort by the footwear industry to diversify away from China over the past decade, it’s still the biggest player by a long shot. According to the AAFA, 80 percent of women’s shoes and kids’ shoes come from China, and 90 percent of slippers do as well. Athletic, outdoor and workboot brands have been more aggressive about moving production and won’t see the effects hit quite as hard.

4) If applied, how long are the tariffs expected to be in effect?

While the Trump administration hasn’t outlined a timeline for how long the tariffs would be imposed, history suggests that once applied, they are likely to stick around. As Priest pointed out, “The current ones are 90 years old. If they’ll added, they’ll be around.” Herman agreed: “If I were a betting person, I would think it’s not going to go away,” Herman said. “A year, two years — it’s not something that will go away after a few months.”

5) What’s the timeline of events if the tariffs are imposed?

When the tariffs were first announced, firms took action: U.S. ports have been overwhelmed with shipments coming from brands rushing to beat potential duties, and Priest said that will continue. “The ports will get really active and congested, because there’s so many goods on this list that will flood in,” he said. “But once they flip the switch, companies will sell through the inventory they got in. And then you’ll start to see the prices skyrocket.” Priest says he thinks it’s possible that the influx of merchandise to beat the potential duty hike and the timing may work out so that back-to-school pricing is relatively unaffected, but said it’s likely the increases will hit for the holiday season.

6) Will brands and manufacturers absorb the duties to keep prices for their customers and consumers down?

Brands will be working to try and keep costs down, but both Priest and Herman warn that a jump of this size is certain to be passed on to the consumer.

“There was a 10 percent tariff first, and it’s easier to hide 10 percent in the supply chain,” Priest said. “But at 25 percent all bets are off.”

“There’s a huge expectation that the manufactures and brands will eat the costs, and since the product coming in for back-to-school and holiday — two biggest sale times of the year for footwear — it’s a pricing dilemma,” Herman said. “But there’s only so much the smaller brands and manufacturers can absorb. There will be cost-sharing between brands and retailers, but they’ll still have to pass it on.”

7) In the long run, could these tariffs spur a boom of shoe production here in the US?

Since tariffs are meant to incentivize domestic production, is it possible that this added spur could move production here? It’s not likely, Herman and Priest agree: the realities of U.S. labor cost and the migration of the supply chain overseas makes it unworkable.

“We have seen a small resurgence in US manufacturing over the last 10 years, but it’s very niche, with small runs or specialized product. And those will continue to grow; in those instances, making the shoes in the U.S. makes sense,” Herman said. “Outside of that, unless you see a breakthrough with 3-D printing and other ways of doing that dramatically reduce labor costs, it’s not gonna come back here.”

Priest agrees. “We have domestic production now, and they have trouble finding people to work. There’s not capacity [here]. All it’s going to be is a shift to another country. it’s not going to come back here.”