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Moody's: Added tariffs on China goods to raise costs for US apparel companies

The additional tariff on the remaining $300 billion of Chinese imports would increase the costs of goods for U.S. apparel and footwear companies, Moody's said in an Aug. 2 research note.

The analysis came after U.S. President Donald Trump on Aug. 1 announced that the 10% additional tariffs on Chinese goods will take effect Sept. 1. This does not include the $250 billion in goods from China already subject to a 25% tariff.

Shares of major U.S. fashion retailers such as Nordstrom Inc., J. C. Penney Co. Inc., Gap Inc. and Abercrombie & Fitch Co. significantly dropped following the announcement.

Moody's noted that apparel and footwear are among the highest-taxed U.S. imports even before the new tariffs were imposed. They were previously excluded from the tariff increases, except for certain accessories, such as handbags and leather gloves, textiles and yarns, leathers and cotton, Moody's said.

The agency said companies in the U.S. would see increased costs of goods sold for products imported from China. It noted that the Trump administration's move is a credit negative for U.S. apparel companies and that the overall credit effect on individual companies would depend on how they can diversify their sourcing, cut costs and adjust product designs.

Moody's predicts that companies would not be quick to raise prices as it could drive U.S. consumers to cut back on purchases and ultimately hurt revenue and profitability.

The agency noted that approximately 53% of the combined revenue for large U.S. apparel manufacturers is derived in the U.S. and is potentially at risk of higher tariffs.

Moody's highlighted some U.S. clothing companies that are expected to be hit the most, including G-III Apparel Group Ltd., Caleres Inc. and Wolverine World Wide Inc., which mostly source over 50% of their inventories from China. The agency said companies like Levi Strauss & Co., V.F. Corp. and PVH Corp. are better positioned, with less than 20% of their products sourced from China.

In June, the American Apparel & Footwear Association noted that a 25% tariff would lift the average cost for a family by $500 per year.

In a separate research note on Aug. 2, Moody's said the country's largest retailers, such as Walmart, Target, Costco, Amazon and Best Buy, have enough diversity in their supply chains and enough pre-buying over the past several quarters to ease the potential damage from the added tariffs.