Unpredictable Trade Policy: Tariffs Tariffs Tariffs
In the first Trump Administration, the fashion, beauty, and retail industries got used to monitoring Twitter for significant trade policy announcements and tariff increases, which were generally dropped on Friday evenings. Judging from President-elect Trump’s recent postings on social media platform Truth Social regarding tariff increases, we should prepare for much the same in the upcoming term.
During his recent campaign for a second term, President-elect Trump made tariffs a pillar of his economic plan. He has threatened tariff increases of up to 60-100% on imported goods from China; and more recently 10% tariffs above any other additional tariffs. The effects of these increases may be further compounded if the revocation of China’s Permanent Normal Trade Relations Status moves forward, which would also further increase the standard tariff rates applicable to China origin products to 35%-100%. But the proposed tariff increases are not limited to China- Trump’s proposed trade policy also involves a universal tariff applied to all other countries of 10-20%. Significantly, despite the United States Mexico Canada Agreement which is supposed to allow for duty free imports between the member countries, Trump recently announced via Truth Social his plan to impose 25% tariffs on all goods from Canada and Mexico. The tariff increases would take effect on January 20, 2025, until each country takes action to stem the tide of drugs and migrants entering the United States. He has also previously threatened Mexico with lockstep tariff increases up to 100% for the same reason.
It remains unclear which increases the Trump Administration will impose and how they will be implemented (e.g., if they will be in addition to standard tariffs) or when the new tariffs will go into effect (some of which might be as early as January 20, 2025).
Some US Congressional leaders have raised the prospect of using revenue from the proposed tariffs to offset the cost of renewing the 2017 tax package passed by President-elect Trump during his first administration. The effort to reform the nation’s tax system is expected to begin in March 2025. However, experts in Washington, DC, question whether tariff revenue can be used to pay for tax expenditures due to the uneven flow of tariff revenue over time. Despite the uncertainty about how new tariffs will be applied, readers should expect President-elect Trump to announce some plans for tariff increases during the first 100 days of his second administration.
Another uncertainty surrounding Trump’s proposed tariffs is his unilateral authority to implement such drastic tariff increases. Congressional approval may be required; however, President-elect Trump may rely on existing executive powers at his disposal that would allow him to move forward with the proposed tariffs, at least temporarily.
Although the timing and authority remain uncertain, it’s clear that the proposed tariffs will have an immediate and direct impact on large and small fashion, beauty, and retail brands that import goods from other countries.
Who Would Be Most Impacted? Everyone!
More than 80% of clothing items sold in the United States are imported according to reports derived from the US Bureau of Economic Analysis data. Tariff increases would have a significant impact on the costs of fashion and retail products sold in the United States because most companies can’t absorb the full impact of additional tariffs. Companies will likely be forced to share the tariff costs with consumers for items such as apparel, cosmetics, toys, furniture, household appliances, footwear, and travel goods. The National Retail Federation (NRF) report projected that Trump’s tariff proposals could increase apparel prices by 12.5%, footwear prices by 18.1%, and toys could see a 55% increase. The NRF reports that the proposed tariffs and resulting price increases on these six product categories would reduce American consumers’ spending power by $46 billion to $78 billion every year the tariffs are in effect. Not only will retailers face higher prices, they will also be impacted by a decrease in sales volumes, particularly for these discretionary products.
What Companies Can Do to Mitigate Tariff Impact
Companies will need a multifaceted approach to mitigating the impact of significant tariff increases and be prepared to pivot quickly. We are advising companies to reassess their supply chains, make strategic global sourcing and manufacturing decisions, and review contractual obligations to protect from tariff risks. Some brands are already diversifying their supply chains by developing manufacturing relationships and sourcing capabilities in alternative countries like Cambodia, Vietnam, Mexico, Brazil, and with Free Trade Agreement partners.
While diversification is key, these measures may only mitigate and likely will not entirely avoid tariff increases. We are counseling companies through several tariff reduction strategies such as first sale, tariff engineering, origin reviews, and others. A flexible supply chain may allow companies to adapt and respond to fast changes in market conditions and tariff rates.
We are closely monitoring the developments in the incoming administration’s trade and tariff policy. ArentFox Schiff has extensive experience in advising and representing companies in the fashion, beauty, and retail industries and in matters involving customs and mitigating the effects of tariff increases. Please contact the authors with any questions.
