WASHINGTON — Brands and retailers are analyzing whether price increases will result from the termination of a Chinese export subsidy program in the textile, apparel and footwear sectors, although executives said it’s too early to gauge the full impact.
Industry trade groups said they have received several calls from companies raising concerns in recent days following China’s decision to eliminate the program, which the U.S. had challenged at the World Trade Organization last year. Trade experts said China likely chose to settle and not wait for a WTO dispute panel decision because it wanted to avoid a lengthy and costly litigation and saw a memorandum of understanding as a face-saving way to end the dispute.
American fashion firms have faced long-term retail price deflation and have lost pricing power for several years, but China’s cheap manufacturing costs helped offset some of the pressure on brands’ margins. But as China’s wages and other costs have risen in recent years, brands have been forced to begin to look to other, lower-cost countries such as Vietnam and Bangladesh.
China agreed to eliminate an export subsidy program earlier this month that provided $1 billion over three years to companies in seven industrial sectors and 179 industrial clusters as part of a memorandum of understanding with the U.S.
According to documents filed by the U.S., several apparel and footwear clusters, or “bases,” were identified as receiving subsidies, including apparel bases in Jiangsu province and Shanghai; a sweater base in Guangdong province; cashmere clusters in Hubei province and Mongolia; a women’s shoe base in Sichuan province; an eyeglasses base in Jiangxi province; men’s clothing, casualwear and necktie products cluster in Zhejiang Province in Ningbo, and textile bases in several provinces.
Chinese apparel, textile and footwear suppliers received subsidies for a wide range of things, from IT services to product design services to employee training, according to the U.S.
In 2012, 16 of the estimated 40 “demonstration bases” or clusters of companies in the three industry sectors allegedly received subsidies accounting for 15 percent, or $33.25 billion, of China’s total exports to the world in those sectors, according to the U.S. Trade Representative’s Office.
About 20 percent of China’s total apparel, textile and footwear exports are destined for the U.S., trade officials said.
U.S. officials said the subsidies were provided to clusters of companies in 29 of China’s largest industrial provinces and municipalities, including Guangdong, Shandong, Sichuan, Jiangsu, Beijing and Shanghai.
The key question now is whether Chinese suppliers benefiting from the subsidies will absorb the extra costs or try to pass them on to overseas buyers in the form of higher prices.
Julia Hughes, president at the U.S. Fashion Industry Association, said the concern is a hot topic.
“People want to know what the impact will be and whether prices will rise, whether the subsidies made a difference from a costing perspective,” she said. “It’s early days. We haven’t heard from anyone that they have seen price increases linked to the elimination of the subsidies. That doesn’t mean there won’t be any, but there was not an immediate reaction in terms of higher prices.
“The assumption should be that there will be upward pressure on prices. What we’re talking about here are subsidies that were basically for back office and for training, so it may take awhile for that to work its way into higher price quotes if that does happen,” Hughes added.
“We’ve actually had members call and ask us [whether there will be price increases],” Rick Helfenbein, president and chief executive officer of the American Apparel & Footwear Association. “Our belief, and we’re pretty strong about this, is it’s not going to affect prices at all.
“The reason is China has always functioned on the basis of supply and demand,” Helfenbein said. “Right now, demand is down. They have a lot of supply. Very often they will adjust their prices to make it more meaningful to buyers, so that they don’t lose a buyer. That’s just the reality of the industry.”
Bud Konheim, ceo at Nicole Miller, said, “I don’ t think it’s affecting anybody right now. We design for J.C. Penney and they would let us know” if they saw price increases.
Konheim said Nicole Miller does a small amount of business in China, in the 1,000-unit range per style.
“It’s the guys that do volumes of 50,000 or 100,000 unit lots” that would feel the impact, he said, adding that any prices negotiated now would not get paid for another three to six months out.
David Spooner, a partner at Barnes & Thornburg LLP who was the chief textile and apparel negotiator at USTR from 2002 to 2006, said the subsidies were small in the scheme of China’s overall global trade.
“Doing a back-of-the-envelope calculation on how much the subsidies benefited the textile, apparel [and footwear] sector, you come out with about $260,000 a year for companies in that cluster,” Spooner said, assuming that the distributions were equal in all seven sectors. “That’s not pocket change but not world changing, either.
“Export subsidies are terrible,” Spooner added. “They distort trade and USTR did a great job in calling China out on them and quickly got China to back down. But we shouldn’t exaggerate the impact on trade. China exports tens of billions of dollars of apparel to the U.S. [and rest of the world] every year and the subsidies amounted to a drop in the bucket.”
Economists said there were several mitigating factors that would prevent price increases.
“They [Chinese suppliers] are going to try, but they are not going to be able to raise prices,” said Chris G. Christopher Jr., director of consumer economics at IHS Global Insight. “Part of the reason is the currency should get weaker this year and they also have to worry about competitive effects — what is coming out of Vietnam and Indonesia.”
Christopher said he does expect China’s currency to devalue in a “gradual sense.”
“Prices are going down for imports from China for goods for the most part because of the weakening of their currency,” which he tied to a “flight of capital out of China.”
All in all, Christopher said he does not expect U.S. brands and retailers to take a big hit on prices.
“Fundamentally what has been going on [related to lower export prices] has nothing to do with subsidies,” he said. “It has more to do with exchange rates. If you look at consumer goods import prices, the core has been in negative territory. Nothing tells me that stuff from China should be getting more expensive for the American consumer. In fact, it should be getting cheaper for awhile.”
Tu Packard, senior economist at Moody’s Analytics, said: “When I look at the magnitude of China’s imports to the U.S. in these areas, it is difficult to see that that amount of subsidies was such a big deal. Things like China’s exchange rate and labor costs are much more significant factors than the subsidies. While some Chinese suppliers may bargain for a better price, using the removal of subsidies as an excuse, the overall impact will likely not be significant.”