18 Feb Boom!
Boom! In a business context, what does that word mean to you?
- Gigantic explosion of new business?
- Disintegration, as chunks of your sales channels and market share fly away in a cloud of smoke?
This article is a just a pondering “What if?”. It is for planning purposes only. These days everyone is a little touchy, so I want to point that out.
Conversation starter. Not argument starter.
Here’s the set up. President Trump has declared that he is going to renegotiate the trade policies of the United States to favor domestic manufacturing above all else. He hates NAFTA. He hated TPP. He is a deal maker and he wants a better deal.
Showing the world who is boss means one thing for US imports:
He’s big on walling off and being divisive. Soon, it’s going to cost more to ship stuff into the good ol’ USA. How much more, nobody is certain. My magic 8 ball is a little hazy at the moment.
Adding cost for landed garments to the United States decorated apparel industry could mean something significant though:
More shirts sewn stateside. More shirts decorated stateside.
Except there may not be enough companies to handle that work. Think about it. How many garment manufacturers for this industry actually make their blanks in the US currently?
According to the Bureau of Labor Statistics, the United States currently employs only 129,400 people that manufacture textiles. That’s down from 938,600 in 1990. Those jobs are gone. That equipment is gone. That knowledge is gone. A lot has changed in 27 years.
Gildan buying American Apparel suddenly looks like an even better move for the Canadian company. Although nothing is manufactured like it was in 1990. The use of technology and automation has changed the landscape. What will they do with that opportunity?
Still, most everything is imported. 97% of all apparel and 98% of all shoes are imported into the US, according to the American Apparel and Footwear Association. How much of a difference could new domestic manufacturers make? Will new manufacturing companies even move the needle?
I was speaking with an industry colleague last week. He was complaining about the looming sourcing challenge facing large apparel programs. These are the one that currently are sourced on another continent and shipped in. The production lead time for these extends into quarters. There is tremendous pressure right now to find domestic apparel sewing facilities that can handle the scale of business. The thought of large tariffs, the end of TPP and soon the end of NAFTA, has these folks scrambling. They want better answers now as they fear what’s coming.
Even nearshore manufacturing isn’t safe, as Trump wants to build his Mexican wall funded by these tariffs. The money for that albatross has to come from somewhere. He has big problems with Mexico, but will that extend to the Dominican Republic? Haiti? Costa Rica? Other usual trade and manufacturing partners in the nearshore South American region?
Oh, you don’t decorate millions of shirts a year?
You are in the crosshairs on this too. Look at the shirts stacked up on carts and tables in your shop right now. Doubtful many say “Made in the USA” on the neck labels. This problem is going to hit you squarely in the face sooner or later when Trump’s trade ideas go through.
More US Apparel Manufacturing?
If you want to get into the shirt manufacturing and sewing business within the continental US this could be an opportune time. A great example to follow would be to look at the impact that Shinola has with bringing manufacturing back to Detroit. Can someone do that for apparel and textiles in North Carolina? Lowell, Massachusetts? California? There may be a lot of political juice to get something going. I’m sure Dov Charney is foaming at the mouth about this opportunity. Plus, he’s got a chip on his shoulder anyway.
Of course if domestic shirt production ramps up, someone has to decorate these garments! Contract decorators may soon see a big jump in business. Maybe Trump’s unfocused plan could be a good thing? It’s too soon to tell. More magic 8 ball unclarity.
Trump seems headstrong to upset a lot of businesses. Depending on if your business is in the US or not, this may mean something different to you. Currently most import tariffs are around 2%. Trump wants to increase this, but he’s been all over the map with the number. He’s stated 5%. He’s stated 10%. He’s stated 20% for Mexico imports. He’s stated 35%. If something is from China, it’s a whopping 45%. Trump hates China evidently.
His modus operandi seems to be declare something outlandish and then back down to a fallback position that is still high, but less inflammatory. Still high somehow looks “normal”.
Will the real number be that far out?
Plan for the Worst
For the sake of argument, let’s pretend the apparel blanks entering into the US cost 35% more. Plan for the worst, right?
How will that affect your business model? It might be positive. It might be negative. It all depends on where you sit in the industry.
Either way, there should be some sort of conversation in your shop. At least crunch the numbers.
What are you going to say to your customers? Will you need to revamp your pricing? Maybe all you need to insert is the percentage increase. Customers are well aware of Trumps plans. It’s inescapable news content. But will they understand when it hits them in the wallet? Hmmm. I think not.
Maybe if you are already using a Made in the USA blank, you can use this as an opportunity to find more margin. Those shirts won’t be hit with the border tax. That is, of course, if the Made in the USA blank is actually cheaper. Most aren’t. Which is why 97% are made somewhere else. It is circular logic.
Outside the US
Also, maybe you don’t live in the United States. Plenty of my blog readers don’t. (thank you for reading by the way!)
Will Trump affect your daily decisions? I’d love to hear how something like this would affect you. (Leave a comment below! – Be nice!)
Vocabulary (no tests!)
Let’s look at some key definitions (all sourced from Wikipedia):
Made in the USA – The Made in USA mark is a country of origin label indicating the product is “all or virtually all” made in the United States. The label is regulated by the US Federal Trade Commission (FTC). See below for the definition of Rule 16 CFR 303.
In general, goods imported into the United States must have a country of origin label unless excepted. Requirements to label domestic content include automobiles, textiles, wool, and fur products. Any voluntary claims made about the amount of U.S. content in other products must comply with the FTC’s Made in USA policy.
FTC Textile Fiber Rule 16 CFR 303 – The Textile Fiber Rule requires that certain textiles sold in the United States carry labels disclosing the generic names and percentages by weight of the constituent fibers in the product, the manufacturer or marketer name, and the country where the product was processed or manufactured.
This is why shirts have to have neck labels with fabric content and country of origin. It is this law.
Import Tariff – A customs duty is the indirect tax levied on the import or export of goods in international trade. In economic sense, a duty is also a kind of consumption tax. A duty levied on goods being imported is referred to as an import duty. Similarly, a duty levied on exports is called an export duty. What you call it depends on what side of the fence you sit.
Nearshoring – is the outsourcing of business processes to companies in a nearby country, often sharing a border with the target country. Both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal (time zone), cultural, social, linguistic, economic, political, or historical linkages.
Offshoring – is the relocation of a business process from one country to another. Typically it is an operational process, such as manufacturing. Most often this is focused on cheaper labor costs. Access to materials and supplies can also factor into the logistics. While nearshoring application is about trade with a neighboring country, offshoring pushes that trade across the planet.
NAFTA – is the North American Free Trade Agreement. It was enacted in 1994 and eliminated most of the tariffs between the US, Canada and Mexico. This agreement opened up the floodgates of business activity, and in 2016 there was a $63 billion dollar trade deficit with Mexico. In 2016, the trade deficit with Canada was $11 billion. This agreement saw lots of companies set up facilities in Mexico and send their goods into the US for sale. Consumers saw prices drop. Manufacturing companies in the US closed their doors, as they couldn’t compete with the cheaper labor. This is the agreement Trump wants to replace.
TPP – was the Trans Pacific Partnership agreement. This was pending legislation that Trump signed away with an executive order in early 2017. The free trade deal was to lower barriers between Japan, Vietnam, Australia and the United States. Companies like Nike and Reebok were tremendously in favor of this agreement, as this geographic area is their manufacturing base.
Trade Deficits – in terms of how the United States trades business with the world. America is a consumer nation. We buy more stuff than we sell because we have the money to do so. Here are the top trade deficits for the country for 2016:
- China – $579 billion traded with a $347 billion deficit.
- Canada – $545 billion traded with a $11 billion deficit.
- Mexico – $525 billion traded with a $63 billion deficit.
- Japan – $196 billion traded with a $69 billion deficit.
- Germany – $164 billion traded with a $65 billion deficit.
So, What Now?
Trump sees these trade deficits as something to change. He’s a business guy, and not a social justice reformer, so this where he wants to make his mark. How goods coming into this country will be taxed is the vehicle that he will use to handle it. The cornerstone of “Make America Great Again” has a lot to do with his vision of international trade. Trump wants to kick ass and chew bubble gum. By the way, he’s out of bubble gum.
To me, there are three basic ways your company needs to look at any US tariff increase discussion:
- Direct impact in a positive way – Simply put, if the cost per garment blank due to a tariff should go up your business is poised to make more money. Is this you? Maybe you’ve taken an inventory position and stocked up. Maybe you grow your own cotton, produce your own blanks, and decorate your own shirts like Cotton of the Carolinas and TS Designs. Whatever happens, the surge pricing for blanks won’t affect you negatively…in fact it will benefit you in some manner. You are already giggling your way to the bank. Will that last?
- Direct impact in a negative way – any price increase due to a tariff will be an incredible buzz kill. The only way to offset this is to increase your prices to your customers. They won’t like it. Will there be backlash? Will this start a round of price shopping? Do you offset this by eating into your margin a little to keep business and avoid any drama? Some tough decisions are headed your way. You hate the guy above with a passion. You should work on using the lemons to make lemonade.
- No impact. Your shop is in the Philippines or Australia. Maybe England, or somewhere else. Anywhere but America. What the US does or doesn’t do won’t affect you at all. It’s a raised eyebrow, another sip of tea and then back to work doing your own thing. Those Yanks are crazy. This is where it gets interesting though. After listening to the US bark like a mad junkyard dog, the US neighbors just go about their business and ignore the noise. If you are running a print shop in Manilla, you aren’t too concerned with what happens in Ohio. Unless of course you are printing for the swoosh.
The challenge looming of course is that adding apparel manufacturing production will take planning, capital investment and logistics. You just can’t flip a switch and presto!, shirts are shipping tomorrow.
The business opportunity here is for those that gamble that something is going to happen and are set up for that situation early. The window from an action to other businesses catching up could be a limited one. A year? Two? Less? Trump’s idea has to worm its way through the 115th Congress.
Trump has a lot of power cards to play, as the Republicans control Congress. The House of Representatives (239 to 193, with 3 seats open) and the Senate (52 to 46 with 2 independents) have clear majorities. Expect lots of positioning, posturing and rhetoric before it is all said and done. Which in the end will mean Trump’s tariff bill passes.
Can a business lasso a hunk of the market in that window? Only their sales team will know. How much growth and market share can you capture if you get a head start?
For apparel blank distributors, there is one obvious question. Can they increase their inventory position and ship it in early to avoid the tariff hike, but sell it quickly enough to cover the added carrying costs? My guess is that we might see warehouses a little more stocked than usual.
This is when it pays to have some brainiacs on your payroll.
Lot of Questions Unanswered
Will there be a sudden increase in American apparel manufacturing? Will apparel companies just offset the tariff with price increases, as that’s easier? How long of a window will this industry have before there is a significant increase?
Let’s not also forget that many of the materials we use in our shops are also imported into the country. Will the cost of production rise when the ingredients for ink, emulsion or thread and other products get hit too? The supply chain isn’t commenting much. I would love to hear their side of the story.
Whatever happens, you’ll be better off if you start planning now for it. Now my magic 8 ball says, “Worry”.
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“Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not to seek to fix the blame for the past. Let us accept the responsibility for the future.” – John F. Kennedy
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin