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Apparel Companies Fear Tariffs Could Squash Profits

U.S. apparel companies are bracing for squeezed profits and potential store closures as a result of the Trump administration's pledge to extend tariffs on Chinese imports.

President Trump recently walked back some of his tariff threat, agreeing to delay new duties on toys, cellphones, and other electronics until December. But a majority of apparel and much of the footwear imported from China are still subject to tariffs starting September 1.

About 40% of all clothing and 70% of shoes sold in the U.S. are made in China, according to the American Apparel and Footwear Association. After China became a member of the World Trade Organization in 2001, U.S. retailers increasingly relied on manufacturing their goods there because of cheaper labor and production costs.

In all, about $33 billion in apparel, shoes, and hats are among the items subject to a 10% tariff on Chinese imports beginning September 1, according to a Wall Street Journal analysis of data from the Office of the U.S. Trade Representative and the Census Bureau.

As fall approaches, the apparel that will be hit by the tariffs includes gloves, mittens, overcoats, and sweaters. More than 60% of U.S. stockings and socks are made in China, and $250 million of them face tariffs in less than two weeks.

Many apparel companies have already been cutting prices to fend off heightened competition from discount chains, Amazon.com, and other online retailers. That has left them operating on such thin margins that absorbing even a portion of any costs associated with the new tariffs would be painful.

The tariffs would come not long before the start of the holiday shopping season, which apparel retailers count on for much of their annual sales.

"Tariffs could wipe out their profits," said Wade Miquelon, chief executive officer of Jo-Ann Fabric and Craft Stores, in a recent press call.

Jay Sole, a retail and department store analyst at UBS, estimated that if the administration raised tariffs on China to 25%, it could lead to as many as 12,000 stores closing, about 10% of the stores among the 524 retailers UBS tracks. Even the proposed 10% tariff would pressure hundreds of stores throughout the U.S., he added.

Some retail landlords are less pessimistic. They suggest it could take years before tariffs siphon enough cash flow to threaten rent payments of most retailers.

"It's a little far down the line," said Charles Lanier, director of real estate at Plaza Associates Inc., a private commercial-property landlord that runs Crabtree Valley Mall in Raleigh, North Carolina.

The administration has already imposed 25% tariffs on $250 billion of Chinese goods.

With plans for new duties on additional Chinese products, virtually all imports from China would be subject to tariffs by year's end.

Most apparel companies are expected to absorb the cost increase themselves or negotiate ways to cut expenses with their Chinese manufacturers to avoid antagonizing customers with higher prices.

Macy's Inc., which raised prices on some luggage, housewares, and furniture when tariffs on such items rose to 25% in May, said it was unlikely to repeat that approach for apparel subject to new tariffs.

Source: Esther Fung and Inti Pacheco, wsj.com

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