Fashion is inherently sensitive to the policies and politics that shape cross-border trade. Recent talk of trade shifts between the United States and some of its key trading partners has brought the issue to the fore. At the same time, the axes of global trade are shifting, amid a surge in commerce between emerging economies in the Global South. The dynamics may lead to a rethinking of sourcing and pricing strategies in the year ahead.
The fashion market and ‘Trade 2.0’
That’s why “Trade 2.0” is one of the ten big trends for fashion players to watch in 2019. This article is an extract from our latest State of Fashion report, written in partnership with the Business of Fashion (BoF); the broader report covers what you need to know about all ten.
As 2019 begins, fashion companies find themselves in a crosscurrent of trade-related news flow. A sharp rise in trade tensions between the United States and other large economies seems set to increase costs for some players and increase the risk of disruption. At the same time, new trade agreements promise better trading conditions in certain instances.
In the United States, the fashion industry accounts for 6 percent of imports but pays 51 percent of tariff receipts, so the tariffs issue is critically important. In addition, with new tariffs coming into force on goods from China (including leather clothing, woven fabrics, and wool yarn), there is a direct feed-through to the consumer. Companies such as Gap and Samsonite, which have large manufacturing operations in China, have said they plan to raise their consumer prices.
Still, while China and the United States are raising tariffs against each other, China is at the same time trying to make some imports cheaper. A Chinese government decision to cut import duties led LVMH to reduce prices by 3 to 5 percent in July 2018 on some items sold in China. In September 2018, China announced it would reduce tariffs for textiles and construction materials to 8.4 percent, from 11.5 percent. Any reduction of tariffs usually must be offered to all countries equally under World Trade Organization rules, but China said US goods would still be subject to retaliatory tariffs.
Despite some of the positive developments in trade, the dominant theme over 2017 has been tightening of trade conditions between specific partners. For the G-20 economies, there were $74 billion worth of restrictive measures in May 2018, compared with $47 billion in May 2017, a rise of 58 percent. Trade-facilitating measures, which include eliminating or reducing tariffs and simplifying customs procedures, meanwhile, fell from $163 billion to just $83 billion, a 49 percent drop. Consumers are also noticing more gloomy trade sentiments: Google searches for the words “trade war,” “trade tensions,” or “tariffs” are at the highest level for at least five years, after growing by a factor of ten in 2018. The International Monetary Fund, meanwhile, predicts rising tariffs and that the ensuing escalation of trade tensions could reduce global economic growth by 0.5 percent by 2020.
Perhaps unsurprisingly, executives are becoming concerned, and increasingly cite trade relations as a major worry for the coming year. McKinsey’s Economic Conditions Snapshot in September 2018 was the second in a row in which trade policy was cited as a threat to global economic growth (exhibit). Sixty-two percent of respondents said it was their number one concern, up from 56 percent in March 2018. It’s worth noting, however, that sentiment tempered somewhat in December 2018.
A related issue is Brexit. A report by the UK Trade Policy Observatory suggests that due to its high level of exports, reliance on international talent, and dependence of raw materials from abroad, the UK textiles, apparel, and footwear industry will be one of the hardest hit by the United Kingdom leaving the European Union in March 2019. Some 63 percent of clothing designers and 55 percent of UK-based luxury-goods makers are involved in exports, and around 10,000 EU citizens are employed in the UK fashion industry. This explains why some 80 percent of respondents from Fashion Roundtable, a lobbying body formed to advise the UK government on matters relating to Brexit respondents, said that they felt Brexit would be bad for fashion in the United Kingdom and European Union. The prospect of Brexit has also started to affect fashion companies in other countries, particularly those being paid in sterling, which has fallen by around 12 percent against the euro and 10 percent against the dollar since the Brexit referendum in 2016.
Against this backdrop in Europe, the US fashion sector is also facing trade-related risks. According to the United States Fashion Industry Association’s 2018 Fashion Industry Benchmarking Study, “protectionist trade policy agenda” in the United States is the number-one business challenge. Before 2017, it never ranked higher than eight. The United States has announced tariff hikes on $200 billion worth of goods from China, including clothing. To highlight the proactive stance taken by some fashion players, the American Apparel & Footwear Association at the end of May 2018 published a letter signed by 60 US labels (including Abercrombie & Fitch, Kate Spade, Levi Strauss, Macy’s, Nike and Under Armour) arguing against increased taxation of Chinese textile and apparel imports.
Some fashion companies have begun to reconsider their presence in, and exposure to, countries where tariff barriers could further increase the cost of doing business. Puma, Steve Madden, and Wolverine World Wide are among companies that stated they would consider moving production out of China. Many companies had begun this process before the trade tensions mounted, but they cite the recent developments as a tipping point.
McKinsey’s 2017 survey of 63 international chief procurement officers suggested that China’s share of apparel exports is likely to continue falling, although trade tensions are just one of several factors driving this downward trend. Some 62 percent of respondents said they expected China’s share of their companies’ sourcing to decrease between now and 2025.
Trade data shows that these plans are now becoming reality: a marked and ongoing shift is under way in the apparel industry’s sourcing markets, with new emerging markets increasing their share compared with China. Still, while China might have passed its manufacturing zenith in apparel, it will likely remain an indispensable sourcing market for some time to come.
While concern over trade tensions is rising, there are also positive dynamics, with new agreements being put in place and new trade routes being developed. The EU has recently entered into new agreements including clothing and apparel with Canada, Mexico, Japan, Singapore, Vietnam, and several countries from Eastern Europe. In September 2018, Canada agreed to join the United States and Mexico in a trade deal that will replace the North American Free Trade Agreement.
In addition, South–South trade is on the rise, amid expectations it will increase from around 25 percent of global trade at present to around 30 percent in 2030. Already, significant new relationships are emerging. China’s expansive One Belt, One Road initiative, which involves large investments in the development of trade routes in the region, has the potential to play a large role in this development.
Finally, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and Regional Comprehensive Economic Partnership (RCEP) will enable more free trade between Asia and South America and within Asia. RCEP members export around $405 billion of textiles a year (more than half of the global total) and import around $115 billion, so the agreements will have a significant economic impact.
Overall, we expect trade-related forces will drive two key dynamics in 2019. Escalating trade tensions will see international brands rethink their sourcing strategies, perhaps to the benefit of countries involved in newly negotiated trade agreements. A further increase in South–South trade, especially between emerging countries in the Asia–Pacific region, is likely. Fast fashion, which depends on short lead times, will need to find new strategies to maintain delivery speed and production quality, for example through nearshoring or even onshoring. Still, tough commercial decisions will be required in the face of tariffs in key consumer markets. Luxury players, especially those that derive most of their income from China or the United States, may be required to choose between raising prices or managing squeezed margins.
For more on all ten trends that will define the fashion agenda in 2019, see The State of Fashion 2019: A year of awakening.