Can the Yuan Aid Re­tail­ers in Trade War?

The fash­ion in­dus­try has been tar­geted in a gov­ern­ment list of $200 bil­lion worth of Chi­nese im­ports set for 10 per­cent levies.

WWD Digital Daily - - Front Page - BY KATHRYN HOP­KINS

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.”

A con­tainer ships sails to the Kwai Ts­ing Con­tainer Ter­mi­nals in Hong Kong.

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