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Retailers watching US-China trade developments closely

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Retailers watching US-China trade developments closely

The retail industry is on high alert for any potential disruptions to the vital supply chain that exists between the U.S. and China, following a rocky few weeks of rhetoric culminating in a report that the White House could open an investigation into China's trading practices.

In what could be the latest shot across the bow, The New York Times reported Aug. 1 that President Donald Trump's administration is considering opening a broad investigation into China's trading practices, one that has the potential to derail economic relations between the two superpowers. CNBC also reported Aug. 3 that Trump will make a speech and sign a memorandum targeting China's intellectual property practices.

In addition to the scrutiny from Trump, one key lawmaker on the Senate Finance Committee is also calling for a separate investigation.

Sen. Ron Wyden, D-Ore., the top Democrat on the committee, sent a letter to U.S. Trade Representative Robert Lighthizer on Aug. 2 asking for an investigation into what he called China's "forced technology transfer policies" as well as action to stop China from requiring U.S. companies to disclose intellectual property information as a condition of doing business there.

The Times reported that the administration's investigation will focus on alleged Chinese violations of American intellectual property and could result in sanctions by the U.S., which could very well disrupt long-standing supply chains.

Retailers have significant exposure to frictions in the U.S.-China trade relationship. Companies produce and import billions of dollars' worth of consumer goods to the U.S. annually. If relations fray, those shipments can become targets in a tit-for-tat between the two countries.

As one illustration of the scope of trade, apparel and textile imports to the U.S. from China totaled $37.89 billion for the year ended May 30, according to the latest data from the U.S. Commerce Department's Office of Textiles and Apparel. Footwear imports from China totaled 1.7 billion pairs in 2016.

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According to U.S. Customs and Border Protection, China accounted for 16,417 of the intellectual property rights seizures made by U.S. authorities in fiscal 2016, roughly 52% of the total seizures made during that period. Those seizures represent a $1.38 billion based on the manufacturer's suggested retail price value — the top category being watches and jewelry at $653.6 million, or 47% of the total. Apparel and accessories represented $110.8 million, or 8% of that value of seizures by U.S. customs officials.

If the Trump administration pursues an investigation into intellectual property violations, there could be significant implications for retailers and brands that support efforts to crack down on counterfeiting but are also cautious about punitive measures.

Stephen Lamar, executive vice president of the American Apparel & Footwear Association, said in an interview that tension in what he called the "extraordinarily complicated" relationship between the U.S. and China is nothing new and is something the AAFA has monitored for years.

Still, he said it is important for brands to have access to China because it is a major source not only for imports but also for exports of textiles and other product inputs, such as leather the U.S. sends across the Pacific.

The announcement that the U.S. will look into China's trade practices surrounding counterfeiting is something AAFA is watching, Lamar said, adding that it should not be an exercise in punishing China but rather about keeping the supply chains mutually dependent.

"We're very much interested in making sure China is playing by the rules," he said. "For us, it's not about imposing sanctions, but making sure there are still uninterrupted supply chains."

There "clearly" has been a shift in tone from the friendly talks between the U.S. and China this spring at Trump's Mar-a-Lago property to what the president spoke of this summer as more hostile nature, according to Josh Teitelbaum, counsel at Akin Gump Strauss Hauer & Feld in Washington.

China, the top source for U.S. apparel since 2004, is a "mainstay" of the apparel supply chain coming to the U.S., Teitelbaum said, but he noted that some companies have become concerned that they are too dependent on the country and that increased costs have driven the pressure closer to the demand market.

"U.S. apparel companies operating in China are exposed to certain actions by the Chinese government," Teitelbaum said. "That is the risk that companies are taking into account. We have a couple of issues not necessarily related to retail but could ricochet over."

Julia Hughes, president of the U.S. Fashion Industry Association, said her organization "absolutely" has concerns about the trade relationship because of the lack of deliverables from the U.S.-China dialogue in July.

"Obviously, the reliance of the fashion industry on imports of apparel, footwear, accessories and other consumer products from China means that we are watching closely the next steps," Hughes said. "While the Trump administration is talking about steel and aluminum and other manufacturing exports, we are concerned that our sector will be harmed if there is a trade war."

The Trump administration is expected to announce before January its findings of an investigation into steel imports, as well as its intent for imposing tariffs on the product.

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Although it has seen a recent decline in imports of footwear, China also remains far and away the top and most important supplier for the U.S. with a roughly 72% share of the market.

In its 2017 Global Footwear Sourcing Assessment, the Footwear Distributors and Retailers of America reported that China shipped 1.7 billion pairs of shoes to the U.S. in 2016, a 13-year low. Imports of shoes also dropped by $2.2 billion last year, but FDRA president and CEO Matt Priest told S&P Global Market Intelligence that the relationship between the two countries is "extremely important" for the industry.

Priest said underlying tension always exists between the two large trade partners, and his members have learned to navigate that "noise that's always there."

Still, he said he would be shocked if there are any retaliatory actions on footwear from any U.S. sanctions.

"Those issues are all percolating out there," Priest said. "But right now, I feel OK."

The Times report follows what was largely seen as unproductive economic dialogue between the two countries in July as well as increased rhetoric from Trump toward the largest supplier of apparel and footwear to the U.S.

Trump has increased rhetoric toward the larger supplier of apparel and footwear to the U.S., and has repeatedly pressed China to cut economic ties with North Korea and persuade it to de-escalate its nuclear advancements, both of which have been unsuccessful to date. Representatives from both sides were slated to hold individual press conferences following talks, on July 19, but both were canceled the day of. In addition, the U.S. and China did not issue a joint statement or memorandum of understanding, which had been done in every round of previous talks since 2006.

Phillip Swagel, an international economic policy professor at the University of Maryland's School of Public Policy, said in an interview that he believes the economic relationship between the two countries will continue, even with the recent tension.

"The economic benefits for both sides are too large to risk over disputes that are important but modest in the big picture," Swagel said. "The U.S. will complain on behalf of particular industries such as steel affected by Chinese competition, but measures in response will be sector-specific rather than going after trade with China as a whole."

Swagel, a former assistant secretary for economic policy at the Treasury Department under the Bush administration and chief of staff at the White House Council of Economic Advisors, said that these trade tensions and subsequent actions could suggest that China would focus on "intermediate" products, such as steel, which are inputs into other products.

"Ironically, higher steel prices would harm U.S. manufacturers. And there are many more people in the U.S. employed by firms that use steel than by firms that produce steel," he said.