Law360 (September 18, 2020, 4:58 PM EDT) --
Protectionist trade policies implemented by the Trump administration have forced fashion manufacturers, merchandisers and retailers to grapple with increased prices due to tariffs, delayed supply, and decreased manufacturing availability.
Once a global pandemic was added to the mix, the resulting landscape forced the fashion industry not only to examine its manufacturing and supply chain but also to adapt quickly or face devastating impact to their continued ability to survive. While some in the fashion industry have been able to thrive due to their adaptability, others have not fared nearly as well.
An examination of recent history shaping the trade war gives insight into the practices that are likely to continue shaping trade policy and affect the fashion industry in the coming years.
An examination of how certain businesses in the fashion industry have responded to the trade war gives insight into avenues to overcome recent obstacles that have arisen in such rapid succession.
And, finally, like any good muse in the fashion world, successful business measures taken by the fashion industry to adapt to the recent trade challenges can provide inspiration for other segments of the economy.
How did we get here?
2018 marked the public implementation of President Donald Trump's protectionist trade policy and the start of what would become watershed changes to the trade landscape.
In January 2018, Trump issued two proclamations imposing tariff rate quotas, and increased duties on imports of solar cells and panels, and washing machines and parts.
Although these proclamations covered imports from all countries, except certain developing countries and Canada, their impact was not necessarily widespread or newsworthy because of the limited scope of goods affected. However, deeming that initial foray into trade policy management a success, the administration soon built on those initial efforts, expanding the scope and effect of its protectionist trade policies.
Accordingly, in March 2018, Trump issued two additional proclamations, imposing increased duties on imports of aluminum and steel. These proclamations added duties equivalent to 25% of the value of steel and 10% of the value of aluminum. While there were more than 13,000 avenues of exclusion built into the assessment, the imposition of these duties undeniably started to garner significant attention from U.S. businesses.
Building on this protectionist momentum, the Trump administration began issuing the so-called 301 tariffs in the summer of 2018, and the entire U.S. economy was forced to sit up, take notice and confront a new chapter in U.S. trade policy.
By way of brief background, what are commonly called the 301 tariffs take root in Sections 301 through 310 of the Trade Act of 1974. These sections of the Trade Act are one of the principal statutory means by which the U.S. enforces rights under trade agreements and addresses unfair foreign barriers to U.S. exports.
Section 301 procedures apply to foreign acts, policies and practices that the U.S. trade representative determines either: (1) violate or are inconsistent with a trade agreement; or (2) are unjustifiable and burden or restrict U.S. commerce. Once the U.S. trade representative begins a Section 301 investigation, it seeks a negotiated settlement with the foreign country concerned, either through compensation or elimination of a particular barrier or practice.
If a settlement is not obtained, as was the case in regard to China's alleged unfair practices, the U.S. trade representative determines whether to retaliate — usually in the form of increased tariffs on selected imports — at a level equivalent to the estimated economic losses incurred by U.S. firms.
Because the U.S. trade representative could not reach a settlement with China in regard to China's policies on intellectual property, technology and innovation, 301 tariffs were assessed beginning in July 2018.
While the first lists of 301 tariffs assessed 25% duties on certain Chinese goods, those lists also allowed for the filing of exemption requests under certain conditions. Later lists, assessed toward the end of 2018 and into 2019, not only expanded the scope of Chinese goods subject to 25% duties, but also eliminated the opportunity to request exclusions.
By the end of September 2019, the four lists of 301 tariffs on Chinese goods collectively encompassed essentially all goods manufactured in China, forcing industries across all sectors of the economy to face a 25% increase in costs.
The significant issue of how to account for these additional tariffs on Chinese goods — namely, whether to pass those increases along to consumers, renegotiate supply contracts to apportion the increase between manufacturer and purchaser, or simply allow for a 25% decrease in profits — faced U.S. businesses at the same time the world began to suffer the effects of the COVID-19 pandemic.
This confluence of challenges was, and is, the immediate impetus for businesses in the fashion industry to analyze and modify their business and supply chain models in order to attempt survival.
How is the fashion industry responding?
The fashion industry, generally slow to address problems that have plagued the industry for decades, is now forced by an actual plague to make a fundamental shift in its business model.
One way fashion brands and retailers are responding to this crisis is by diversifying their supply chain — from the sourcing of raw materials to the manufacturing of the finished product.
By sourcing from other markets, such as those in Southeast Asia, and thus decreasing their reliance on China, fashion brands are in a much better position to balance risk of disruption and costs caused by regulatory changes or, as we have seen, the compounding effect of a trade war with China and a global pandemic.
Another industry response has been to move the supply chain closer to home — or at least as much of the supply chain as possible. This allows for speed and flexibility in the design process and getting to market by eliminating long lead times caused by overseas shipping.
Of course, the benefits of sourcing and manufacturing solely within the U.S., and avoiding 301 tariffs on Chinese goods, have to be balanced against the increase in labor costs, manufacturing costs and potential capital expenditures to allow businesses to scale — costs that, ultimately, are passed along to the consumer.
Several brands, however, have found this strategy to be successful, as they are able to advertise their brand by using the highly coveted "Made in the USA" designation — a strong attraction for consumers.
How can other industries take inspiration from fashion's example?
Other U.S. industries can certainly use the pattern set by the fashion industry (pun intended) to map a successful response to obstacles posed by the U.S. -China trade war. One of the most immediate ways businesses can do this is through a careful analysis of their supply chain factors.
Classification and Valuation
Drilling down to core supply chain-import issues, businesses can and should examine the classification and the valuation of their imported goods, whether imported from China or other countries.
These two issues were long ignored prior to the imposition of the 301 tariffs and can be avenues for significant cost savings. If imports are not properly classified or are valued improperly, excess import duties are paid. Potential profits are essentially lost from the moment the goods hit U.S. soil.
Particularly if history repeats and U.S. trade policies continue to assert a protectionist posture — potentially expanding into countries like Taiwan and India which have received an influx of manufacturing that was exiting China — finding all available exemptions to duties through proper classification and valuation of goods is and will continue to be essential.
Diversification of Manufacturing Sources
The businesses that suffered some of the biggest losses with the imposition of the 301 tariffs were those that had no diversity in their manufacturing platform and were focused solely on Chinese-manufactured goods.
The history of recent trade policy being what it is, it is very likely that the U.S. will continue at least some threads of imposition and enforcement of tariffs. The ability of businesses to pivot, like those in the fashion industry, making adjustments to manufacturing supply from a variety of sources across the globe is likely key to weathering future trade storms.
Prior to the 25% 301 tariffs and the coronavirus pandemic, few business contracts included specific mechanisms to address meaningfully the imposition of significant tariffs or global outbreaks, either one of which can essentially eliminate import options.
Successful businesses, if they haven't already done so, must review existing supply, import and distribution contracts carefully, viewing through the lens of recent events to ensure that apportionment or absorption of tariffs, careful definitions of force majeure circumstances, and meaningful cover options are included, or risk being left with empty shelves and empty coffers.
The unfortunate combination of a trade war with China and a global pandemic is a Darwinian moment for the fashion industry. Reliance upon China as a primary or sole source throughout the entire fashion supply chain has proven to be unsustainable.
Brands that diversified their supply chains, carefully examined their classifications of imported goods and analyzed their supply chain contracts — thus allowing them to quickly pivot and adapt to market disruptions — increased their chances of survival and will likely emerge as the fittest among their less-agile competitors.
Danielle N. Garno is a member and co-chair of the retail industry group at Cozen O'Connor.
Heather L. Marx is a member at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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