Talk About An Unraveling with Steve Lamar
June 21, 2019
Scott Miller: I'm Scott.
Bill Reinsch: I'm Bill.
Scott and Bill: And we're the Trade Guys.
Andrew Schwartz: You're listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I'm H. Andrew Schwartz, and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. In this episode of The Trade Guys, we welcome a very special guest. Steve Lamar is the Executive Vice President of the American Apparel & Footwear Association. He represents the AAFA members before Congress and the administration on a range of trade issues. We'll ask Steve how the Trump Administration's tariffs are affecting his industry. So, buckle your seatbelts. We'll discuss all that, plus President Trump's big meeting with Xi Jinping and much more on this episode of The Trade Guys.
Andrew Schwartz: Steve Lamar joins us. He's the Executive Vice President of the American Apparel & Footwear Association. Steve, I am known to purchase a lot of American apparel and footwear, so I didn't notice a truck that you brought with things for me. So like, what's going on here, man?
Steve Lamar: I apologize for that, but I see you're all very fashionably dressed. So I-
Andrew Schwartz: Yes, Trade Guys are fashionable.
Bill Reinsch: We did that on purpose, knowing that you were coming.
Steve Lamar: I appreciate it.
Andrew Schwartz: Most of what I'm wearing is Italian, though, to be honest with you. Now that you didn't bring stuff for me, okay, so anyway-
Bill Reinsch: That's a good question. How much of your association is domestic manufacture, and how much of it is imports?
Steve Lamar: Well, we don't really divide between domestic manufacturing and imports, we divide between where the jobs are. We have about four million jobs that we create in the United States, that we support, which is interesting because this is an industry that is about 98% import penetration. So what that means is 98% of the stuff in your closet is going to be imported. So the apparel, the footwear, the bags, everything else, a lot of that stuff's imported. The amount of people that help convert those products from concept to consumer is about four million that are in the United States. So-
Andrew Schwartz: So to be exact, one-third of U.S. apparel imports came from China in 2018. That's some 28 billion.
Steve Lamar: That's by value. If you look at it by volume, you get to about 42%.
Andrew Schwartz: Okay. And another statistic, over 50% of U.S. footwear imports, six billion came from China.
Steve Lamar: Again, by value. If you look at volume, that number's about 69%.
Andrew Schwartz: So, tell us, what do you do with the AAFA?
Steve Lamar: As an association, we work on three areas. One is brand protection, to protect intellectual property. One is trade, to make sure that goods can be traded across borders so we don't encounter trade barriers. And the last one is supply chain and manufacturing, to make sure that there is responsible production activities, that we can make sure that the product safety is paid attention to, garments and shoes are made in a sustainable manner, things like that.
Steve Lamar: And that last area, the supply chain and manufacturing, is probably the most evolutionary one because every day you're doing stuff better than you did the day before. And then next week and next year it'll be better than what you did today.
Andrew Schwartz: All right, so everybody who knows me knows that I'm a brand guy. I think about branding. I think about media all day long. But I know that your companies that you represent, your job is not to talk about their brands. Your job is a bit broader than that. Today we're not going to be talking about the companies that you represent per se, we're going to be talking more about the product. So instead of talking about a specific manufacturer of jeans, we're going to be talking about blue jeans. Explain why that is.
Steve Lamar: What you find in our industry is we're able to maintain these jobs, four million jobs. They're good-paying jobs. They're really in all areas of our supply chain, because we have these global supply chains. We have these global value chains is what we refer to them. And this means that you're producing products all around the world in the place where those countries have the most competitive advantage to make them. And then that allows us to focus on the stuff where we can have the most competitive advantage.
Steve Lamar: And I was actually on the Hill yesterday, and somebody was talking about how we don't have a lot of factories, and factories are sexy. People want to talk about factories. And we countered and said, "Jeez, but we have a lot of other things. We've got these great design jobs, and these IT jobs, and these very high-paying jobs, jobs that require education, that require very specialized skill sets. They're very much in demand in our industry. And those jobs exist here in the United States because we're able to produce products all around the world in places where it makes the most sense to produce those products.
Bill Reinsch: So break down the four million. Does this count retail?
Steve Lamar: It counts retail, but it also counts the designers, the customs compliance people, the product safety compliance people, all the folks that are in the headquarters, the people that are doing the branding, that really make sure that as you think about it, producing a product that goes, say, from concept to consumer. All those things, all those steps that go into it, there's people involved. It's not like you wake up and all of a sudden there's clothes in your closet. Stuff has to happen in order for them to get to you, in order for them to be developed.
Scott Miller: It is interesting that you point to this bias, and I noticed it a lot in talking to members of Congress over the year. It's- making things is somehow a superior activity, but in fact, a lot of the jobs throughout the supply chains are very beneficial. I always point out to people that in, say, 50 years ago the Ford Motor Company made its vehicles in maybe 10, 15 locations in the United States. But in every little town, the richest guy in town was the Ford dealer. Well, he didn't or she didn't make cars. But the dealership was incredibly valuable. And the retail business adds immense value to what the consumer gets.
Steve Lamar: So 50 years ago, I might've been in a factory and I was in my office in the factory right above the factory floor. I was considered a factory job. And then over time my company expanded and maybe I moved to a building across the street. So the factory's on one side of the street; I'm on the other side of the street. I'm still doing the exact same thing I was doing before, supervising it. Over time, the factory then moves to another place. My office is still located there. I'm adding other jobs in there. I'm still doing the same thing, but now I no longer have a factory job. I might be doing literally the same kinds of activities, but I'm no longer classified as a factory job because I'm not physically in the factory even though I control production.
Andrew Schwartz: Well, see, I don't understand this. What's less glamorous? I mean, there's a very memorable scene in the David Simon show The Wire where the head of the docks in Baltimore, Frank Sobotka says, "We used to make things in this country." Well, maybe we don't make as many things now, but we design things in this country. Isn't that glamorous?
Steve Lamar: Yeah, absolutely. And we look at making things as, you're making all of those decisions that allow the thing to come to creation. I mean, someone's got to order the cotton. Someone's got to figure out where the cotton gets planted. Someone's got to figure out what kind of yarn spinning you're going to use, what kind of fabric production you're going to use, where the zippers and buttons are going to come from.
Andrew Schwartz: Scott has a great presentation about how- he tells you how all of the things that go into making a tie and that- all the logistics and how a tie actually comes together. So it's awesome.
Steve Lamar: I'd love to hear it at some point.
Scott Miller: Well, I can-
Andrew Schwartz: You can go to The Trade Guys microsite to find this. It's on video.
Scott Miller: It's a way to describe rules of origin, but you talk about how value gets added, okay, and that even things we think are simple, like a necktie, are actually quite complicated products. They're made of a lot of different pieces. There's a lot of people involved in it, from design and invention all the way through to selling and delivering to the consumer, so-
Steve Lamar: Absolutely.
Bill Reinsch: Let's go back to manufacturing again because I don't agree with Andrew. I think we're making more stuff than ever. We're just doing it with fewer workers.
Steve Lamar: Well, there's that too. You look at a textile facility, so we make a lot of textiles in the United States, so by this, I mean yarns and fabrics. And those used to be much more labor intensive than they are right now. I mean, the big thing about textiles is … Where's the water going to come from, the electricity? Is the production process sustainable? Those are the questions that we need to solve when you make textiles in the United States right now, not how many people you employ.
Bill Reinsch: There's a joke about that, you know, that the modern textile factory has only two workers: a man and a dog. And the man's job is to feed the dog, and the dog's job is to keep the man away from the machines.
Scott Miller: Well, if you’ve ever been to a sock plant, it kind of looks like that. I mean, socks are as-
Andrew Schwartz: That's not a very good joke.
Scott Miller: ... capital-
Andrew Schwartz: I mean ...
Bill Reinsch: I've always liked it.
Scott Miller: We were just going to let it lie there, Andrew. It's okay. It's okay.
Steve Lamar: I thought it was funny.
Andrew Schwartz: I mean, there's better Trade Guy humor than that, I'm just going to say. We've had better humor.
Scott Miller: Yeah, but socks look like an advanced chemical plant almost. It's almost- very little actual labor is part of the value-added of making a sock. It's highly mechanized. And so we just don't recognize these processes.
Steve Lamar: Yeah, but you also look at the socks that are on the market today, and there are these brightly colored socks, the-
Scott Miller: Oh, the performance fabrics, the weaves of the yarn itself that delivers either support or-
Steve Lamar: And you're also buying socks for specific activities. You're not just buying white socks anymore, you're buying socks for basketball. So-
Andrew Schwartz: I am currently wearing brightly-colored socks.
Steve Lamar: You have awesome socks.
Andrew Schwartz: And they were made in the United States, actually.
Steve Lamar: Those look like them, absolutely.
Andrew Schwartz: Yeah, absolutely.
Steve Lamar: No, there is sock production in the United States still. It's one of the sectors.
Andrew Schwartz: We've got all kinds of colors. We've got blue. We've got azure. We've got all kinds of stuff going on here.
Steve Lamar: Is this Trade Guy endorsed legwear?
Andrew Schwartz: Absolutely.
Steve Lamar: Good. I appreciate that.
Andrew Schwartz: It has the Trade Guy legwear stamp of approval indeed. And that might be something that we turn to you and your companies to manufacture and get the AAFA stamp of approval for our kiosk upstairs with CSIS we will be creating to sell Trade Guy merchandise.
Steve Lamar: Okay, we're on it.
Andrew Schwartz: You heard it first.
Scott Miller: Yes.
Steve Lamar: We're on it.
Scott Miller: We may be a nonprofit, but we're not crazy.
Andrew Schwartz: That's right. So tell us, Steve, today, these days, right now with all that's going on with trade, what is your primary mission on behalf of your membership? What are you spending all your time doing?
Steve Lamar: So I'm going to give you a couple of numbers and then explain why those matter. The first two sets of numbers are 98 and 95. And 98 is the percentage of apparel and footwear that's, as I mentioned before, in our closet that's imported. So we make some stuff here in the United States but not a lot. And 95 is the percentage of people on the planet who wear clothes and shoes who live outside of our borders. Some would say 96, so 95, 96.
Steve Lamar: And if you look at those two numbers, 98 and 95, that tells you that if you want to be competitive in our industry, you need to have access to global suppliers, and you need to have access to global customers. And it's really that simple. And many of our members, their supply chains, they will thread, pun intended, through and across a lot of different countries. And those will change. Those supply chains will grow and die over time. The one I'm using for this year and next year and next season, I'll eventually change it as a new supplier comes online and I got to change it. So that's one area.
Steve Lamar: The other set of numbers to give you, and this is really where a lot of the focus is right now for us, is 6 and 51. So 6 is the percentage of imports that we import in the United States that my members represent. So textiles, apparel, footwear, travel goods, we represent about 6% of all the imports.
Scott Miller: Of all the imports, everything in the United States imports.
Steve Lamar: Yeah, so-
Scott Miller: All two trillion dollars. (11:49)
Steve Lamar: We count food, and tables, and automobiles, and petroleum, and everything else. We represent 6% of that by value. In 2017 we represented 51% of all the duties that were collected by the U.S. government, so 6% of the imports, but 51% of the duties. How is that possible? Because we still pay the very high tariffs, the very high duties that were imposed by the folks that were running this town in 1930, under the Smoot–Hawley, Hawley-Smoot Tariff legislation. Those are still largely in effect for our industry.
Steve Lamar: And so 6 and 51. So one of the things we try to do is to get those duties reduced, find opportunities, whether it's through trade policy or through other activities to reduce those duties because those tariffs are taxes that are paid by U.S. consumers ultimately.
Bill Reinsch: When I was working on the Hill, the first thing I did in trade was, I was working for Senator Heinz from Pennsylvania, was work on footwear protection because Pennsylvania was the second or third largest footwear-producing state in the county, and that was when we produced a lot of footwear. And it's all gone. So, tariffs didn't make any difference, right?
Steve Lamar: Well, tariffs made a difference. I think some of the footwear companies would argue it made a difference in very specific pockets. I mean, there were companies that will say that because of the tariffs that are existing on certain lines that still support them, and they do produce in the United States behind that tariff wall. But for most of the industry, and by most, I mean 98% of the industry, the fact that there are still very high tariffs simply just means a cost that gets added to the price that the consumers ultimately pay.
Scott Miller: Over the years of multilateral trade negotiations, say, from 1947 to the mid-1990s, what you had were American industries like the high technology industries at the time in chemicals, machine tools, those kinds of things were very interested in the global market. And so in trade negotiations, they were happy to drop U.S. tariffs in return for lower tariffs abroad because they had an international view, while in light industrials, which would characterize most of the apparel and footwear business, the light industries were subject to import competition even in the '50s and '60s. And their idea for tariff negotiation is to keep our tariffs high and to keep the jobs here. So there really was a split in the industry, so to speak, that led to… And you can see it today in the tariff schedule.
Steve Lamar: Mm-hmm. In fact, if you look at the tariff schedule, you will find that there are these very high tariff peaks for textiles, apparel, footwear. For some footwear, it can get as high as 60, 67% that you pay for a small children's shoe. For apparel, it can get up to 32%. For things like synthetic active wear garments, that can be 32%.
Bill Reinsch: And if we had Ed Gresser here, now at USTR, he could explain in great detail why some of the highest tariffs are on the cheapest goods and really work against the poor people.
Steve Lamar: Right. Tariffs. It's a classically regressive tax, where an individual that's got less income, a greater percentage of their available spend, the amount of money that they spend is going towards clothing. And if you've got a tax on those products, then they're paying a higher percent.
Steve Lamar: The second thing that happens is ... And, again, this is probably more of an accident of the way the tariffs were created, but a lot of times when you have a product that can come in at a specific price point, so if it's $10 or less, it's this tariff, if it's $11 to $20, it's this tariff, those price points, as you get higher and higher, the tariff rate drops. So you are charging a higher tariff on the lower price point item.
Bill Reinsch: On the cheaper stuff. Can you say a few words about tariff engineering and this new thing that has sprung up?
Steve Lamar: Well, it's not a new thing. It's been around for a long time. But-
Andrew Schwartz: But can you first say what tariff engineering is?
Scott Miller: Thank you, Andrew.
Bill Reinsch: He will explain.
Steve Lamar: So tariff engineering is when you design a product specifically to meet a tariff classification. And the reason you're doing that is because the tariff classifications are different for different products. So, if you add a pocket on a dress below a certain point in the garment then that will allow you to have a different tariff rate, a lower tariff rate. A classic example is this, is that if you've got a garment that is chief weight cotton, that tends to be in the 16% range and if you have a garment that's chief weight, so the majority of the weight is a synthetic, that'll be in the 32%. If I've got a 51/49 garment, where 51 is the synthetic and 49 is the cotton, then that'll be a higher tariff rate than if I have a 49/51 where I put the 49 for the synthetic and 51 for cotton.
Scott Miller: So it really affects decision making on the garment itself.
Steve Lamar: It makes decision making so that’s … Companies that have been able to do this really well, they bring their designers in with their customs executives from the very beginning to figure out what kinds of features are they going to include on this so they can see whether they can take advantage of a lower tariff rate.
Andrew Schwartz: I bet the designers can get a little annoyed with accountants telling them, "Hey, you got to put an extra pocket on that thing or we're going to pay more for it."
Steve Lamar: Well, actually, it gets more complicated than that because what happens now, and this is a good thing, is designers are working with a whole team of people. I mean, we want designers to produce items that are sustainably produced, right? So they can either be recycled if it's a close-the-loop conversation, to make sure that you aren't bringing into your product either a product safety violation or a violation of some other compliance issues. There's a whole host of requirements that we have to follow. Conflict minerals. I mean, I can go on and on. But you need to make sure that the designers are aware of that, so as they're designing the product they aren't inadvertently tripping up one of these other requirements that are there. That's one of the reasons we have so many jobs in our industry because it's so complicated to-
Andrew Schwartz: Got to figure out how to keep track of all of this. Yeah.
Steve Lamar: Absolutely.
Scott Miller: What happens in a free trade area like the NAFTA or better yet, what's going to happen when USMCA … in your industry, how does that help or hurt this kind of product?
Steve Lamar: Well, let me just start by saying that NAFTA, the North American Free Trade Agreement, is a good agreement. We have long supported it. It supports couple hundred thousand jobs in the textile, apparel, footwear industry and the supply chain. We talked about blue jeans earlier. A typical supply chain might look like, you know, you harvest the cotton in Texas, that cotton is sent to Alabama where it's spun into yarn. It's then sent to North Carolina, woven into fabric. That fabric gets shipped down to Mexico. Alongside with that, you're sending down buttons and rivets from states like Georgia and Tennessee and so forth. You're sending down labels, other things that go into a pair of jeans. All that's assembled in Mexico and then it's brought back up to the United States. So you've got this phenomenal two-way trade supply chain where we're exporting the materials down, we're adding value, we're assembling the finished product, maybe doing the finishes and other things and then bringing this product back up to the United States. That's made possible because of NAFTA. The USMCA will keep that going, we'll still have that. That's assuming the USMCA actually gets approved by Congress.
Scott Miller: Gets implemented. Correct.
Steve Lamar: … is implemented and so forth. One of the things we asked for with the USMCA was, keep it trilateral, which, I think we succeeded. We wanted to make sure that no harm got done. In other words, that you didn't unwind any of the supply chain, which was largely accomplished, and then we're now looking for seamless, to make sure that it is seamlessly implemented from the NAFTA to the USMCA, and the jury is still out on that one.
Bill Reinsch: Why is trilateral important? Is there a lot of cross-border traffic with Canada?
Steve Lamar: Yeah. We actually make stuff in the United States and export to Canada. We make stuff in Canada that gets combined with materials in the U.S. and shipped to Mexico. There's a lot of supply chains that go through all three countries.
Bill Reinsch: What would happen... One of the rumors, one of the landmines we've talked about toward USMCA implementation is if the president decides to jam the Congress and withdraw or announce that he's withdrawing from existing NAFTA and basically tell the Congress, "You take my new one or you get nothing." What would happen to you guys if there were nothing? If there were no NAFTA of any kind? Would all this unravel, or would it just continue?
Steve Lamar: I appreciate your use of the word unravel. We always appreciate the use of industry metaphors.
Bill Reinsch: That was accidental but okay.
Andrew Schwartz: We've had unravel, we've had seamless, we've had thread. There's a lot going on in this podcast.
Steve Lamar: We've got some time left still.
Andrew Schwartz: Yeah. Oh yeah. Oh yeah.
Steve Lamar: It would be a huge problem. First of all, the thing we always look at in an agreement like NAFTA is, it's really going to answer a fundamental question. Are we going to be making products in Mexico using U.S. content, U.S. yarns and fabrics, or are we going to be making them in other places where we don't use that U.S. content? If you no longer have the NAFTA, then the incentive to produce close to the United States and Mexico evaporates. It goes away immediately. Then companies that are doing that, they may still do that and figure out a way to make that work but largely, the numbers aren't going to work and so, you're going to see them migrate to, perhaps, other free trade agreement partners like CAFTA, Central America, or they may just move to Asia where they won't use that U.S. content. The big loser in that will be the U.S. textile industry. It's one of the reasons, actually, why the Textile Industry Association was one of the first entities to endorse the USMCA. They came out of the box very, very early on and said they wanted to see that approved. You normally don't see that. Normally, they come to agreements very late in the game. They came very early and we give them high marks for that.
Bill Reinsch: They're big where, South East, right? United States?
Steve Lamar: I think, yeah. Cotton is pretty much throughout the South. The southeast is a traditional textile, yarn, and yarn fabric production … but they'll have members that are really, throughout the United States, as do we. The industry isn't really as concentrated in one location as it used to be.
Bill Reinsch: No. It is scattered. One of my favorite statistics, when I was working for Senator Heinz back in the '80s, everybody thought Pennsylvania, steel state, big deal.
Andrew Schwartz: Right. Ketchup state.
Bill Reinsch: Well, we didn't talk about that because that would have been a conflict of interest.
Andrew Schwartz: Oh yeah, of course.
Bill Reinsch: I can tell you a funny story about that.
Andrew Schwartz: Oh, I want to hear it.
Bill Reinsch: Well, I'll digress for a moment. We were visited by a guy in Wilkes-Barre, who had invested a lot of money in tomato-canning equipment, and I learned a lot about this. It turns out that you can can most anything with regular canning equipment: beans, corn, peas. But for tomatoes, you can't, because of the high water content. You need special equipment. He had invested a lot of money in special canning equipment for tomatoes. Right after he did it, he discovered that the Italians started exporting to the United States, large amounts of canned tomatoes, tomato paste, and other Italian products. He came down to us to talk about relief. What could we do for him? Make a trade case to help him deal with the ... I think he accused that these were allegedly subsidized tomatoes coming in. We agonized about this, but in the end, told him, asking John Heinz to save the tomato industry is about the clearest conflict of interest you could finally-
Scott Miller: ... it writes itself.
Bill Reinsch: Go talk to Arlen Specter. She'll help you. Getting back to the statistic, what always struck me is that people thought of Pennsylvania as steel or ketchup. In fact, the largest manufacturing employer in Pennsylvania at the time, was the apparel industry.
Steve Lamar: Yeah. They've got-
Bill Reinsch: They're all gone now, or most of them are gone.
Steve Lamar: Well most of them. There's still apparel. There’s textiles, footwear, in Pennsylvania. I mean, they really exist all throughout the United States. It's not concentrated in any one state like the way you used to think of it, because it is an industry that is supported by these global value chains.
Scott Miller: That's a huge adaptation for every company in that … supply chains.
Steve Lamar: Absolutely. 100%.
Scott Miller: Because you move to these global networks, now you're doing... The thing you're doing in the United States are the high value added activities. It actually works out.
Andrew Schwartz: Steve, let me ask you a question. Our viewers can't see this, of course, because they're listening, but on your very dapper suit today, you're wearing on your lapel, a lapel sticker that says, "Tariffs are taxes." Why that sticker?
Steve Lamar: I just came from the hearings that are being held this week and next week. The administration has proposed as the most recent tranche of products to get tariffs in an effort to establish leverage over the Chinese government for these negotiations.
Andrew Schwartz: This is the big kahuna. This is what Donald Trump's talking about and he's going to meet with Xi Jinping at the G20.
Steve Lamar: Next week.
Andrew Schwartz: Next week. If they don't do this, this is going to be the most expensive dinner of all time.
Scott Miller: Yes. This is known as List 4 in trade speak.
Andrew Schwartz: Right. Really expensive ketchup for your steak at that dinner.
Bill Reinsch: It'll be $300 billion. Well, he gets hit harder than the ketchup people.
Steve Lamar: We get hit a lot people than the ketchup people. They broke this down into four lists. The first three lists are fully tariffed. That's about $250 billion. We have some products that are on third list. Things like backpacks, purses, gloves. Not only do they hit us in the wallet but they literally hit our wallet too. Wallets are on that list as well.
Andrew Schwartz: Which means that consumers get hit.
Steve Lamar: Right. The consumers get hit. So the administration, recognizing that these were consumer items. When they first started out they said, "We don't want to touch consumer items. They have a-”
Andrew Schwartz: You're talking backpacks. That means that in September, or more to the point, in August, when everybody's getting ready to go back to school …
Steve Lamar: Back to school. Right.
Andrew Schwartz: When you go to Walmart, when you go to Dick's Sporting Goods, whatever, when you go to get your backpack, you're going to pay $10 more for your backpack, $20 more? We don't know.
Steve Lamar: We don't know. It depends on the price point, but you could absolutely see price increases coming through. Or you could see companies not able to pass the prices on because the contracts are already written. You have to remember, these tariffs that happen, that occur, they were at 10%. We went into the weekend about a month and a half ago thinking that there was a trade deal going to happen any day now. If you remember this, there was a lot of optimism. President was Tweeting about this trade deal and then 48 hours later, the president was Tweeting that, instead of a trade deal, he's instructed his people to ratchet the tariffs on backpacks from 10% to 25%. He gave us four days notice. Those contracts are written. Those contracts are already done.
Scott Miller: In a previous episode we talked about a small business who had placed an order for a very expensive machine to add to his plant, from China, and while the machine was on the water, the tariffs were applied.
Andrew Schwartz: The lesson here is, that it's not over 'til the orange man Tweets.
Scott Miller: Tweets, correct.
Andrew Schwartz: This is patented by Scott Miller. You heard it here first. Well, you heard it on our last episode of The Trade Guys. "It is not over 'til the orange man Tweets."
Steve Lamar: I think that’s what’s going to be on the first Trade Guys t-shirt.
Andrew Schwartz: Yes. Yes.
Scott Miller: We can see merch from that one. Definitely.
Bill Reinsch: Talk a little bit more about, who actually pays the tariffs and how does this work out? Assuming a whole bunch more of your stuff is going to get hit by the fourth tranche if the president does that.
Steve Lamar: The fourth tranche is basically everything else. There's a couple of items that have been accepted but it's largely everything else. So that is, now we're talking about apparel, footwear, home textiles, so things like blankets and sheets and things like that.
Scott Miller: Not to mention consumer electronics, luggage, all that.
Steve Lamar: And consumer electronics.
Scott Miller: Toys.
Steve Lamar: Well, luggage was on the previous list.
Scott Miller: Oh luggage was on the previous … okay.
Steve Lamar: Right. This is basically, as you said, I think you said, the big kahuna. This gets to everything else, and that's why you have these hearings. There's seven days of hearings. About 320 or so witnesses. I had some of my members that were in town today and this week and they'll be in some tomorrow and so forth. Everyone is basically making the same point about how these products shouldn't be taxed because we can't move the product, we can't move the product quickly enough. Meaning, they can't move the production. The production is embedded in China.
Scott Miller: Yes. Those networks are where they are for the moment.
Steve Lamar: It supports jobs in the United States. And then to your point, if we have to pay these taxes, these tariffs, it's tariffs that we pay. It's a question that a lot of people... I have another sticker that says, "We pay the tariffs". Which is basically, when a product comes across the border, when it's entered into a port, the importer, whoever is the importer of record, they pay the tariff. So, if it's the retailer that you're buying your product from, they're the ones paying the tariff.
Scott Miller: Sure.
Steve Lamar: That's money that has to be paid, has to go to the U.S. government, and it's got to come from somewhere.
Bill Reinsch: Because the goods aren't released until it's paid.
Steve Lamar: The goods aren't released until it's paid so it comes from somewhere. Where does it come from? It comes from payroll, it comes from maybe other items they were going to introduce, some new innovations or some design elements that they can no longer do. Perhaps they'll just stop producing certain products. We refer to this as an existential event. It's existential because there are some products that will literally disappear, some low-end, low-value products that are just no longer … makes sense to make them, so they just won't be made anymore. Who's going to be hurt by that? Consumers at the value end of the equation because they won't be able to find items that they could find before. They'll just go away. The other thing that will go away are companies. We heard some very compelling testimony from some companies that have been around for a hundred years saying, "If you make me pay 25% on everything that I am making because everything that I make is in China because I've been doing it for so long, it's been built up, I can't afford it. I can't pass that price along because I'm at the value end. My consumer won't pay an extra 25% more, so I can't pass it along. I can't get my suppliers to pay that cost. It's got to come from somewhere, so I'll just have to go out of business." That's what you hear people saying.
Andrew Schwartz: Talk about an unraveling.
Steve Lamar: Talk about unraveling, yeah. It's a very emotional response that you get from some of these companies that are seeing families that their parents, that their grandparents, in some cases, their great-grandparents started, are under this threat.
Bill Reinsch: How often can a company in that situation go back to the Chinese manufacturer, in this case, and say, "Can you give me a break on price to offset the tariff?"
Steve Lamar: Let's look at what we’re asking the Chinese manufacturer to do. We want to make sure they employ people responsibly, that they're in safe buildings, that they're using sustainable materials, using sustainable practices, right? We're already asking them to do a lot of things. Say what you want about China but a lot of the companies that are there have really accepted and embraced those requirements as part of their competitive advantage. We've got these very efficient supply chains.
Scott Miller: This was built over a very long period of time.
Steve Lamar: It's exactly, thirty years.
Scott Miller: We're treating these tariffs like a light switch. The fact is that you have relationships that have been built up. We heard about this in the other direction from Blake Hurst who talked about farmers and farm co-ops who cultivated relationships with their customers in China.
Andrew Schwartz: Blake Hurst is the head of the Missouri Farm Bureau.
Scott Miller: Over years and years. All of a sudden, somebody flips the light switch and your product's too expensive. This is a disruption, and nothing's free here, okay?
Steve Lamar: Right. And so then what happens is then you... The other option I think, people are looking at and exploring is, can they move these supply chains to other countries, you know, Vietnam, Bangladesh. People ask, actually, can you move them back to the United States? We don't have the capacity here in the U.S. to do it. I mean, you're talking about moving an industry back, and not just our industry. You're talking about moving the toy industry and the electronic industry, so all these industries moving back at the same time, it's-
Scott Miller: While we're at full employment.
Steve Lamar: Let's the four of us all try to walk out that door at the same time and see what happens. It's not going to occur, right? So you run into these problems, but nevertheless people are looking at other options. They're sort of looking at the tea leaves. It's going to be difficult to stay in China over the medium term, so maybe I can reduce my exposure a little bit or a lot, so people are looking at those things. What happens if the trade war's gone? So it's gone and then you walk back into the factory that you abandoned, that you were with for 10 years and you abandoned them, you come back in five years later, not only do they not want to take your phone call, but your competitor is in the factory that you trained. That's not a good thing.
Bill Reinsch: Have a lot of your members been moving to other locations anyway because Chinese wage rates have been going up, irrespective of anything Trump is doing?
Steve Lamar: Yeah, and that's a natural evolutionary thing. Our industry, whether you're looking at the footwear side or the apparel side, has evolved and moved over time. I mean, if I go back long enough, it moved through the United States and go back to Europe.
Scott Miller: From Massachusetts then to the Carolinas.
Bill Reinsch: To the South, yeah.
Steve Lamar: The Carolinas and so forth. There's been a long term trend for diversification away from China. What's interesting is footwear, I've been with my association for a little more than 20 years or so, and footwear has largely been at the 80 to 90% and it's been dropping consistently, but over a 20-year period it's now dropped to about 70%, I think, was the number we talked about earlier. Apparel, on the other hand, as you went through a lot of the trade changes over the last 20 years, free trade agreements, the removal of a quota system that limited the amount of product that you could ship, China becoming a member of the WTO, Vietnam becoming a member of the WTO, the emergence of e-commerce and speed to market and consumers that want products delivered to their house before they even order them online. As you've started to look at that you've seen apparel grow and then begin to sort of move out of China, grow into Vietnam and so forth. So you've seen a lot of changes in where we get our products.
Scott Miller: Sure. And there's a lot of different kinds of apparel. Fast fashion's different than sort of basics.
Steve Lamar: Right.
Scott Miller: Underwear and socks, or whatever.
Bill Reinsch: I would think, on the tariffs, it may have something to do with demand elasticities, too. If you're a Chinese manufacturer and you're making $300 coats and you're going to add 25% to that, I'm inclined to think somebody who’s going to buy a $300 coat will probably be willing to pay $350 or $360 for it anyway, so there you can probably pass it on, which tells me kind of it's the low end of your spectrum that really gets hit the hardest.
Steve Lamar: Right. But you still may see some price increases on the low end. But let me kind of walk you through how this is inflationary in so many different ways. Look at the two numbers I gave you before, and I'll add a third one. So 42% for apparel, 70% for footwear, 82% for backpacks, luggage, things like that. That's in China, okay? I'm putting a 25% tariff on the number one supplier for those three general product categories. So that's 25% up. All of their competitors, they now realize, "Well, I can raise my prices 5%, 10%, 15%," and if they don't do that to be opportunistic, they do it because as people start to migrate out of China they go into those other countries and now you've got bumper car inflation, where they're starting to bid up the prices in those other countries because of capacity. So that's just our industry. That same thing is now happening in toys, electronics, food, a lot of other places. On top of that, don't forget the Chinese are retaliating also. So instead of ... It's not just the apparel that we produce in China coming in and having a higher price, but the cotton that we export to China, that's getting whacked as well with a tariff.
Bill Reinsch: With their retaliation.
Steve Lamar: With their retaliation. So we're finding we're paying going into China and then we're paying coming out of China. So we're getting hit two different times.
Bill Reinsch: There are so many anomalies here that make it interesting. I think we may have talked about this before, when the president put tariffs on washing machines, which was not a part of the China thing. It was a safeguard thing that he did in 2018. There's now data coming in and one of the things that amused me was that while the average price of a washer, washing machine has gone up $86, the average price of dryers has gone up $92 even though there are no tariffs on dryers. So it's sort of ... People know that you usually buy both of them together.
Steve Lamar: It's a sympathetic thing.
Bill Reinsch: It's an ... Well, I don't know that it's sympathetic to the consumer, but it's an opportunistic-
Steve Lamar: It's not sympathetic to the consumer at all.
Bill Reinsch: ... increase. But you're exactly right. Other people are going to take advantage of basically the opportunity to raise their prices and get some of the additional money.
Steve Lamar: Right. And then when it translates down to the consumer, I don't recall the proposal that everyone gets a 25% pay increase. I haven't seen that come out yet.
Scott Miller: Definitely. That's not come out recently.
Bill Reinsch: It's a Republican administration, Steve. You're not going to see that from them.
Steve Lamar: Okay, so that's not going to come. So everyone's got the same available dollars but now they're going to be spending on product that is all going up in price in one form or another. So not only might I lose sales because my product is more expensive, but I might lose sales because everybody else's product is more expensive and there's no money left over to buy that pair of jeans.
Bill Reinsch: Tell me, how big do you think this ends up being? Let's assume he does it, okay? How big does this end up being politically? I'm thinking, so my t-shirt is going to go from $9.95 to $11.45 or $11.49. Am I really going to get upset enough to change my vote over that, or is there a cumulative effect of, if everything I buy is going to go up 25% it's going to have an impact? I'm trying to figure out if this is politically as volatile as some people think it is.
Steve Lamar: You know, that's one of the things we're trying to figure out. I mean, obviously, if you look at the last 18 months you see a lot of volatility in the stock market, and I've seen some studies that kind of track some of the president's tweets to when you see some of the activity up and down, so clearly there's a relationship between that. That affects people's sense of whether they feel wealthy or not and whether they feel that they're, do I need to save more because my portfolio is now not doing so well? And then as you begin to see these price increases creep in … You have to remember a lot of the tariffs that have been, washing machines notwithstanding, that have been imposed so far, if you look not only at the China 301 tariffs but also the steel and aluminum tariffs we've heard so much about and some of the other ones, a lot of those tariffs have been on inputs.
Scott Miller: Intermediate goods.
Steve Lamar: Intermediate goods.
Scott Miller: Right.
Steve Lamar: So they've made it more expensive for you to do things here if you're using inputs, but they haven't been as much on the finished product. The administration has largely been taking finished products off the list. Again, wallets and backpacks and baseball gloves and things like that notwithstanding. This last tranche is almost entirely consumer goods. Why? Because almost all the consumer goods have been off the list before.
Scott Miller: Right. That's what's left.
Steve Lamar: And so you're going to start to see some of the tariffs from before still working their way through the economy. I think that's still going to be happening. Maybe not so much because of the steel and aluminum relief for Mexico and Canada, so that might have some impact, and then you're going to now start to see the goods coming in, the finished goods coming in hitting with a higher tariff. Eventually, those tariffs have to be paid.
Scott Miller: But it's really complicated and it's hard to find. I mean, the example of the small businessman who had the machine that arrived with a big tariff on it, he simply didn't hire a couple of new employees.
Steve Lamar: Right.
Scott Miller: But there's no record of those employees not being hired. Nobody keeps track of that statistic, but that was the fact. He had to pay the tariffs, he couldn't hire people.
Steve Lamar: There was a fellow at the hearing today that was testifying, and he said that he got hit. He's in List 3 and List 4. His goods got hit on List 3 and as a result of them getting hit on List 3, they had to let people go in the first time in the history of their company. So List 4 will be even more of that, so more of that. Their decision is, we can't raise the price for these particular products and so the way they had to resolve that was people lost their jobs.
Andrew Schwartz: So, what's your prediction about what's going to happen with Trump and Xi Jinping?
Steve Lamar: Well, I haven't looked at my Twitter feed in 20 minutes, so I-
Andrew Schwartz: Fair enough.
Steve Lamar: Look, I think both sides say they want to reach a deal.
Andrew Schwartz: Right.
Steve Lamar: I take both sides at their word. I think there is probably also politics that might favor both sides wanting to let this drag on a little bit longer to seem tough. You want to-
Scott Miller: Yeah, you can see-
Andrew Schwartz: But as you said, when it really starts to hurt American consumers, in addition to all the other people you talked about, maybe this isn't such good politics back home here.
Steve Lamar: Right. You know, as it begins to affect the economics that we have here, I think the president might feel some pressure to reach a deal. I think he feels that that's the case in China, that the Chinese government is beginning to feel the pressure there, too. Eventually that pressure will merge to create a deal, whether that deal is at the end of next week or whether that deal is later on. I think one of the things we may see next week is a truce. You could see another truce where they both decide to kind of kick the can-
Scott Miller: Yeah. Return to the negotiating table and-
Steve Lamar: Kick the can down the road a little bit.
Andrew Schwartz : I mean, but Bill-
Bill Reinsch: Exactly. That's what we've been predicting.
Andrew Schwartz: Bill, isn't he putting himself, isn't Trump putting himself in a tough position, though? Because he's going to be hearing back home here from Joe Biden that the consumer's going to be getting hit hard at Walmart, right? And then, on the other hand, if he even shows any weakness or caving towards the Chinese he's giving in to the Chinese, which is a big part of his bravado towards his base, which is I've stood up to the Chinese. So, he's in kind of a tough position here.
Bill Reinsch: Well, exactly. I think the Democrats are salivating about this. If he postpones, he just kicks the can until some later date, but ultimately he's faced with exactly the dilemma that you've described. He can make a deal, which will probably be less than he wants, which takes, the press will say soft on China, poor negotiator, or he can impose the tariffs, escalate, it's the only tool that he seems to know, in which case they say you caused an enormous amount of damage. All these people are going to go out of business, as Steve was just talking about, and you've produced nothing. We have no agreement, we have no gain. I think he's in a corner on this. Now, what I think he will do is pick door number one, which is take a deal, any deal, and then say it's the greatest one ever.
Andrew Schwartz: Beautiful deal.
Bill Reinsch: Beautiful deal.
Scott Miller: Luxurious.
Bill Reinsch: And hope nobody notices. Now, this then raises an interesting timing question. I think if he were really ... I don't think he can do this, but if he were smart about it he would drag this on for a year so that he makes the deal so close to the election-
Scott Miller: That nobody can measure it.
Bill Reinsch: ... that nobody knows it's terrible until after the election.
Scott Miller : Right. Sure.
Bill Reinsch: If he makes a deal now, or in the next three or four months-
Scott Miller: It will be able to-
Bill Reinsch: ... it will be a big market bump when it happens, of course. Everybody will be very excited.
Scott Miller: But you'll be able to check whether the deal worked and whether they complied.
Bill Reinsch: A year later ... Yes. A year later, you'll see the flaws in the deal. You'll see Chinese cheating, which I think is very likely, and he's going to be talking about more tariffs, and the Democrats are going to say, "All this stuff you did accomplished nothing." I think he's vulnerable on it.
Andrew Schwartz: Interesting. Scott, any comment on that?
Scott Miller: What a mess. The beat goes on. But of course, that’ll be another subject for us next week.
Andrew Schwartz: Absolutely.
Scott Miller: That's the good news.
Andrew Schwartz : Steve Lamar, thank you for joining the Trade Guys-
Steve Lamar: It's a pleasure.
Andrew Schwartz: ... and enduring our banter and educating us as to what's going on in your world.
Steve Lamar: I love it. Any time.
Andrew Schwartz: To our listeners, if you have a question for the Trade Guys, write us at email@example.com. That's firstname.lastname@example.org. We'll read some of your emails and have the Trade Guys react to it. We're also now on Spotify, so you can find us there when you're listening to the Rolling Stones or you're listening to Tom Petty or whatever you're listening to. Thank you, Trade Guys.
Scott Miller: Thanks.
Bill Reinsch: Thank you.
Andrew Schwartz: You've been listening to The Trade Guys, a CSIS podcast.