Why threatening tariffs is better than implementing

If you take away one idea from this, it’s that the threat of tariffs are a bigger attractor of on-shoring then actual tariffs. The problem with real tariffs is that they create a butts on fire urgency to save margin that leads to the easiest short term solution which is never setup a new factory in the US.

The threat of tariffs and the threatened increase in duties on goods coming from outside the country, in particular China, has the effect of forcing supply chain analysts and VP’s to explore alternatives. While that duty cost can be used to leverage manufacturers against each other for more price competition there is not that much room left. The manufacturers are usually sporting a 10-20% margin in apparel. They just don’t have a lot to give up and stay in business. However, if they don’t carve it back somewhere, that duty becomes an immediate hit on company margins & profit (usually american) and not just the goods that sell. Every product that comes in is hit whether it sells or not. In deflationary products like apparel, where 30% is unsold and excess clothing is burnt to maintain scarcity, and in footwear, where 40% of your product is misforcasted because you had to do it 18 months earlier, tariffs are killers. It’s no secret that H&M had a $4B inventory problem in 2017. That inventory is unsold but tariffed. That duty burden accelerates the need to get the inventory off your books which will only accelerate the burning.

However, when tariffs are still just a threat, this gives companies time to investigate, plan, and strategize what plays are available to them. The problem with moving manufacturing back to the US or any highly developed country is that you can’t compete on cost with the global supply chain, so you can’t use the same business model. This means you are asking a large enterprise to change strategy. That is always slow.

When you impose the tariffs and costs jump so rapidly people go into emergency mode, scrambling to implement the fastest, least risky strategy to reduce cost. In manufacturing that is never America. The end result is that a new factory goes up in Vietnam, Kenya or Indonesia or in the case of Adidas, new technology doesn't have time to mature and they reallocate US based capacity. That factory and staffing needs time to pay off and in the process will delay future decisions in evaluating a local for local manufacturing strategy.

Without time to evaluate new business models for American Apparel Manufacturing, you can’t reshore footwear and apparel even if automation lowers cost to be on par with our global supply bases. There is still too much risk.