Fashion Braces for Impact as Trump Tariffs Returns

0:07Hello, and welcome to The Debrief from the Business of Fashion, where each week we delve into our most popular BOF professional stories with the correspondents who created them. I'm executive editor Brian Baskin. And I'm senior correspondent Sheena Butler-Young. For the last few weeks, the focus in Washington has been on passing the big, beautiful bill and the conflict with Iran. But we're definitely back to all tariffs all the time now. President Donald Trump has threatened punishing new duties on the EU, South Korea, and other trade partners, and has set a deadline of August 1st for reciprocal tariffs to kick in on many other countries.

0:44For an industry built on long lead times in global supply chains, unpredictability at this level isn't just frustrating, it's costly. Fashion companies are already reporting losses and rewriting expectations for the rest of the year. And as brands look to diversify production away from Asia, the costs and complexities of those shifts are starting to add up. Things are definitely getting interesting out there, And to check in on the state of play, we've brought in our in-house tariff experts, Joan Kennedy and Mark Bain. Joan and Mark, welcome back to the Debrief podcast. Hi, Brian. Thanks for having me.

1:17Hey, always nice to be back. So, Mark, can you just catch us up on the latest in terms of the state of play of tariffs? It sort of feels like I heard someone use this analogy, like a spinning wheel, like you go on a game show and you spin the wheel. And this week the tariff is against is on this country and is at this percent. Can you sort of fill us in? Maybe that's not the best analogy, but I'd love to hear what you're seeing out there. I mean, that's not the worst analogy either. That is kind of how it feels. So recently, Trump threatened about two dozen trading partners with new tariffs that are now set to kick in on August 1st of varying degrees.

1:54We still have this 10 % universal tariff. We have seen some additional tariffs announced relevant to the fashion industry is the 20 % tariff on goods from Vietnam, or that actually goes to 40 % if those goods originated in another country. So that's clearly directed at a practice called trans-shipping of goods being routed through Vietnam from China. We have a 25 % tariff on Japan and South Korea. There's a new 50 % tariff on Brazil. And we've just had this 30 % tariff threatened on the EU and Mexico. Whether all of this will kick in on August 1st, how these things will shift, like we are all waiting to see.

2:36We know a lot of things get said, and it doesn't mean that that's what ends up happening. What that means is the total effective tariff rate in the U.S., it was about 2.5 % at the start of the year, and now it's up to about 16.6%. This is according to the budget lab at Yale University. And now if all the tariffs that Trump is threatening go into effect on August 1st, that tariff rate would go up to 20.6%, which would actually mark the highest rate since 1910. And that plays into the story I assigned you this morning, actually, Joan, which is we're starting to see these tariffs playing out in the price of clothing in the U.S., right?

3:14We are. Yeah. Today, we got the first bit of evidence that tariffs are actually having an impact on prices. The Bureau of Labor Statistics released its latest version of the Consumer Price Index, which is a monthly measure of the average price increases in the U.S., and it showed that inflation picked up in June, rising 2.7 % year over year. And that's compared to a 2.4 % overall rise in May. And apparel prices in particular were up 0.4%, which is interesting because it really bucked a trend of declines in price hikes that had begun around 2022 following massive post-pandemic price hikes. And then more recently, as we saw, a fall in prices earlier this year.

4:00I think that's worth emphasizing. Even in April and May, when tariffs were first starting to kick in, apparel prices actually fell. So why are they suddenly now actually starting to rise? They're suddenly now starting to rise because we're seeing inventory start to trickle onto shelves that is affected by these new duties. You know, when this news first hit of tariffs in April and then the pause in May, a lot of brands and retailers started pulling forward merchandise to try to delay the pain. And they may have announced price hikes, but they hadn't yet gone into play. So, yeah, like a lot of the tariff pain hadn't been felt yet.

4:41and we're kind of seeing that trickle in now. Mark, can you talk about why, if there is a why, Trump is escalating these trade tensions again? And obviously brands are reacting differently than they did on Liberation Day in April, which we can get into a little bit later, but is there a sense of why? Like why now and why again? I think because, you know, he announced those April 2nd tariffs, then there was the 90-day pause and then that expired and then he was pushing it back further. So it's all still part of that same, I don't know, onslaught of tariffs. You know, these pauses expire. He creates an extension.

5:20But at some point, you have to say that something has changed, something is happening. And we still don't have real clarity on what's happened. So why now? Because we still don't actually have an answer. And how are brands reacting this time versus in April when there was like mass hysteria across? I mean, not just fashion industry, but where we're focused is fashion. It seems like there's a quieter response now. To what extent are people just fatigued at all of the tariff whiplash or have companies formed a contingency plan they're just waiting to activate? Is that why they're quieter? I think it's kind of all of the above.

5:57I think the initial shock of the April 2nd tariffs has kind of worn off. And I think there's some expectation that the tariffs won't actually be as bad as Trump has said, that they'll strike deals and, you know, the rates will come down. But then also, like, companies have made contingency plans. We've seen companies talking about how they're shifting production. You know, everyone is reacting to this. So there's a lot less of that feeling of shock when there's a new announcement these days. We've taken to calling July 9th Liberation Day Part 2. In Liberation Day Part 1, you really saw this visceral, stunned reaction from fashion.

6:36In Liberation Day Part 2, July 9th, you just feel the exhaustion. Even the markets didn't react as strongly, which experts say is a mix of things. People getting used to this stop and go and pricing in uncertainty. And then, as Mark said, bullishness on the idea that Trump will reach agreements with trading partners. Or alternatively, the taco Trump always chickens out philosophy, which I think is just that, you know, he'll find some way to avoid actually implementing these very high tariffs that he's threatened. Speaking of trade deals, though, Mark, we've seen a couple and one in particular that came as a huge relief to fashion.

7:19Where do we stand when it comes to negotiations between major fashion producers and the U.S.? So Vietnam was one of the big ones because on April 2nd, it was hit with one of the highest potential tariff rates. If I remember right, it was 46%. And the announcement recently was that it'll be only 20%. That's also, again, like 20 % in addition to the usual duties that fashion products incur when they come into the US. So it's not nothing, but it's a lot better than it could have been. And I think that's sort of the reaction, especially like sports brands. The sportswear industry produces a lot in Vietnam.

7:59A lot of sneakers and athletic wear is made there. And so I think that's kind of been the reaction is like, well, it's not great, but it's better than it could have been. We're also keeping an eye on some other places. You know, I think Bangladesh is one of the countries that has a tariff rate set to kick in on August 1st. That is fairly high. We'll see how that progresses. I think it's 35 percent, if I remember. But then another big topic of concern, you know, Trump has now threatened these new tariffs on the EU, which is obviously a big luxury producer, a 30 percent tariff. So that would impact luxury companies.

8:39So on the supply chain diversification point, it was one of those things that was a go-to strategy for brands. When tariffs are introduced, you diversify your supply chain outside of the region that is being highly tariffed. That's not as reliable of a tactic anymore. It's sort of like whack-a-mole, like you move one place and then the tariffs go there next. So Joan, talk to us about where supply chain diversification sits in terms of a tactic that brands employ right now. It's definitely still important. But the challenge is that, yeah, as you said, it is kind of like a game of whack-a-mole. One of the countries that was expected to, after the early announcements, maybe benefit from all of this tariff confusion was Brazil.

9:27Initially, they were hit with like a way lower, I think it was like a 10 % rate. They have manufacturing prowess, particularly in shoes. But with these new threats, particularly on BRICS nations, it kind of erased that advantage. And then we've also seen more recently, as of last Friday, a new 50 % tariff threatened on Brazil. So it is really unpredictable. and it's hard to predict what's next. And that leaves brands in this state of reacting. And I think that's what's become most important is like, how can you react to this? Though that being said, even before tariffs and all of this uncertainty, it's not easy to like up and find a new manufacturer.

10:10And I mean, just beyond the logistical challenges of doing that, you also think about like the downstream impact, like all of these new sources, These add complexity to the business. It's costly to find them. And, you know, of course, still like the risk and instability and that sort of thing. One thing that I've heard companies talking about, experts advising companies, is with diversification, it's not just about finding another source for things. It's having some layer of redundancy built in, in part because you never know what's going to happen. And this is something companies have been doing since COVID.

10:47and really trying to shore up their supply chains in a way so that they are diversified, not just across different countries, but they can also turn to different factories to produce the same product if they need to, as things get really chaotic and crazy. So I think for that reason, also diversification continues to be a pretty important part of a strategy. The other tactic that we're seeing companies use is to simplify their assortment. We saw Levi's announced this week that they're going to discontinue certain less popular styles during the holiday shopping season. And this would be a way to reduce their exposure to tariffs.

11:24Explain the link there, Mark. Why does offering fewer or simpler products help shield a brand from the tariffs? So when you're looking at how companies are producing stuff, the wider an assortment you have, the more complexity you have. You might be sourcing from different places. they're essentially focusing on stuff that is more of a sure thing that helps reduce some of the complexity in the assortment, you know, in terms of like, you're not buying as many different fabrics and that kind of thing. But also, if you know that these are more sure bets, you're less likely to have to discount them later.

12:00That, you know, obviously helps with margins and that kind of thing. So as you're trying to offset the cost going up from tariffs, you can try to reduce your costs in other places too. Speaking of costs going up, Joan, you wrote a little bit about inflation or you write a lot about it actually, but how much can the consumer take on at this point? The U.S. consumer has been very resilient, like surprisingly so for the last five to 10 years. And we started to see some cracks in that in the start of this year because of the long tail of inflation coming into 2025. Should brands continue, as we've already seen, raising their prices?

12:34Will the consumer continue to buy? Like where do they come into this equation now? That is a big unknown. We have seen consumer sentiment, consumer confidence kind of drop as of late. I think it reached its lowest point in April and then made some gains in May and then dropped again in June. and people are watching really closely to see how that holds up because there are a lot of unknowns. A lot of this merchandise that's more expensive hasn't yet filtered onto the market. We don't know how that will affect demand. And so it really is just another wait and see. Brands and experts are really watching end of year sales and holiday for kind of a clue as to where demand will fall.

13:20One maybe shred of positivity is that some have said that given this most recent news, maybe it'll help with the blow for holiday merchandise as extra duties won't apply until a little bit later. But it really is a wait and see. It's a tough equation. The last study I saw said that consumers expect brands to pick up most of those duties and to pass off no more than 10%. So as more and more announcements come and those percentages get higher, brands are going to have to do a lot of calculation to figure out how much they can, in fact, pass off. Although honestly, I mean, how does the average consumer know what percent a brand is picking up of the tariff charges?

13:59They say a lot of things in these surveys, Brian. All we can do is report on it. Although one reason that brands had started kind of lowering prices is that they were seeing shoppers maybe start to pull back. They had raised their prices significantly a lot post-pandemic. So there are kind of some signs there to watch. Yeah, it's definitely about managing perceptions. It's why you see these brands putting out Instagram posts about tariffs and why they're raising prices. I think it helps soften the blow and answer the concerns of all the consumers and surveys saying they don't want to be picking up the tab for Trump's tariffs.

14:36Well, one thing that we've seen brands do is or say that they're going to do is get smart about where exactly they make these price hikes. Perhaps, you know, upping the price on a more fashion item, but keeping the prices on these staples, these basics that people are like returning to buy over and over again, stable so that consumers don't really see as much fluctuation or like kind of is in places that they wouldn't notice it. That's a good point. I think I've seen that. I've heard that from brands like Revolve. And in my recent case study that talked about they're able to raise the price if it's special, like if it's an occasion wear or if it's something that people are willing to invest in, like to wear to a wedding or to a festival or to prom, they have a little more wiggle room there versus the foundational pieces.

15:22And companies aren't just asking consumers to absorb the price hikes either. They're asking their manufacturers to take on some of the costs, the retail partners, like the CEO of JD Sports in an interview with the Times UK said that Nike's strategy was basically spread the costs across like a third to the consumer, a third to the manufacturer, and a third to the rest of the supply chain, including like JD Sports and retail partners. All right. And just to wrap things up here, what is a signal you all are looking for, whether it's an economic indicator or something that a brand does that will point the way for you about where this all might be headed?

15:58I definitely will be keeping an eye on all things consumer sentiment. I think that's a really important piece here. Sometimes it's hard to tell the connection between consumer sentiment and how consumers are shopping, but it feels like on this issue, they're really connected just because we don't know what demand will look like. And there are a lot of concerns around demand, both as this geopolitical situation, economic situation evolves and just the mood of shoppers, but also as those price hikes really start to trickle in. How much are shoppers noticing it? What sort of impact is it having on their spending?

16:38And then how are brands and retailers reacting to that? Will there be empty shelves or will we see shelves completely full and then a lot of discounting afterwards? words. One of the things I'll be keeping an eye out for is, I mean, pretty obviously, if we actually get any trade agreements and what they end up looking like for a few reasons, you know, one, because obviously, we'll have a sense of how prices are going to go up. But also, like the uncertainty of not having these agreements of having this constant, like pushing things off, like puts everyone in a state of limbo. And while that's going on, it's uncertain what's going to happen next.

17:18And so at least if we know they're going to be really bad, we have some idea of what to expect. And one of the obvious places we'll be looking out for is what ultimately comes to pass with China and whether that agreement is something substantial that actually reduces tariffs, or if Trump does actually intend to go ahead and put some really extraordinarily high tariff on Chinese goods that would essentially just halt U.S. trade. I don't see that happening. That would be a lot. But so, yeah, those are things I'll be watching. Yeah, I think it's all very, very scary. And uncertainty is the name of the game.

17:56What I think is interesting, and maybe it's not the outright indicator that Brian asked for, but is how companies respond. Like one of my favorite things that one of our analysts we speak to, Simeon Siegel, always says is like the best companies are made in the famine, not the feast. So like how brands get creative around pricing strategies and product innovation right now, I think is going to be important, not for the short term, but the long term in terms of where they're positioned five years from now. I think that's the most interesting thing to me right now, how brands respond and pivot and get innovative.

18:27I think all those are great. I think for my indicator, I will piggyback off what Joan said and pick how the back-to-school shopping season plays out because Amazon typically kicks that off with Prime Day. And it seemed like that was maybe a little shaky last week. And that might be an Amazon thing. It might be a sign consumers really are starting to pull back. And I'm very curious what happens in the next few weeks as we get closer to the new school year. Mark, Joan, thank you so much for joining us today. Thanks for having me. Thanks, Brian and Sheena. Please be sure to check out our coverage of the tariff changes and how they're affecting the industry at businessoffashion.com.

19:04These and other stories are available to BOF professional subscribers only, and you can find the links in the episode notes. You've been listening to The Debrief, produced and edited by Olivia Davies and Eric Bria. I'm Sheena Butler-Young. And I'm Brian Baskin. We'll be back next week with a new episode. Thanks so much for joining us and be sure to follow us wherever you get your podcasts.