Some are moving factories out of China. Others are strategically redesigning products. Some are seeking loopholes in trade law or even mislabelling where their goods originate – all with the goal of evading U.S. President Donald Trump’s sweeping tariffs on goods from China.
But most of the companies that stand to be hurt by Mr. Trump’s tariffs are hunkering down and waiting because they don’t know when, whether or how his year-long trade war with China will end, or which other countries the President might target next.
Consider Xcel Brands Inc., a New York-based company that owns such brands as Halston, Isaac Mizrahi and C. Wonder. Two years ago, it made all its clothing in China. Now it’s on the move – diversifying production to Vietnam, Cambodia, Bangladesh and Canada, and considering Mexico and Central America as well. By next year, it expects to have left China completely.
“You have to keep moving things around,” chief executive officer Robert D’Loren said.
Mr. Trump launched the world’s biggest trade war since the 1930s by imposing tariffs on US$250-billion in Chinese goods and threatening to tax US$300-billion more. He has pursued separate battles with his country’s allies, too – from South Korea, Mexico and Canada to Japan and the European Union – over trade in steel, aluminum and autos.
Faced with the prospect of a forever war with the United States’ trading partners, numerous businesses say they’re delaying investment decisions and reviewing their business relationships until they have a clearer view of how Mr. Trump’s trade wars might end – if they will.
Shifting to other countries could slash Xcel Brands’ labour costs in half. This is crucial, Mr. D’Loren said, because fashion companies have little ability to raise prices and would have to absorb the cost of higher import taxes.
The trend of manufacturers leaving China predates Mr. Trump’s trade wars. With wages and other costs in China rising, companies were already shifting toward lower-wage countries, from Vietnam to Mexico.
A few have considered shifting production to the U.S.
Hurt by Trump tariffs on the metals used to make brass, Coins 4 U, which markets coins for awards and promotions, last year moved production from China, where it had been manufacturing since its founding in 2013, to Lake Ronkonkoma, N.Y.
“Our costs didn’t rise too much, about 10 per cent,” said Sam Carter, sales manager for the company, based in Cheyenne, Wyo.
But it isn’t simple for some companies to completely abandon China, where specialized suppliers cluster in manufacturing centres and make it convenient for factories to obtain parts when they need them.
Over the past five years, Columbia Sportswear Co. has cut its manufacturing presence in China by more than 60 per cent. But some products can’t be made elsewhere, the company says, because they’re highly specialized and dependent on significant investments in tooling, machinery and staff training.
Columbia’s Sorel-style shoe, for example, features a hidden wedge heel that requires proprietary tooling and machinery. Moving its remaining production out of China, Columbia says, would cost at least US$3-million in machinery, require hiring and training a new work force and delaying production at least a year.
Increasingly, clothing and shoe companies are trying to design their way out of paying tariffs. Some have used a strategy called “tariff engineering.” It involves altering products just enough to change how they’re classified under the U.S. International Trade Commission’s Harmonized Tariff Schedule to evade or reduce import taxes.
Small changes can make a big difference. Add drawstrings or pockets below the waist to a blouse and the import tax drops from 15.4 per cent to 8.1 per cent for a cotton version, and from 26.9 per cent to 16 per cent for one made of polyester.
U.S.-based companies are also scouring customs laws for loopholes. Increasingly, e-commerce companies are looking to ship directly to U.S. homes from warehouses in Mexico, Hong Kong and Canada. Federal regulations allow U.S.-based companies to send packages worth less than US$800 to American homes from countries such as Mexico and pay no tariffs.
Some are trying not-so-legitimate means, too. Chinese exporters have tried to evade U.S. tariffs by sending honey, steel, ceramic tiles and other goods through Vietnam and relabelling them as Vietnamese, according to the country’s customs agency.
The standoff over Beijing’s combative technology policies has dragged on for more than a year and consumed 11 rounds of negotiations. Even if the two sides forge an agreement, it’s far from clear that it would stick. The uncertainty is chilling investment.
A survey by the American Chamber of Commerce in South China found that U.S. manufacturers had suspended nearly half their investment projects valued at more than US$250-million because of uncertainty in U.S.-China trade relations.
Some companies worry that there may be no way out of Mr. Trump’s trade wars. Disputes that seemed to have been resolved can suddenly flare up again.
Less than two weeks after the U.S. lifted steel and aluminum tariffs on Mexico – a move that seemed to signal a return to harmony in North American trade – Mr. Trump in May threatened to impose heavy tariffs on Mexican imports – to press Mexico to stop the flow of Central American migrants to the southern U.S. border. Though Mr. Trump later dropped that threat, the incident highlighted the way the mercurial President can upend the rules of trade on a whim.