A container ships sails to the Kwai Tsing Container Terminals in Hong Kong, 11 July 2018. According to reports, Hong Kong's finance minister Paul Chan said the short-term impact on the city of China's escalating trade war with the United States would be limited to a dip in growth of just 0.1 or 0.2 of a percentage point. According to reports, US President Donald Trump announced on 10 July that US is preparing to impose 10 percent tariffs worth 200 billion US dollars on imported goods from China.A container ships sails the East lamma Channel, Hong Kong, China - 11 Jul 2018

The weakening Chinese yuan could help fashion retailers offset the latest round of Trump administration tariffs, but it might not be enough to stop the predicted decline in American consumers’ purchasing power if the trade war continues, economists warned Wednesday.

After successfully escaping the first round of tariffs on Chinese imports, the U.S. fashion industry wasn’t so lucky the second time, with multiple items — from textiles to handbags to footwear and suitcases — on a list of $200 billion worth of items that are next in the firing line for 10 percent levies.

Since the trade war between the U.S. and China began, the fear among industry watchers has been that retailers will be left with little choice but to pass on the higher costs to consumers at a time when the U.S. economy is ticking long nicely and the Federal Reserve continues with its plan to slowly normalize interest rates.

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, believes that the weaker Chinese yuan could partially offset the 10 percent tariffs that will be implemented in September at the earliest, following two months of hearings.

The renminbi fell to 6.67 per dollar on Wednesday after the U.S. made its latest move and China pledged to take “necessary countermeasures,” but did not specify what they would be.

This was a near 11-month low and around 4 percent below its mid-June level as markets speculated the Chinese government could deliberately allow it to keep dropping as a tool to battle the trade war.

“The cost of the tax only gets passed onto the U.S. consumer if the exchange rate remains the same,” Dhawan said. “That’s the key and the Chinese knew this was coming so they were already working toward making their currency weaker.”

But while this tactic may enable U.S. retailers to partially offset levy increases on Chinese imports in the short term, it won’t help the fact that consumers’ purchasing power is likely to decline on the back of rising oil prices and if the trade war continues to escalate, according to Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University.

The concern is that the trade war could derail the strong U.S. economy if more companies follow Harley-Davidson’s decision to move some operations outside the U.S., while further tariffs and potential Chinese trade barriers could push up prices across a broad range of sectors, further squeezing the consumer at the same time as rising oil prices make it more expensive to power their cars and heat their homes.

“The consumer needs to have money to buy the fashion so if the tariffs hit the other segments of society and purchasing power deteriorates, then that’s going to have an impact on buying clothing. Historically clothing was essential, but right now it’s a desire to get this bag or a desire to get that coat. That can be cut back very rapidly,” Ghadar cautioned.

Frank Badillo, director of research for Macro Savvy, a market research and consulting company, chimed in adding that “with each tit-for-tat move by the U.S. and China, among other countries, it’s likely to have a still greater impact” on the consumer.

Most retailers remained tight-lipped on the subject Wednesday, but Baltimore-based activewear brand Under Armour told WWD that while the company is continuing to evaluate the evolving trade situation, its current assessment is that the potential impact would be “immaterial to our business,” with less than 15 percent of its overall goods being sourced from China.

Hours before the new list of tariffs were released, Levi Strauss & Co. chief executive officer Chip Bergh said he was less worried about how his company would respond, but more concerned about how consumers and the broader economy would be impacted.

“It’s going to have a negative impact on the U.S. consumer and it’s going to have a negative impact on U.S. jobs. Look at Harley-Davidson; they’ve shifted production out of the U.S.,” he told WWD.

Even as retailers and brands remained mum on new tariffs, the latest development weighed on U.S. markets. The S&P 500 finished the day 0.7 percent lower at 2,774.02, while the Dow Jones Industrial Average was down 0.9 percent at 24,700.45. Among the losers were Nike Inc., down 0.3 percent to $77.36; Ralph Lauren, 2.2 percent to $126.37., and Michael Kors, 1.2 percent at $66.50.

In China, the Shanghai Composite slid 1.8 percent, while European markets also closed lower, with Britain’s FTSE 100 index down 1.3 percent, Germany’s Dax by 1.53 percent and France’s CAC 40 by 1.48 percent.

Tuesday’s developments come on top of the first wave of levies on $34 billion worth of Chinese imports that were implemented Friday, with another $16 billion earmarked for an unspecified later date. China retaliated immediately, placing levies on $34 billion worth of American imports.

And more could be on their way as President Trump has already pledged to slap tariffs on another $200 billion worth of Chinese imports if the Asian country makes another move, raising questions over what the end result could be in the tit-for-tat trade war.

Paul Ashworth, chief North American economist at Capital Economics, said: “If tensions continue to escalate, the logical end-game is that Trump will eventually withdraw from the WTO [World Trade Organization] and impose tariffs on all imports.”

 

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