Overview

• The US-China trade deal announced on May 12th significantly reduced tariffs (from 145% to 30% for US imports from China) for a 90-day period, providing temporary relief to businesses while still maintaining substantial trade barriers.

• Companies are using this 90-day window to rapidly place holiday orders while simultaneously pursuing long-term supply chain diversification strategies across countries like Vietnam, Cambodia, and India as a hedge against future trade uncertainty.

• Retailers are taking a conservative approach by focusing on "evergreen" products with proven sales histories, while brands employ various tariff mitigation techniques including "first sale declaration" and strategic product modifications to reduce tax burdens.

• The lack of clarity about whether US trade strategy aims to secure better international deals or revive domestic manufacturing creates significant planning challenges for businesses, forcing them to develop flexible, redundant supply chains.

• Recent developments have created cautious optimism that similar tariff reductions might extend to other countries like Vietnam, potentially establishing a precedent for broader trade de-escalation.

Content

Trade Deal Announcement and Initial Impact

* On May 12th, the US and China announced a deal to lower tariffs for 90 days * US tariffs on China dropped from 145% to 30% * Chinese tariffs on US goods dropped from 125% to 10%

Reasons for De-escalation

* Both sides recognized the trade war was causing significant economic damage * Concerns included: - Dropping cargo volumes - Investor panic - Recession projections - GDP contraction - Potential empty retail shelves (highlighted by Walmart and Target)

Tariff Landscape Analysis

* Previous 145% tariff was essentially an "import ban" * 30% tariff allows imports but remains potentially expensive * Tariffs apply on top of existing customs duties * Impact varies by product and company size * Some companies can resume shipping, others still face challenges

Market and Industry Reaction

* Stock market rallied, erasing recent losses * Industry remains cautious with ongoing uncertainty about long-term trade relations * Potential continued inflationary pressures * Consumer confidence and demand remain significant concerns

Business Implications and Strategy Shifts

* Specific Brand Example (Bog Bags): - CEO immediately greenlit 90% of previously suspended fall and holiday product orders - Continuing to explore production alternatives in Vietnam and Sri Lanka - Plans to maintain 40% production in China, diversify remaining production across other countries

* Production Hub Considerations: - Emerging hubs like Vietnam, Cambodia, and India were preparing for potential Chinese tariff increases - Current 90-day pause creates uncertainty about future production strategies - Negotiations could dramatically shift production landscape

U.S. Trade Strategy Observations

* Unclear whether the goal is to: 1. Negotiate more favorable international deals 2. Bring manufacturing back to the U.S. * Lack of clarity creates planning challenges for businesses * U.S. manufacturing revival still does not appear to be a likely immediate outcome

Inventory and Retail Response

* Brands are using the 90-day trade deal window to place holiday orders * Retailers taking a conservative approach to inventory: - Focusing on "evergreen" or core products with proven sales history - Inventory levels are up for some major retailers (Aritzia, Revolve, Tapestry) * Retailers expect minimal stock-outs for summer and back-to-school shopping

Shipping and Supply Chain Implications

* 90-day window provides temporary certainty for imports from China * Brands rushing to import products before potential future tariff changes * Anticipated challenges include: - Potential increase in freight costs due to competition for shipping space - Ongoing 30% tariff - Uncertainty about trade relations after 90-day period

Small Parcel Tariff Changes

* The U.S. duty-free exemption loophole for imports was modified on May 2nd * Tariff rates for small parcels from China/Hong Kong reduced from 120% to 54% * This change came shortly before the 90-day trade pause announcement

Brand Communication Strategies

* Brands taking different approaches to communicating about tariffs: - Explaining price increases transparently - Hosting AMAs (Ask Me Anything) about tariffs - Using tariff discussions in marketing communications * Many brands have been raising prices silently * Some leveraging tariff uncertainty as an opportunity to adjust pricing

Consumer Perception

* Tariff news about companies like Shein and Timu may already be deterring customers * Consumers generally aware of tariff discussions due to media coverage * Some brands leveraging the narrative that price increases are due to external factors

Tariff Mitigation Techniques

* "First sale declaration" allows declaring initial product origin for tariff calculations * "Tariff engineering" involves strategic product modifications to reduce tax rates * Examples include: - Adding fabric/leather elements to change product classification - Adjusting fabric composition (natural vs. synthetic fibers) - Strategic placement of pockets or design elements * These combined strategies could potentially save up to 30% in tariffs * Trade complexity has revived old workaround techniques previously unnecessary

Supply Chain Resilience Strategies

* Brands advised to diversify supply chains and build redundancy * Having multiple manufacturing locations helps mitigate risks from disruptions * COVID-19 and tariffs have accelerated the need for supply chain flexibility * Forge stronger ties with suppliers, vendors, and retail partners * Collaborate to share margin impacts and minimize customer price increases * Brands with strong supplier relationships more likely to receive preferential treatment

Future Outlook

* Recent China trade developments create hope for resolving other international trade tensions * Matt Priest (Footwear Distributors and Retailers of America CEO) suggests the China deal sets a precedent for other trade agreements * Similar tariff reductions expected for other countries like Vietnam (potentially from 46% to 30% or lower) * Additional trade deals likely to be negotiated with tariff rates lowered from previous levels * Significant uncertainty remains about long-term trade negotiations and potential future tariffs