In breaking news last week, the United States and China released details of a “phase one trade deal” according to the Outdoor Industry Association (OIA) that will cancel upcoming punitive tariffs on outdoor apparel, footwear and equipment and, for the first time, roll back existing tariffs on some of those products.
“The cancellation of some tariffs and reduction of others for products like outdoor apparel, footwear and equipment is welcome holiday season news to the outdoor industry and consumers, but more needs to be done—and done soon—to provide a stable economic environment so our outdoor businesses can innovate and plan ahead,” said Patricia Rojas-Ungar, vice president of government affairs for OIA. “Outdoor companies large and small have already paid $2.6 billion more in tariffs than last year on affected products and are doing everything they can to absorb these costs and avoid price increases.”
The biggest headache outdoor brands face when trying to figure out how to come to terms with the reality of the “Tariff War” between China and the United States is that it’s impossible to know what the Trump Administration will do next. Things seesaw back and forth so fast that it’s hard to know what tariffs and policies will become reality. Take last year’s threat that on October 1, tariffs on certain goods with a certificate of origin from China would jump to an astronomical 30%. That date then moved to October 15. Then on October 12, the President announced the increase would be halted. One thing is certain: Outdoor manufacturers who need to write orders sometimes a year out still have to prepare for the worst, despite the positive new developments. And everyone down the line, from reps to retailers to consumers, will pay the price—everyone except maybe China.
It’s important to note when discussing global supply chains and distribution that the war only affects goods made in China and imported into the U.S. Other manufacturing hubs such as Vietnam or Eastern Europe, remain unchanged, as do imports to Canada, Mexico, and other nations that rely on Chinese-made goods—but that’s a big chunk of the industry. The Trump Administration has broken goods imported from China into four lists so far (with the fourth list broken up into two groups) and began raising duties on them in phases. On May 10, 2019, a tariff increase went into effect on $200 billion in Chinese imports on “List 3,” raising the tariffs from 10% to 25%. That list includes items ranging from skis to backpacks. On May 13, the administration released the new proposed “List 4” of 25% tariffs on over $300 billion of Chinese-manufactured goods that include performance outerwear, gloves, mittens, sweaters, safety headgear, footwear, scarves/shawls, skis and bindings, ski boots, snowshoes, ice skates, toboggans, and sleds. Among the 6,000 products on the list, snow-sports-specific products also include ski gloves, knit hats, and sports bags. List 4a went up 15% effective September 1, 2019.
Last week’s deal is supposed to cancel the 15% punitive tariff on List 4B products that was scheduled to come into effect on December 15, 2019, and reduce the 15% tariff on List 4A products to 7.5 percent.
The 25% punitive tariff on $250 billion worth of products—including List 3 items such as backpacks, sports bags, camp chairs, bikes and leather ski gloves—will remain in place and be the subject of phase two negotiations, OIA said, and the fact remains that outdoor companies have already paid that $2.6 billion more in tariffs in 2019 due to the U.S.-China trade war.
Yet another uncertainty for brands is that policy is not only constantly moving in terms of what’s going to happen when, but also when it comes to what items are going to be on the lists. For example ski and snowboard helmets were initially going to be on List 4, then were to be exempt as safety items on List 3, and then ended up back on List 4.
As reported by OIA in September 2019, outdoor brands paid $1.8 billion more in tariffs from September 2018 to July 2019 than the same period a year ago. And OIA says that since the start of the trade war with China in the spring of 2018, outdoor equipment makers have paid a total of $2.8 billion in tariffs. This includes products such as camp chairs, bikes, kayaks, ski gloves, and backpacks, all laid out in very detailed, specific “harmonization” codes (HTS codes, which dictate the rate of duty on a product) for products with varying start dates, which are subject to tariff increases based on country of origin (China) and when they shipped (the start dates have also been a moving target and under contention between importers and the Commerce department collecting the fees).
It’s not just brands that manufacture in China that are affected, either. Many U.S. manufacturers are feeling the crunch, too. Almost all plastic hardware, zippers, sliders, nylon webbing/tape, and synthetic fabrics are imported from China. “The tariffs are definitely increasing our costs of building products in the U.S.,” says Davidson Lewis of Green Guru Gear in Boulder, Colorado. “Pretty much all plastic hardware is made in China these days, along with a good percentage of fabrics. These raw materials increases have gone up 23% since October, so all of a sudden we have to take that into account. The good thing is Green Guru’s business is built on utilizing upcycled and salvaged materials found in the U.S., keeping our need for imported materials some of the lowest in the industry.”
So what can manufacturers do? The No. 1 mitigation strategy being employed by brands is to shift production away from China—but that can take years. In an attempt to limit exposure, brands are sacrificing decades of relationships with factories in China and moving as quickly as possible to other countries—even though some alternatives, such as Vietnamese footwear factories, are already at capacity. Brands with a diversified supply chain are able to spread tariff risk more nimbly than others, and that means less chance of cost increases being passed on to retailers and consumers. But most brands say bringing production back to the U.S. simply isn’t a reality.
Halting the increase to 30% on List 3 in October seemed like a positive development and the halt on List 4 seems even better—but uncertainty still rules. “We’ve been close to a deal before. I’m advising members this could go on for a while,” said Rich Harper, OIA’s manager of international trade, before the December agreement. “The concern is these punitive tariffs become the new normal,” says Harper, adding that even in the event of an impeachment or that Trump is not reelected, the tariffs may just remain in place. “Right now we’re trying to highlight the impact on outdoor companies and the potential impact on consumers.”
The Tariff War stems from worries about the theft of U.S. intellectual property (IP). “This whole thing with China began when the U.S. trade representative launched an investigation into China’s IP practices under a provision of U.S. trade law known as Section 301,” says OIA’s Harper. “Section 301 allows the President to impose tariffs and other measures to protect U.S. IP from foreign government practices. The investigation was launched in August of 2017, and a report was issued in March 2018 concluding that China’s policies were undermining U.S. IP and recommending that the president impose tariffs.”
The danger is very real: The Tariff War could incite a full-blown recession. OIA is pressing Washington to understand that outdoor brands are unable to innovate and unable to hire when burdened with these costs—especially when prices are set a year in advance. This alone sets off a turbulence in the industry between brands, reps, and retailers with regard to pricing the impacts of which consumers will only begin to see next year, despite the Trump Administration’s claims that China is somehow paying for these tariffs. “We honor a sales order as a contract,” says Dino Dardano, president of the U.S. subsidiary of Hestra gloves. “We’ve already internalized more than $250,000 in tariff expense, an impact directly on the bottom line. Hestra is actually one of the lucky ones. It’s been able to shift nearly 70% of production from its two Chinese factories into Hungary and Vietnam.”
Like other suppliers, Hestra implemented a pricing-modification clause into its purchase orders, hoping to spread some increases over onto reps’ and dealers’ plates next season. “It’s detrimental to our company, with these expenses that you can’t budget for,” says Dardano. One way the company won’t spread costs, he says, is by increasing prices to dealers in the 25 other countries Hestra does business in. “We’re not going to penalize them based on this situation,” Dardano says. “It’s a sad state for all of us, for the U.S. There’s no positive outcome. All the other countries are working toward free trade agreements, and we’re doing the opposite, and forcing this on the U.S. consumer is unfortunate for all of us.”
“Fortunately it’s having relatively little impact on an international basis. The U.S. is only one part of the market,” says Drew Saunders, U.S. country manager for Salewa, part of Oberalp, which is based in Italy. Saunders says that almost all of the apparel he imports from China is on the third or fourth tariff list, but again, it’s a brand that only makes about half of its goods in China. For those who are 100% in China, it stings more.
“The big impact is that your costs go up instantly,” Saunders says of the short lead times and on-and-off nature of this war. “In some cases we have to absorb, which hurts our profitability, and in other cases we have increased our prices to retailers. But there’s still a lot of uncertainty for Fall ’20. We’ve had an interesting experience; fortunately we don’t have the same exposure as some people.”
In the end, manufacturers have been forced to make tough choices now, no matter what news, good or bad, shakes out in Washington.
A version of this story—that went to print before the decision to halt the List 4b tariff increase—will appear in the upcoming Winter 2020 issue of Outdoor Retailer Magazine. Pick it up at the Outdoor + Snow Show in Denver, January 29-31, 2020.