Updated 5:28 P.M. E.T. Feb. 3
President Donald Trump is doing the tariff two-step with Mexico and Canada — imposing 25 percent duties on both countries only to quickly reach deals pausing the new tariffs for 30 days.
But new 10 percent tariffs on China, which come on top of existing duties, seem to have stuck and are set to go into effect on Tuesday.
The latest round of tariffs are bigger than those imposed during Trump’s first term and are intended to pressure the countries to stop illegal migration and the flow of fentanyl into the U.S.
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The tariffs on Mexican imports were delayed by 30 days after Mexican President Claudia Sheinbaum agreed on Monday to send 10,000 troops to her border to prevent drug trafficking.
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Late Monday, Trump agreed to also pause implementation of the Canadian tariffs for 30 days given the country’s new efforts to curtail the flow of fentanyl into the U.S. Canadian Prime Minister Justin Trudeau had also slapped a 25 percent retaliatory duty on American-made goods ranging from apparel to footwear, home and furniture. Those duties are presumed to be on hold as well.
For fashion brands, Jefferies equity analyst Ashley Helgans said firms under her coverage have “limited sourcing exposure to China” at 10 percent or less. The analyst said Tapestry Inc. and Ralph Lauren Corp. have the ability to continue to raise prices to mitigate any cost impacts.
“Companies also have become increasingly agile since the pandemic in diversifying sourcing,” Helgans said.
She concluded that department stores such as Kohl’s Corp. and Macy’s Inc. will see more risk to their top-and-bottom lines. That’s because they are value-focused and have consumers who are more susceptible to inflationary pressures from increased tariffs on imports. Helgan noted that Kohl’s in 2019 said it had “slightly more than 20 percent China sourcing exposure.”
For other fashion brands, the analyst said Capri Holdings Ltd. has less than 5 percent China exposure, while PVH Corp. noted in 2019 its exposure was between 10 percent to 12 percent. For footwear, VF Corp. said recently its China exposure was minimal, with the analyst noting that in 2019 the company had predicted U.S. imports from China would be 4 percent in 2020.
TD Cowan analyst John Kernan also said that the headline 10 percent tariff increase on Chinese imports of apparel and footwear, from a sales exposure point of view, “represents little [earnings per share] risk in our coverage, though China retaliation is a rising risk.” Brands that he says have “significant” China sourcing exposure include Skechers at 45 percent, Amer Sports at 33 percent, Puma at 32 percent, and Nike at 18 percent.
Footwear firms in particular are expected to be hard hit because China is one of the top three suppliers to the U.S. Footwear Distributors and Retailers of America CEO Matt Priest has said that the tariffs are inflationary for consumers because the majority of footwear imported from China is tagged as “value product” and sold at mass retailers, including Target and Walmart. Higher prices at mass would hit working families.
The order Trump signed on Saturday also contains language specifying that the de minimis trade exemption — which allows for shipments worth less than $800 to enter the U.S. duty-free — is now closed for products subject to the tariffs. Kernan said the revocation of duty-free de minimis treatment will hurt Chinese firms Temu and Shein, but that “could help the off-price retailers in the long run given the heavy cross shopping.”
How retailers will react to the increased costs and what proportion will be allocated as a pass-along to consumers remains to be seen. The tariffs may not be long-lived if Trump gets the concessions that he wants. For example, the one-month delay on when tariffs begin for Mexican imports could be rescinded as government officials negotiate a resolution. Meanwhile, Tractor Supply CEO Hal Lawton said he has a playbook for tariffs from 2018. That playbook called for Tractor Supply, its manufacturers and its customers each absorbing about one-third of the cost of the tariff increase.
A report from Coresight Research indicated that retailers such as Lowe’s, TJX Cos., Walmart and Wayfair have said that they anticipate price increases should the tariffs be implemented. In addition, retailers or brands that rely less on imports, such as Williams-Sonoma, could gain an advantage if tariffs are imposed as their products “would be competitively priced within the U.S. market.” In contrast, retailers in the electronics and toy categories are expected to lose market share to other competitive retailers since those sectors rely heavily on imports.
Separate from the impacts on apparel and footwear, tariffs are expected to increase costs in other sectors as well. Logistics is one area, and so are paper products and packaging, which are in high demand in the e-commerce sector. While that could force companies to look at options for alternate sourcing, the ability of some suppliers to absorb new demand could be an issue.