Tariffs Are Down, But Uncertainty Is Back

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 senior correspondent Sheena Butler-Young. And I'm executive editor Brian Baskin. Nearly a year after President Donald Trump's Liberation Day tariffs sent shockwaves through the fashion industry, the Supreme Court has struck them down, ruling that Trump, in fact, did not have the authority to impose such sweeping levies. For an industry that imports billions of dollars worth of clothing, shoes, and accessories into the U.S.

0:41each year, the initial reaction was relief, but that window narrowed almost as quickly as it opened. With new tariffs introduced at 10 % and then pushed higher, brands are once again in a holding pattern, reluctant to bank any real upside as the risk of more uncertainty looms. Joining us today are BOF reporters Mark Bain and Kathleen Chen to help make sense of it all. Mark, Kat, welcome to The Debrief. Hey. Hey, guys. Thanks for having us. So how would both of you characterize the mood in the industry this week? I sort of described a whiplash. Does it feel like that right now? Whiplash, yes. But today, as of today, and I've been doing some reporting about, you know, how their industry is going to respond.

1:24It seems like already the mood soured from initial happiness to, oh, my God, what's going on? It's like we're back to this purgatory of uncertainty, which was the vibe for most of last year when brands and retailers had no idea where tariffs were going to land. And it's like we're back there once again. Mark, would you say the same thing? My sense was that I thought people would maybe be happier a little bit longer. It's not that often that something that's catastrophic or seemingly catastrophic gets a blow like it got on last week. are retailers maybe a little bit happier than they were last year?

2:04Yeah. I mean, I think they are. I think, you know, if you look at the stock market, investors are feeling a little bit more optimistic, but it's not like incredibly excited. You might want to update your priors there, Mark. I was looking at the market today. So that was true immediately after the ruling. And then I was looking at the market just before this episode and all of the stocks that went up 4 % last week are down 10 % this week after, we should say, Trump immediately imposed that 10 % tariff and then jacked it up to 15 % over the weekend. Well, let's say this. There is some cause to be a little bit more optimistic.

2:44Tariffs are not going away. We all know that. But the previous tariffs were really high on some garment manufacturing and footwear manufacturing hubs. And those in theory will at least come down to 15%. So it's maybe a little better. I think the problem is though, it's not even the difference in the rate of tariffs. It's that uncertainty makes making decisions so much harder than if we knew exactly what that rate was going to be, even if it was higher than before. And I think that's the problem. And I think that's the pessimism right now is that we have returned to the state of just uncertainty and it's bad for for operations.

3:31Tell us more about that, because this was true even post-Liberation Day as well. I mean, I think even people who didn't think, OK, Trump's really going to stick to this 48 % tariff on this or that country still felt pretty bleak about the future. That just the fact that they didn't know what the tariff would be, whether it be 10 % or 50%. I mean, how does that affect your operations if you're a fashion business? I think slowly. I think there's a lot of paralysis on decision making. I was talking to a brand today. They make travel bags and accessories out of China. The CEO told me that, so last year, they really, I mean, tariffs on China went from, I think, like 145 % to 40%.

4:18No one knew if it was going to go up again or go down again or stay at the level for however much time. And so what he ended up doing was he would tweak pricing and promotions based on just what the import invoices are. So he would make that decision on pricing after he has seen what he has charged by border and customs control. And that's like the level of how disruptive these tariffs are. You don't know how to make a decision. And he told me that that's likely what will happen again with this round of uncertainty, that he's not clamoring to, you know, lower prices or celebrating the SCOTUS ruling because he's not really going to be able to see an impact on the business until he sees those customs invoices come down.

5:11That's fascinating because he should be one of the big winners here. I mean, going from whatever, I'm not even sure what China's tariff was before last week, but 15 % would count as a major reduction. And he's saying, until I see that money, I'm not going to believe it. It sort of goes against every best practice that we discuss here in the debrief about how do you grow and fortify a business? You want to play the long game and not be short term. It seems like every company has to be very reactive and it's very hard to fortify your business for the future when you're making decisions up until you see an invoice from the Customs Border Patrol.

5:43Yeah, Mark, why don't you expand on that? Because you wrote so much last year about how businesses should approach uncertainty. And I mean, what is the playbook when now that we're back in this period where who knows what tariffs will be from week to week? I mean, there isn't just one playbook. And that's kind of the issue is one of the ways it was described to me is like, in the past, something like this was like, you'd talk to your supply chain manager and like come up with a plan with them. Now it's like you get everyone in the C-suite together into a war room and you have to figure out across the business what you are doing.

6:19You know, it's supply chain. It's also how you're adjusting product, you know, that feeds into your marketing and how you're talking to consumers and the messaging around your prices and all of that stuff. It's like, you know, it is just constant negotiation within your company and with your consumers. It's just kind of nonstop at this point. And these corporate war rooms are getting a lot of use. I think you need to replace the carpet at this point. I like that you mentioned consumers, Mark, because I saw something funny on social media, which is there was this conversation happening inside companies around getting refunds, recouping some of what they paid on tariffs.

6:56I think some consumers actually think if social media is to be believed that they are also entitled to some refund. Can you talk through what this whole recouping thing means and what companies think or don't think they can get back and why that's more complicated? I'm not getting a refund. I know. You will not. You almost certainly are not getting a refund, Brian. But maybe Mark has thoughts on how companies can navigate it. Mark, give me a different answer. How big will my refund be? I think that consumers are probably not getting refunds. It's not going to be a simple and swift process. There was a note to clients by lawyers at this legal firm, Clark Hill.

7:30They said the process is likely to be hashed out by a mix of U.S. Customs and Border Protection, the Specialized Court of International Trade, and some other lower courts. It's going to be a lot of legal wrangling, a lot of like making sure you have the right paperwork. And there's also some expectation that the Trump administration is going to fight trying to pay back any refunds. They can make it tough to get refunds by requiring proof that you didn't pass the cost on to consumers. Because if you did, why are you entitled to a refund? Or demanding like extensive paperwork for each shipment. And from what I understand, the expectation is this refunds are a possibility, but it's not going to be a simple process where, you know, it's not like returning your e-commerce order online or something where you fill out a form and you get a bunch of money back.

8:18Oh, bad news for Brian. Also, I saw in some of your reporting that because Trump is continuing to try to impose more tariffs, that none of this can really be worked out till we see how much tariffs are actually due, right? Like you start giving people refunds, but then there are more tariffs coming in. I mean, I guess it's on the refunds that are already paid. So in theory, you'd be entitled to that money back. But again, it's my understanding is it's, you know, you'll probably have to hire like, you know, special counsel and actually file a claim. And, you know, there will be a lot of paperwork involved and back and forth, you know, wrangling just to make sure that they're going to try to make sure that you're only getting what you say you are owed.

9:04And maybe not even that, from my understanding. So there was a U.S. Customs and Border Protection agent who said that there will only likely be a refund on previously collected tariffs when there's a final unappealable ruling, which could involve further rounds of briefings and oral arguments, etc. etc.

9:25I've also heard that whether or not the government has spent that money, so liquidated the term liquidated the funds of the tariffs that were collected, whether the government has spent that money or not is also going to factor into the refunds. So I think any conversation about refunds is jumping the gun. I'd love to circle back to maybe I'm not getting my refund, but maybe the prices I'm paying for certain imported goods might go down a bit. I mean, I know you mentioned that the luggage retailer maybe isn't immediately going to be cutting prices, but what about all those brands that did say, hey, we got to raise prices 5%, 10%, 20 % because of these tariffs?

10:10Is that all going to be unwound now? I think it's a possibility that some brands and retailers will lower their prices, likely in the form of discounting rather than lowering retail prices. But a lot of companies also were able to drive their top line growth because of higher prices, right? You look at recent earnings and the average rate of sales change was positive. It was single digit sales growth, which meant that the higher prices did not result in a lot of their customers effectively declining the changes in prices. So people were receptive enough. Consumers were receptive enough. And so if I were a brand, I would obviously look at my P &Ls and I would look at not only my sales, but also how my margins were affected by the tariffs.

11:11And a lot of brands, they posted sales increases, but a hit on their profitability, right? And so if I'm getting some relief in my cost of production, that means that if I don't change prices, then my profitability will improve. So it creates that flexibility. Let's, you know, I think of a brand like Abercrombie where sales growth has slowed from that, you know, torrid pace they were at a couple years ago, and maybe they want to juice things a little bit and they couldn't before with a great sale because of the tariffs. And now maybe they can. Yes, exactly. If they decide that they will continue to bear that hit on profitability, then maybe they can lower their prices even more.

11:56But I think we'll see, you know, I think there's a million permutations of these levers that companies will pull. And I think we will see, you know, across the spectrum. And I think the most powerful retailers, in the sense that they have the most powerful brand equity, the most cachet, so someone like a coach, which has raised prices considerably in the past couple of years, they will not have to lower their prices. They will not have to do discounting because there is just simply so much consumer demand for their products at these higher prices now. And so it also just really depends on the strength of each company.

12:40I'm just sitting here as a consumer feeling very screwed over. It's like every time these sort of shocks happen and companies say, there's nothing we can do. We're really sorry. We have to pass off some of these cost increases to you. And then they get relief. And it's like, well, actually, you were able to buy at that price. And now that gives us wiggle room. Man, does that not feel great as a consumer? Just putting my two cents in. You know, Shina, I'm surprised to hear that because I feel like it's been sticker shock for years now. I mean, it really started before the tariffs with pandemic inflation, right?

13:14And so now, am I bitter about the prices, especially in fashion? Yes, but I can't say I'm surprised. Well, bitter is exactly what I'm saying. It's like when the airlines did this post 9-11 and they started to reduce the size of what you could bring on a plane, then you had to bring a carrier and all the, and then they never changed it, no matter what happened. Kind of reminds me of that. Although it should also be noted, inflation has not been as high as some were expecting post-Liberation Day. I think in January, it was 2.4 % year over year. That's a little higher than maybe the Fed wants it to be, but that's not runaway prices.

13:52There hasn't necessarily been that sticker shock. Well, you're talking yourself out of that refund, Brian. I will also point out that in clothing, if you look back historically, going back decades, clothing itself has not kept pace with regular inflation and the rest of the economy. So we're still paying relatively low prices for clothing, even as brands might be jacking up prices a bit now, which still doesn't feel great as a consumer. But, you know. Mark's message is you will pay high prices and you will like it. I mean, yeah, there's something to be said about paying more and buying less, right?

14:30Ideally, that's what would happen. Yeah, it's not necessarily... I think the missing piece is that quality piece. Pricing is going to be a huge topic this year, but not only because of tariffs. Because the way that consumers have shifted in how they're buying stuff has changed, has evolved in the past couple of years. Whereas before, I think we used to have sort of more like blind fanaticism of certain brands and, you know, especially in luxury. We've lost a lot of that. One, because, you know, things have become really expensive and there's been some powerful questions around whether these price increases are warranted by the quality of these products.

15:16And also, too, even though consumer spending has been extremely resilient in the U.S., it's complicated because that's not been the case for everybody. And so we are, you know, all the sort of the pandemic inflation hangover is still happening. The grocery bills are higher. Rent is much, much higher in New York City, at least. And so there's also that bit of like spending is just stretch, period. And so all of these factors combined means that the consumer is just more picky than ever. And how you factor in your pricing in relation to the perception of your brand is going to be really delicate.

16:00Why don't we close things out with a lightning round where each of us says where we think this is all headed. You can interpret that any way you want, whether meaning tomorrow or five years from now or anything in between. I mean, Mark, when will you start? It's going back to court, whatever it is. It'll be back in court at some point. I'll go next. I think I agree it's going back to court, but I also think the trajectory overall is going to be toward lower tariffs, not where we were pre-Trump. But I think the era of Trump threatening 50 % tariffs on India or threatening to essentially cut off imports of French champagne are basically over.

16:42and the reality that we're seeing this week is closer to the long-term reality that we'll see. I would sort of double down on what Brian just said and what I was asking earlier, which is I think that anytime Trump gets a significant thumbs down, like one from the Supreme Court to something that he's threatened and made good on, I think that's really significant in this political climate. So I think even though things will be back in court and they will not be exactly as retailers may have wanted it, it will be, I think, better than expected in the realm of tariffs. Like, we can't get any worse.

17:18Yeah, I would agree with that. I was going to say that the Democrats are going to have great midterm elections. Am I allowed to say that on here? Of course. It's just a prediction, you know, not a personal opinion or of a political opinion, at least. Well, it's bad press. And that is there's there are a few things that Trump likes worse than bad press. So there we go. I agree on the tariffs point, by the way, just because every other lever that I've seen that he can pull is limited compared to the illegal emergency tariffs that he used. So, you know, they'll require they'll be in place for a certain time.

17:55They won't be as high. They'll require some investigation and approval from Congress at some point. I just I agree with both of you guys. It's not going back there. So, Kat and Mark, thank you so much for joining us today. This was very informative. We appreciate your insights. Thank you for having us. Thanks. Always a pleasure to join. Please be sure to check out Mark and Kat's ongoing coverage at businessoffashion.com. These 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.

18:29I'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.