After increasing tariffs on $200 billion worth of Chinese imports from 10% to 25%, the Trump administration is reportedly mulling to impose additional tariffs on remaining $325 billion worth of imports to rake in more revenues. These include a wide array of consumer electronics items, toys and shoes that were hitherto left outside the purview of the trade war to shield the American shoppers from the cascading impact of higher tariffs.
With China playing a vital role in the supply chain process for most U.S. footwear firms, the proposed tariffs are likely to be a death knell for the industry that is already reeling under a $3 billion annual duty bill. Consequently, advocacy groups from the industry are urging the administration to rethink the issue to avoid any “catastrophic” impact on consumers, the overall sector, and the U.S. economy as a whole.
In an open letter posted on the website for the Footwear Distributors and Retailers of America, the industry trade group made an earnest plea to Trump to desist from the temptation to slap 25% additional tariff on the footwear industry. Ratified by more than 170 footwear firms, the letter was also addressed to U.S. trade representative Robert Lighthizer, treasury secretary Steven Mnuchin, commerce secretary Wilbur Ross and Larry Kudlow – the director of the National Economic Council.
The petition reasoned that tariffs are imposed disproportionately on the footwear industry, averaging 11.3% and often reaching as high as 67.5% in some cases compared with an average of 1.9% on all consumer good items. An additional 25% tariff will eventually lead to Americans paying almost 100% tax on some shoes, leading to $7 billion in added annual costs to consumers. This is likely to lead to lower demand for discretionary items like shoes, forcing several industry participants to run out of business.
Despite efforts in recent years to move out some of the production facilities to other low-cost countries like Cambodia and Vietnam, footwear firms rely heavily on Chinese suppliers and its cheap labor force. In 2017, about $14.8 billion worth of shoes were imported from China, making it the fifth largest import product category, per the data by the American Enterprise Institute. Notably, China alone accounted for 72% of all shoes imported in the United States in 2017.
The footwear industry is highly capital intensive and requires effective planning and supply-chain mechanism for seamless operations. Consequently, possible knee-jerk reactions to shift manufacturing operations from such a dominant and established market to offset higher tariffs are likely to take considerable time with adequate planning and involve higher costs. Financially weaker companies could also find such an exercise to be potentially unviable, leading to an untimely death.
Leading footwear manufacturer Nike Inc. (NKE - Free Report) has revealed that about 26% of its footwear was produced in China in fiscal 2018. The company maintained that the communist country was an integral part of its business operations, both in terms of raw material supply and end-market consumption. With increased tariffs, the company would be left with no other option but to raise product prices, passing on most of the added expenditure to consumers and thereby, making a larger dent in their wallet.
Several other footwear firms such as adidas AG (ADDYY - Free Report) , Rocky Brands, Inc. (RCKY - Free Report) and Wolverine World Wide, Inc. (WWW - Free Report) have echoed such sentiments and have collectively appealed to the government to save the industry from further distress.
Whether the administration will heed to such SOS calls from the industry remains to be seen.
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