TARIFF UPDATE: CAN WE PREPARE FOR TARIFFS?

Update: Following last week’s story on tariffs, a 90-day agreement was reached to reduce the 145% tariff rate to 30%.

HOWEVER, according to shipping expert Sal Mercogliano from the What’s Going On With Shipping YouTube channel, the 30% tariff rate “will apply to the cargo being loaded after May 14, from what has been reported.”

This means that cargo already loaded on inbound ships will continue to be tariffed at 145% until the arrival of vessels that were loaded in China after the May 14th date.

We will keep you updated if the information in this area changes further.

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(The below article was originally published on MR Magazine, May 8th)

Worried about the impact of tariffs on business? So are we!

At MR Magazine we’ve been going over the numbers so that we can bring them to you straight. There is a lot we do and don’t know about these tariffs including if they will or won’t stick long term. But there is enough data we can look at to give our readers the best chance of understanding what’s about to happen.

First things first!
There is no global “shutdown” of trade. The ports are not empty. And, shipments from China have not stopped. However, shipments have slowed. To look specifically at the Port of Los Angeles, container shipping levels over the next week are down 24% and are predicted to be down around 13% for the two following weeks.

What are we looking at?
The United States imports 97% of apparel and footwear, according to the AAFA. Because of this, the tariffs will impact the fashion industry disproportionately. As we put together an outlook for what’s happening, we’ve been analyzing the COVID-19 Pandemic, consumer crisis studies, import/export supply chains, inflation responses, and wealth distribution shopping trends.

There’s good news and bad news…
To get the bad news out of the way, things are going to get more expensive. According to the Yale Budget Lab, inflation is going to rise, (64% higher apparel prices in the short term, 27% in the long term), and consumer spending on apparel is going to decrease. So, what’s the good news? Luxury retailers are situated to take on a smaller portion of the pain than fast fashion.

Lower-end consumer products operate at typically lower profit margins, which will require them to pass on a greater magnitude of the tariff increases. Luxury goods are better positioned in this regard as evidenced by some retailers already adjusting their prices but not by the full tariff rate.

Generally, all income brackets spend between 3.2% and 3.9% of their income on apparel. Disregarding crisis behaviors, as prices rise, the total percentage will not, meaning they will be spending that same percentage for the purchase of fewer items.

What’s the timeline?
The global supply chain relies on stability and predictability. Production time, transport to port, dwell time in port before loading, being assigned to a boat, offloading, intermodal transportation out of the port, warehousing at distribution, truck loading, and sometimes more before a product ever arrives at its destination. This requires all of these components to work predictably and timely; it’s not hard to see the problem if excessive dwell times overburden a port’s container capacity, making it impossible to unload a vessel that is scheduled with its return cargo.

Some things are happening now. According to a call between MR and the New York Governor’s Office, apparel manufacturers are already trapped by the expense. One eyewear manufacturer (who wishes to remain anonymous for fear of retaliation) stated that they currently have a $48,000 optical glass shipment at the Port of New York with an additional $72,000 tariff bill they cannot cover nor can they sell the products that would be made from this glass to raise funds necessary and the longer it sits at the port, the more it will occur storage charges. As complications like these build up in the ports, on-site storage facilities will reach capacity, causing goods to be shipped to other port storage facilities or even back to their origin port.

May 10^th – This is the day that the US will be fully receiving shipments covered by the new tariff policy. The decrease in imports is estimated to become visible on shelves as soon as May 20^th. The site of empty shelves could probably instigate so-called crisis shopping patterns. For the duration of the tariffs, supply will continue to reduce and re-stocking purchase orders will move into a lower pattern.

As this process continues, we are also likely to see layoffs, which could be significantly impactful to the economy and only deepen the difficulty of the situation. According to Lightfast analytics, in New York State, the fashion industry employs 250,000 (132,000 in retail and 100,000 in marketing), and the sector represents 3.4% of the state’s GDP.

What happens when it’s over?
When the tariffs are lifted, from that day, relief will not come the right way. Because of reduced factory production abroad, a stockpile of inventory will not be waiting to ship. The reemployment of factories will follow new purchase orders. It is estimated that production will likely take 2-6 months to fulfill from the time of order. This manufacturing delay is a prime example of elements of delay masked by stability in the system that is exposed when that system is destabilized. After manufacturing, the time for a ship from China to reach the Port of Los Angeles is 30 days, to reach the Port of Chicago 45 days, and the Port of New York in 50 days.

This means that if the tariffs are repealed on May 10^th, those goods will not arrive in the port of L.A. until June 24^th for short-timeline production goods and November 5^th for longer-to-produce items.

For now, we wait.
All signs point to this being a particularly bad moment for fast fashion retailers and a particularly strong moment for the re-sale fashion market. Properly managing inventories and expanding into re-sale offerings are easy bets to make. Being aware of the delay when the tariffs are removed and when new goods arrive, and tracking which products in your inventory are pre-tariff, tariffed, and post-tariff are good ideas to be on top of before things get mixed up. As luxury retailers, there are some things to be thankful for. We don’t know what will happen, and we will have to wait, but just because we’re patient doesn’t mean we have to be complacent.