If President Donald Trump imposes punitive tariffs on Chinese garment imports into the United States, David Birnbaum believes the move would simply subsidise every other apparel exporting country in the world, in the form of increased orders at higher prices.
Economists will tell you that government actions almost always have unintended consequences. We in the global garment industry can testify to the validity of this law of unintended consequences.
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The US garment industry fiasco: Part I
In 1963, the US government, seeking to protect its domestic garment makers from competition, imposed export quotas on the major Asian garment producers. The consequences of this policy were far different than planned.
On the Asian supplier side:
- The quota forced the factories to trade up to higher value-added products;
- The quota forced the factories to expand off-shore to quota-free countries;
- The quota, which could be bought and sold, provided the factories and middlemen with capital assets worth literally billions of dollars, thus subsidising their investments in the new global industry.
On the US receiving side:
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By GlobalData- The direct consequence of that policy was to virtually obliterate America’s domestic garment industry;
- For the US consumer there was one important benefit: as Asian factories competed with one another to reduce FOB prices, the result was decades of ever-decreasing retail prices.
The US garment industry fiasco: Part II – the sequel
President Trump is about to is produce a sequel to the great garment industry fiasco if he imposes a surcharge on garment imports from China. I am not sure what he would accomplish. The fact is that China does not need outside help to reduce garment exports. For the past 20 years, China has been moving away from garment exports all by itself.
Furthermore, this is not a good time to institute a policy that will lead to increased FOB prices. After years of steadily declining FOB prices, the trend has now reversed. A surcharge on the world’s largest garment exporter would simply exacerbate an already difficult problem.
Finally, despite China’s declining garment exports, they are still irreplaceable. As of 2017, China, ranking number one with a 35.1% world market share, was almost equal to the aggregate exports of next eight largest garment exporting countries. Just who does President Trump think will replace China’s market share?
I suggest that the unintended consequences of the Fiasco Part II will be the same those of the Fiasco Part I.
On the China side:
- The tariff would once again force their factories to trade up to higher value-added products;
- The tariff would once again force their factories to expand to off-shore countries.
- While Fiasco Part II would not subsidise China, it would subsidise every other garment exporting country in the world, in the form of increased orders at higher prices.
On the US receiving side:
- The added costs of any tariff would be paid for by US consumers, in the form of higher retail prices. Those with lower incomes, who rely on low cost made-in-China garments, would pay the greater share.
There is an old Yiddish adage, which sums up the Law of Unintended Consequences as it relates to President Trump’s China policy to get even with China: “If you are out to dig a grave, dig two.”
