A “New Cold War” With China Could Mean Curtains For US Retail

The relationship between the US and China was distressed even before the COVID-19 outbreak, but the pandemic has even further eroded the two countries’ rapport. Some China experts warn that interactions between the two global superpowers have become so belligerent that they’re almost reminiscent of Cold War-era politics.

“We’re essentially in the beginnings of a Cold War,” said Orville Schell, the director of the Center on US-China Relations at the Asia Society, to Business Insider. And this hostility could have grave consequences — not only for the global economy but also for an American retail industry that is highly dependent on China.

Why? Mostly because these two biggest global economies are “intricately linked.” Before the COVID-19 pandemic, China held $1.09 trillion in US debt, a number bested by only one other foreign country: Japan.  Meanwhile, Oxford Economics highlights that the US-China trade relationship supports over 2.6 million jobs in the United States across a range of industries. And lastly, many American companies operate or have assembly lines based in China.

In an interview with CNN’s Fareed Zakaria, former UK Prime Minister Tony Blair said that the relationship between the two superpowers is sure to be the “determining geopolitical relationship of the 21st century.” He also emphasized the “interconnectedness” of these two leading economies.

“Here’s one big difference between [America’s] Cold War with the Soviet Union and today with China,” said Blair.” “At the end of the Cold War, I think America was importing something like $200 million worth of goods from the Soviet Union. American imports from China in 2018 were worth $500 billion.”

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Regarding retail, the whole world is reliant on China because it dominates global supply chains. According to Bloomberg, President Trump discussed an option that would bring supply chains home from China, and he even “publicly floated the need for a group of friendly nations in Asia that could help produce essential goods.” But the state of global retail is far more complicated than Trump knows. An alteration to the current system could have a devastating effect on the retail industry and the entire global economy.

Now let’s analyze the impact the New Cold War could have on the American retail industry:

The high cost of a forced economic “decoupling”

In an opinion piece, Wharton’s dean, Geoffrey Garrett, emphasizes that decoupling the two global economies and annihilating the international supply chain should prove to be a difficult task that will come at a hefty cost.

And it’s American companies that will pay the highest price. According to CNBC, Trump’s tariffs cost U.S. businesses $3.4 billion in June 2019 alone (a figure that came before a fresh round of new tariffs).

“We know firsthand that the additional tariffs will have a significant negative and long-term impact on American businesses, farmers, families, and the US economy,” stated over 600 companies and industry trade associations in a letter addressed to the White House which dates from June 2019.

In 2017, before the trade war, China was America’s largest supplier of textiles and apparel, according to CGTN. After Trump hiked tariffs again by adding a 15-percent tariff onto approximately $300 billion of Chinese imports last September, the sales of clothing and clothing accessory stores in the US registered a 10.2-percent point year-on-year decline for May of 2018.

That led to even American giants like Walmart Inc., Target Corp., and Amazon registering lower net profits. CGTN highlights that from fiscal Q4 2018 to Q3 2020, the year-on-year growth of Walmart’s revenue plummeted from 4.1 percent to 2.5 percent.

A report commissioned by “Tariffs Hurt the Heartland,” which is an umbrella group of trade associations pushing back against Trump’s trade war, showed how Trump’s tariffs would hike costs for the average American family of four by $2,300 a year. In fact, each second of this trade war costs Americans an average of $810.

The New Cold War will wipe out whole industry sectors

According to Fortune, Trump’s tariffs will have a devastating impact on the $2-billion bridal gown industry. The 25-percent tariff that was applied to silk, silk-blend fabrics, trims, and other wedding accessories will most assuredly boost production costs and reduce gross profit margin.

Since China is the world’s largest silk producer, any levy on silk will directly impact the 6,500 independently-owned bridal salons in the US.

Stephen Lang, the owner of the New Jersey-based salon Mon Cheri Bridals, told Fortune that he gets his materials from China, “and there’s no way that these other countries would be able to absorb the production that this industry needs.”

Wedding gown retailers like Lang believe that Trump’s tariffs will wipe out the industry or force consumers to look for more cost-effective alternatives like counterfeit gowns.

Retail employment will suffer and US unemployment will rise

The US-China trade relationship supports around 2.6 million jobs in the United States, including retail jobs. But a closer look at the retail industry shows the horrifying reality of the New Cold War through bankruptcies, store closings, and a wave of layoffs.

A study released by the National Retail Federation and the Consumer Technology Association highlights that the US GDP will shrink by nearly $3 billion, and around 134,000 American jobs will be lost every year because of Trump’s tariffs.

The study also shows that imposing tariffs on an additional $100 billion worth of Chinese imports would eliminate 455,000 jobs each year and reduce the GDP by $49 billion. Considering that retail lost another 8,300 jobs just in January of 2020, it seems like those original estimations were too optimistic, and the final numbers will be higher.

Punishing the American consumer

According to a study released in 2018 by the United Way ALICE Project, 43 percent of American households cannot earn enough money to afford necessities. American consumers were already cash-poor before Trump’s trade war, and these additional tariffs on consumer goods could have devastating outcomes for household incomes, which could leave many families in desperate situations.

Trump’s tariffs are ultimately a tax on American consumers, and many expect that business owners will hike prices by as much as 25 percent since the vast majority of retail goods come from China.

“Tariffs are a hidden tax on Americans, plain and simple,” said Rick Helfenbein, the AAFA’s former president and chief executive officer, in a March 2020 letter addressed to President Trump. “More than 41 percent of clothing, 72 percent of footwear, and 84 percent of travel goods sold in the US are made in China. A tariff on these products would be a tax on every American. In addition to increasing costs for American families, this action could result in retaliatory tariffs that target American businesses, resulting in job losses. At the end of the day, this could be disastrous for American families, American workers, and American businesses.”

Gary A. Williams, the founder and CEO of the market research firm wRatings, seems to agree with Helfenbein. “If consumer staples increase in price, consumers will have less money to spend on discretionary items, so demand will be hit,” Williams told RIS News.

To sum up, Trump’s trade war will have a devastating effect on retail and will further harm an industry that was already seeing falling sales and declining profit margins. But in the end, everyone will suffer from the “New Cold War,” making it difficult to find a plausible explanation for Trump’s trade policies.

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