Trump’s Tariffs Change Everything

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. Before Donald Trump announced his tariff plan on April 2nd, the conventional wisdom was that the fashion industry would need to use every tool in its arsenal to cope with the higher import costs that would inevitably result. That advice, sound as it was, proved woefully inadequate for what Trump had in mind. You cope with a 10 % tariff, which is what Trump initially rolled out in his Rose Garden speech.

0:45When he pulled out the poster board listing reciprocal tariffs as high as 49 % on some of fashion's biggest manufacturing centers, the time for coping was over and the time for panic had begun. And that is basically what the fashion industry did. The day after the announcement, Nike's stock dropped 14%, Victoria's Secret dropped 20%, and VF Corp, which owns Vans and some other brands, dropped 28%. It was the biggest stock market wipeout overall since the early days of the COVID lockdowns. Consumers rushed out to stock up on Lululemon yoga pants and anything they could think of that might be imported.

1:23And in a country that imports virtually all of its fashion and footwear, that means virtually everything. No brand, no consumer will be untouched. and the effects will quickly ripple out globally to garment factories, cotton farms, and every other link in fashion's supply chain. With us to help make sense of what just happened are Chief Sustainability Correspondent, Sarah Kent, and Luxury Correspondent, Simone Stern-Carbonnet. Hi, Sarah. Hi, Simone. Welcome to the D-Reef Podcast. Hi, guys. Thanks for having us. Excited to be here. So, Sarah, we know what Trump handed down on April 2nd was the highest and most comprehensive of tariffs we've seen in a century.

2:01Can you talk us through what exactly that means and what he announced? I mean, he hit the market with a ton of bricks. As Brian said, there was an expectation of maybe a 10 % tariff, but on dozens of countries, he imposed what he's calling reciprocal tariffs that are much, much higher and they vary country by country. But many of fashion's biggest manufacturing hubs are on there. And these are really, really substantial duties that are going to be imposed on goods ranging from 20 % for the EU. So that's going to hit luxury up to 54 % for China. Wow. And you know, it's so funny. I had a call with my mom in the Bahamas this morning, and she said, even our fish and lobster will be hit with a 10 % tariff.

2:45Like when we say everything and everyone will be impacted, it's no exaggeration. But to that point though, how different is this from what Trump did in 2016? How big or significant is this quote unquote trade war that might be brewing? It's on a completely different scale. You know, back then, the main target of his import duties was China. There were big adjustments, but not on this scale. This isn't everything, everywhere, all at once form of tariffs. And, you know, back in Trump 1.0, there were more moderating voices around that stopped this kind of excessive form of action. Like this is Trump unleashed.

3:30And the scope is also so much wider in terms of the types of goods we're talking about. When we were talking about China in 2016 or 2017, that was, you know, things like sneakers. You know, there's some higher end goods produced there, but it was mostly things aimed at the middle market or fast fashion. But Simone, I mean, this encompasses pretty much everything luxury brands produce as well, right? It does, both in Europe and outside. So some luxury companies, whether consumers like to accept it or not, actually have a lot of production in Asia especially. But even for luxury brands that pride themselves for their production in countries like mostly France and Italy, they are going to be hit with some tariffs too.

4:08Although it's not as dramatic for Europe and for luxury companies as it is for some other countries and other industries. We had an interesting conversation in one of our meetings this week, which, to put it frankly, laid bare the fact that as much as tariffs are feared, they're not quite understood. So one of the editors asked the question of what exactly will be taxed? Like, if you're Apple bringing in something, is the intellectual property taxable? I think that was how the question was framed. But I don't know that everyone fully understands who is paying the tariff and what it applies to.

4:40Sarah, can you kind of break that down a little bit? Yeah, I mean, I would start by saying that it's also not clear. It's complicated. So, you know, maybe not everyone would understand anyway. But also, what has been announced is vague on the details. But in theory, import duties are paid on the cost of the good to manufacture. So it's not the retail price that you might see at the shop. That gets marked up later. But brands have to think about, okay, what did we pay to make this good? What is its value at the point of entry into the country? And that is the duty that you get taxed on. That could also lead to all kinds of, I guess, games down the line as we see how this plays out as brands try to optimize where they do different parts of manufacturing to make sure that that price on entry into the U.S.

5:31is as low as possible. So could you package the good in the U.S., even if it's made elsewhere, that would lower the value? So the fact that all these luxury brands have doubled or tripled the price of their handbags, that actually kind of works in their favor here because the actual cost of the good they're importing maybe hasn't changed all that much. And so the price increase won't be so great in comparison. In theory, but I think it will be complicated because it depends on what price historically they've been saying the cost of goods are at the border. If on April 9th, when these come into effect, suddenly the cost of that good drops, that's going to look suspicious.

6:07So internally, everyone will have been looking at this. That's fascinating. So they basically have to start telling the truth about what actually is going into their luxury products. Right. But I don't think any of this is going to be disclosed on a company by company basis, which is such a shame because that information will be fascinating. Simone is sitting there with like a knife and fork out, like ready to go. It's not going to happen. That's what I can say. So I think the other thing that is interesting to add is that even companies that make in America are not protected from this. So, you know, for instance, if you look at the fashion industry, if you are a company making in America, you're probably importing your fabrics from elsewhere.

6:47And we've actually already seen small brands posting on social media because they can't get access to material that they had been relying on to come into the country because these tariffs are coming in and they don't know if they'll be able to afford it. This is obviously different across categories. So you have luxury as a sector. There are different facets of luxury. So a leather good might be different than, say, jewelry. Simone, talk us through some of the category specific challenges. So this doesn't affect all luxury companies the same way. Luxury companies based in Switzerland in particular are hit harder than EU-based luxury companies.

7:21So we're talking about Richemont and Swatch Group here. What does this mean for those companies? Well, they're already struggling because watch exports have been down for a while, and the U.S. is actually Switzerland's top foreign watch market. So it's likely that Richemont and Swatch Group are not having the best week right now. I want to get into this idea that I've seen a lot on social media, but also in like publishing and also in like newspapers like The Times and Wall Street Journal or others where the theory that tariffs can lend themselves to supporting sustainability. I bet Sarah loves this one.

7:55But basically making things more expensive will help reduce wasteful consumption. That it's not the American dream, I think, is how it's been described to be just buying cheap stuff from all over the world. That's a theory. Whose theory is that? What do they mean? And do the economic realities back it up? What's interesting is I think this originated from the Trump administration, which is obviously known for all of its green policies and supporting sustainability. But it is obviously a narrative that you can use to bring people along with you when you're putting in place these intense tariffs.

8:31And if the economy tanks, it's true, people will consume less. What I think gets a bit more complex is you're not really changing anything. We saw at the beginning of the pandemic, people didn't buy as much because they were feeling insecure. But the bounce back when they started to feel like they could spend again was huge. You're not really changing consumer behavior. And meanwhile, on the back end, this is going to be disaster for any efforts to make the industry operate more sustainably. If companies are seeing a massive increase in the cost of getting goods into the country and they're seeing people buying less, they're not putting money into decarbonization, that is for sure.

9:06I think you're spot on about what's going to happen up the supply chain. But I do think, in a way, Trump actually put his money where his mouth is when it comes to that sustainability, anti-consumption angle. Because another thing that he did when he announced these tariffs is close the de minimis loophole, my very favorite loophole in the whole tax code. For China only. For China only. But what that means is that is essentially a loophole that was being used overwhelmingly by fast fashion retailers, Shein and Timo in particular. It was the way that they were able to undercut their competition elsewhere is why their prices were so low.

9:45They didn't have to pay taxes at the border because they send in all these little shipments under$800. And that's not going to be available to them anymore. So in a way, it is clamping down on the biggest symbols of that overconsumption mindset that Shein raised. And also big competitors to American industry. And not to be the class cynic, but last time he tried to do this, Customs and Border Patrol and the U.S. Postal Service collapsed because they couldn't process all of these small orders. So unless he's putting tons more money into the administration that's going to need to be in place to actually implement this law, it's hard to understand how it's going to work in practice.

10:22I just have to note, just as a cautionary note, that if people are losing their jobs and inflation is record high and they can't pay their rent, I don't know how any of this really supports sustainability or lower consumption if you're not consuming simply because you have no resources. That's pretty fair. I think that's the main takeaway. I mean, for all that we're talking about, the particulars of this is there is going to be suffering at every single step on the supply chain from a farmer in India growing cotton to a consumer in America who is buying a finished t-shirt. And that's part of the point.

10:58And that's been pretty explicit here, which is lots of pain now, maybe some bright new American manufacturing future later. So let's talk about that. How realistic is it that the global fashion supply chain reshapes itself around these tariffs into something better for, I don't know who, better for America, better for the American consumer, better for everyone? Sarah, what's going to happen on that front? In the near term, that is a fantasy. It would take years of investment to build up the infrastructure and skill base within the U.S. to replace manufacturing capacity that has been moving abroad for decades.

11:35For the apparel industry, it just does not exist on the scale that would be needed to in any way service the fashion industry. You know, small scale, fine, but not really in a meaningful way at the moment. So where will manufacturing move? You know, if Cambodia, you know, 49 % tariff on Cambodia, that and Vietnam, which I think had the second highest tariff levied against it, were the two big China alternatives in Southeast Asia after the last round of tariffs. All these companies, Nike, Lululemon, could name many, many others, they all moved their manufacturing partly to avoid tariffs, partly to find lower costs.

12:15And that really backfired. So what do you do now when the number of safe havens is vanishingly small and could change it any day? Yeah. I mean, this is also part of the wild aspect of it is no one knows if this is going to stick. No one knows if these numbers are a negotiating position or real. And so even that concept of where do I relocate, it's sort of the idea of spending the time and money to figure that out when you don't know what things are going to look like tomorrow is kind of tricky. But there are quite large manufacturing countries that only are subject to this lowest 10 % tariff. They include places like Turkey.

12:52Much of Latin America are on that list. But they don't have the capacity to absorb everything that's being made in Cambodia or Vietnam or China or Bangladesh. They're also completely different parts of the world. So you're rerouting your entire supply chain as well, which isn't entirely simple. And on top of that, countries have different specializations. Vietnam and Cambodia are very specialized in sneakers and more technical apparel. Turkey is more denim and cottonwear. So it's not a like-for-like transfer that you could just do overnight. That's one of the solutions that when we've written about this, we put out a case study earlier this week.

13:31And then the immediate reaction was one thing a lot of brands are going to do is cut products, take them off the shelves if they can't find a way to produce them that is friendly to this new tariff system. So I could see a world where we see a lot more Turkish denim and a lot less technical active wear coming out of Vietnam. Can we talk about some of these brands specifically that have said what they're planning to do? Like Hermes and Steve Madden outright said they're going to raise their prices to the consumer. There's others like Walmart that's saying it's going to try to negotiate with manufacturers.

14:04Walmart's a retailer, but obviously as large as Walmart is, they have different negotiating power. Simone, what are you hearing from luxury brands specifically around how they're going to approach this? So the general consensus is that luxury brands can generally pass on price hikes to the consumer more easily than other consumer goods because consumers are less price sensitive. But this is not actually true across the board. So yes, Hermes, for example, they're one of the most resilient luxury brands, especially when it comes to pricing. They can really inflate their prices and consumers will still buy the Birkin and the Kelly and be on the wait list.

14:40At the same time, other brands have been more cautious. A lot of them actually haven't said anything outright about price hikes, I think, because they are aware of the fact that they've been under a lot of fire recently for inflating their prices a lot, and that has actually dampened growth for a lot of companies. So we'll see what they will do. But I do think that there will be some price increases that might be incremental. I think that the companies hope that consumers won't notice them as much. Although in your story that ran this morning about how Trump's tariffs threaten luxury fashion, you said it wasn't the price hikes that were the problem.

15:16It was demand, right? Well, yes. Again, that really depends on the company, right? So you can't really compare Hermes to, let's say, a Kering. So Kering, for example, has been struggling when it comes to its main brand, Gucci, but also Saint Laurent. And basically, most of their brands are just not up to par with some of the other luxury companies like Prada Group, with Prada Miu Miu that are doing really well, of course, Hermes and Louis Vuitton and so forth. And I think the issue here is that it's this mix between pricing, demand, maybe a lack of creativity, and also incentivizing customers to actually purchase luxury goods.

15:48Because let's be real, one doesn't necessarily need a new bag, right? So it's a luxury good because it's something extra, it's something nice to have, but it's not an essential need. So again, I think we will see a lot of variation depending on which brand does what, not just on the price front, but also on the creative front. I feel like this sounds like the pandemic when brands that were teetering or retailers that were teetering and about to have a hard financial moment blamed everything on the pandemic. Like, oh, it's not that we are not digitally savvy or don't have the best products. We're all going to just say this economic pressure from this world health crisis is to blame.

16:26It sounds like some brands that were not maybe the most creative or most resilient are going to just point to this. in the next few months. Yeah, but they can't, right? For example, Caring can't do that because they had a really bad year last year, 2024. And so it might just get worse for them, hopefully not, right? I mean, they might do better, but it's going to be more complicated now with the new tariffs in place, especially for a company like Caring that has a large exposure to more aspirational customers. So of course, not all luxury consumers are the same, right? So if you can buy an Hermes Kelly, then you're probably of a slightly different purchasing power than if you're looking into brands more under the caring umbrella, which of course, a lot of these items from Gucci and co are still very expensive.

17:09But there are definitely products in that range that are catered and marketed more towards aspirational customers. And now aspirational customers are predicted to be a lot more affected by raised tariffs because they are just more price sensitive than ultra wealthy people. I'd also think if you look at what's happening with the stock market at the moment, like even very rich Americans are a lot poorer today than they were on Wednesday. Yeah, that's the other impact of this that I think is getting sort of hidden is that if you are a wealthy investor, you hurt too when this happens. It's not just the middle class or the poor that are like, I can't buy, fill in the blank grocery item.

17:48But if you are an investor and your money is tied up in markets right now, or if you're in a top position at a big company, you're taking this this ding too exactly and this is why even though for example bernstein analyst luka solka said that he thinks the new tariffs on especially eu countries of 20 are negligible because the price increase really will just be between one to four percent it's not necessarily negligible if you look at the long-term effects right so the trickle-down effect this lack of returns from the stock market people seeing you know their investments depreciating overnight that's definitely going to add to the already dampened consumer sentiment in the U.S.

18:27and of course internationally too. And I think the huge uncertainty doesn't help either, right? You don't know what he's going to do next. You don't know if this is going to stick. So are you going to spend$10 ,000 on a handbag, even if you can technically afford it, when you don't know what tomorrow brings?

18:44We'll be back with more of The Debrief right after this.

18:51is there anything that brands aren't doing that they should be doing right now to start to prepare for what is seemingly unrelenting uncertainty i think it's really hard to say that brands should be doing a certain thing because again there's variation between the companies but also because this is so unpredictable and i think a lot of companies need to look into having a plan a B, C, and D, because things could change again overnight. So I think that one thing that comes up a lot is should they refocus on other markets? For example, Asia is the obvious choice for luxury, but I think yes and no.

19:30Luxury companies with a heavy China focus are still licking their wounds from the pandemic. So I think that they're going to be quite cautious when it comes to maybe over-investing in any one market. We're also seeing that a lot of consumers in countries like Korea or Japan are preferring not really luxury goods, but performance sportswear goods, as opposed to traditional luxury like a$5 ,000 handbag. But I think it does make sense for brands to diversify geographically as much as they can where it makes sense. So for example, last week on Zenya's earnings call, they repeatedly stressed their strength in the Emirati market, particularly Dubai, and they're actually going to hold their first ever non-Milan fashion show there.

20:13So it shows that they're definitely thinking into creating a strong and loyal customer base in high earning and high spending power markets outside of maybe the traditional US and greater China areas. Sarah, is there anything else that you would add to what brands can do? Because I think it's mitigating now, right? It's not like we're all going to be affected. Even the uncertainty of none of this sticks or takes hold is affecting everyone. Well, just to start, I guess, to start with the obvious things that brands can do, which we've kind of talked about already, which is there's these three R's.

20:46You can renegotiate, relocate, reprice. And manufacturers are definitely bracing for the first two. I think there's concern that you're going to start seeing similar behavior that you saw in the pandemic, where everyone panicked and just started canceling orders. And that could have really, really devastating consequences on the economies of entire countries in this instance and thousands of workers in places like Bangladesh, Cambodia, and Vietnam. So I think being really transparent and trying to work in partnership with the suppliers that you have relationships with is an important one. The other thing that doesn't really get talked about is brands have a voice.

21:26Brands are part of the global economy. Brands can lobby. They can be part of this conversation and they can make it known that they don't like this. And Trump isn't particularly receptive to that. But if you're not raising your voice and saying, hey, this is really hurting big business and it's not making America great again, then you're not even trying. The most interesting reaction I've seen to the tariffs so far was Volkswagen was one of the first companies to come out and say they're going to put an import fee on cars sold in the US, which means everyone who buys a Volkswagen and car, we'll get a little reminder that there's a big tariff on automobile imports.

22:02And I think if a whole bunch of brands start doing that, this conversation changes very quickly. The question is, are brands going to do that? That's a very good question. I do want to just add that a peculiarity for the luxury sector and that would really just put a dent in maybe Trump's secret plan to get a lot of production over to the US and to strengthen the American textile industry is that for luxury, that probably is not going to work. LVMH, interestingly enough, during Trump's first term, built three Louis Vuitton facilities in California and Texas. And they're set to account for around a third of the value of its US business.

22:37So that's quite significant. But in luxury, a made in France or Italy stamp is just part of the cachet. So I don't think that we can assume that, you know, other than maybe the row, although they also shifted their whole production over to during the pandemic, but there's not a lot of US-based luxury brands that really ride on the made in America seal. So I don't think that's going to be something that he can count on. In fact, caring CEO, Francois-Henri Pinot, recently said that manufacturing stateside makes no sense. So we, as I said before, we published a, we call it an executive memo. It's a case study, basically, about how brands can respond to tariffs earlier this week.

23:16We'll put a link in the show notes. And the number one thing we wrote in our solution section was stay calm and maintain perspective. And I think that really is the only actionable advice right now is to not make a snap decision based on whatever Trump said in the Rose Garden and to really see how things play out a little bit, see what your customers are willing to accept and your suppliers and work out a solution calmly with your whole team. Don't just fly off the handle and move all your production to Turkey or whatever we've been talking about here. That's a good note. I will concur. Stay calm.

23:50Sarah and Simone, thank you so much for joining us today. This was super insightful and positive at the end. Thank you for having us. Thank you. Thank you so much. Please be sure to check out Sarah and Simone's articles at businessoffashion.com. Simone, alongside BOF reporter Joan Kennedy, just wrote an explainer on how Trump's tariffs will threaten the luxury fashion industry. This 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 Ria. I'm Sheena Butler-Young.

24:24And 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.