On a good day, making sourcing decisions is a delicate balancing act of multiple factors constantly in motion. Since April 2nd, good days have been hard to come by.
The reciprocal tariffs announced by the Trump administration on nearly 60 countries around the world has the fashion industry scrambling. Add to that the baseline 10 percent tariffs on imports from all other corners of the globe as well as the tit for tat with China that had escalated to 145 percent before settling down to a (permanent?) 30 percent, and it adds up to an historic event that threatens partnerships, operations and livelihoods across the supply chain.
So, the race is on to find new footing in an unstable environment. For some, that includes passing as much of the financial burden onto production partners as possible. Meanwhile other brands and retailers have been busy sending teams out into the field to investigate options in least-hit nations. There are no great options, even for the largest retailer in the U.S. Immediately following the retaliatory tariff announcement Bloomberg reported that Walmart asked suppliers to absorb up to 10 percent of the stated tariffs before finally admitting a month later that it would have to raise prices.
How much the American public will end up paying remains to be seen. Because almost as soon as the initial announcement was made in April, Trump placed a 90-day stay on the trade action. Ostensibly the move was to give the rest of the world time to come to the negotiating table. China has been one of the firsts to do just that. In the end, the two countries seemingly reached an agreement that has deescalate matters. It’s proof that negotiations are possible for those countries willing to make concessions. But which ones will do so by early July when the pause on retaliatory tariffs end and how much they will be rewarded is impossible to predict. In the meantime, sourcing executives and their counterparts around the globe are busy strategizing for a million what-ifs as they wait.
“It’s prudent for companies to not make any rash, irreversible decisions based on information that comes out of the White House,” warned Steve Lamar, president and CEO of the American Apparel & Footwear Association, shortly after the tariffs were announced. “You have to make sure that you are making decisions on things that you feel confident about.”
But confidence is in short supply.
That’s evident by industry reaction. While capacities were solid in Pakistan through most of 2024, things started to get “rocky” by the end of the year, said Barry Tariq, director of product, sales and marketing at Kay and Emms Global, a textile and apparel factory in Pakistan. “The market has been slower anyway, but with this tariff, it’s kind of made it even worse. And retailers are all holding back. What I’ve been hearing is a 20 to 30 percent reduction in their forecasts after tariffs.”
Where to now?
At the outset of the trade war during the first Trump administration, the mandate seemed clear: exit China. And many in our industry did just that, at least in part.
The section 301 tariffs compounded by the impact of the global pandemic prompted U.S.-based brands and retailers to reduce their reliance on China. By 2024, nearly half (43 percent) of U.S. fashion firms reported they source less than 10 percent of their apparel from China. That’s up from 18 percent in 2018, according to the USFIA Fashion Industry Benchmarking Study. Further, China slipped from its position as top supplier for nearly 60 percent of those companies.
“Don’t move production countries only because of tariffs. That’s a clear lesson to be learned here.”
—Guido Schlossmann, M5Groupe
However, with this administration’s latest actions, the message is no longer diversify out of China, if it ever really was. Lamar calls China diversification “an acceptable side effect” for the president but not his main goal when it comes to international relations. Just look at the government’s trade actions over the last few years, he said. Congress has allowed the GSP program to lapse, which would have supported that cause. Trump has created “damage” to free trade agreements, which were designed to promote diversification. And, of course, the U.S. exited TPP, which was specifically designed to constrain China’s power.
The administration’s stated goal in devastating supply chains and roiling markets is to reduce the country’s trade deficit around the world.
With that in mind, there’s no one villain and no simple answer.
The list of countries line to incur reciprocal tariffs past the July deadline is lengthy. Among them are Bangladesh with 37 percent, India with 26 percent, Pakistan with 29 percent and Vietnam with 46 percent. Any nation not explicitly on the list, faces a 10 percent tariff. With the trade war placing undue burden on some countries, other nations that had been at a disadvantage could end up in play in new ways. For brands and retailers, it’s now a matter of recalibrating priorities and recalculating risk.
Assuming the tariffs go into effect as initially written, the sourcing calculus has changed. “We always have to speak in comparison and proportion now,” said Guido Schlossmann, chief supply chain officer for supply chain management firm M5Groupe. He mused that Mexico’s 10 percent vs Cambodia’s 49 percent could be enough to balance out Mexico’s higher wages. Similarly, he noted the 26 percent tariff on India compared to 37 percent on Bangladesh makes up for the productivity imbalance.
For India this might fuel what had already been speculated to be the country’s moment. Much has been made of India’s potential to emerge as a greater apparel leader even before the tariffs. Nitin Gupta, CEO and founder of Maavi Global, a sourcing advisory for brands learning to navigate the U.S. market, is optimistic because the country has recently committed to boosting exports in general and supporting the garment industry in particular. “One good thing which has happened is that the government is now serious about it and has been giving incentives and setting up industrial parks all across India, not just in the old core manufacturing areas,” he said. Now, he said, it’s just a matter of raising awareness with the rest of the world.
“I think India is the only country on the planet, after China, which has every part of the supply chain covered domestically. It’s just that it’s not enough or it is not price sensitive,” Gupta said, noting India’s relatively lower tariff compared to China, Vietnam and others in addition to a fairly favorable relationship with Trump may change all that.
Schlossmann has his eye on another player with similar advantages. “Turkey with 10 percent, that’s an interesting phenomenon, because Turkey, after China, is actually one of the countries with the most integrated backward industry. You have fabrics, you have raw material, you have accessories, everything similar to China, just in a smaller scale,” he said.
There’s a lot to consider in this potential new world order, Schlossmann said. But as tempting as it may be to jump if your production countries of choice are on the higher end of the spectrum, he offers a cautionary tale. When the initial trade war began in 2018, production started moving, with orders flooding into one country in particular: Vietnam. Just seven years later, Vietnam is firmly in Trump’s crosshairs as well.
“Don’t move production countries only because of tariffs. That’s a clear lesson to be learned here,” Schlossmann said. “Tariffs are a political instrument. They can change at any time.” Setting up operations in a new country only to have it targeted is costly, particularly for upstream operations which are especially capital intensive. He said sewing operations are relatively easy to move but spinning, weaving and knitting mills are another story—all of which have received big investments in the now heavily tariffed Vietnam.
The nature of this trade war, which doesn’t single out a solitary target, not only has the industry reexamining individual countries but also rethinking strategies that had become commonplace. Over the last few years, apparel firms have sought to decentralize operations in order to hedge against geopolitical, social and environmental risk. While that tactic has helped protect against localized natural disasters and bilateral trade wars, it may be counterproductive going forward, Schlossmann said. “If we diversify, we lose strength because we split volume into multiple smaller buckets, so we have less negotiating power than if I put everything into one country,” he said.
But of course, not every country can meet all needs. Even in the face of the increased costs that come with the tariffs, Stanley Szeto, executive chairman of supply chain solutions provider Lever Style, said the tariffs don’t negate the relative capabilities of each country, which have to drive sourcing decisions. “It’s not about category. It’s mostly about the nature of the orders. Things that are fast fashion, very quick response in small lots, China is still the place where that supply chain exists,” Szeto said. “The other countries don’t have that sort of skill set yet.”
Further, he said this moment doesn’t change the basic rules of modern sourcing: shorter lead times and closer to demand are key—even if that means still leaning into China or other tariff-stricken nations. “In a way, it’s sort of better to pay a little bit more, even with tariffs to get goods that you know will sell, rather than just taking a guess and producing in very far-flung places in Africa,” he said, by example.
What he describes is basically the Shein model, which in itself looks quite similar to how Zara operates. Despite the fact that the Zara model has been the gold standard for sourcing for decades, Szeto said that few have been able to adopt the Spanish fast fashion retailer’s practices because processes and mindsets are hard to change. “Sourcing people have been brought up over decades to think that their job is to minimize product costs at the FOB or LDP level rather than ‘how do we get speed.’”
Ethics on the line
Now that the tariffs have blown balance sheets up, the question is, can the industry use this massive disruption as an inflection point?
If so, David Birnbaum, managing director for sourcing consultancy Third Horizon Limited said it would unlock multiple major margin killers.
“Most of the money in the United States goes to two items: One is the markdown because the customer is not buying the goods, and the other is the returns,” Birnbaum said. These non-garment costs are where traditional companies falter against not just Zara but the likes of H&M, Mango and Uniqlo, he said.
While speed is part of the issue, the bigger problem is fashion’s propensity for picking the cheapest needle over the factory with the best material sourcing and design capabilities—and then leaning into those strengths. The result would be clothes consumers actually want without sacrificing efficiency or cost, Birnbaum said. “To do that, you have to stop attacking the factory and go into partnership with the factory.”
By doing so, Birnbaum said brands and retailers operating in the U.S. could recoup a major portion of the tariff hikes—without squeezing already distressed production partners. And without spending the hefty advertising dollars to try to entice reluctant shoppers. With that, the math works out whether the tariffs resume as announced after the pause or not, he said, because ultimately the trade war isn’t the problem. “It brings to light the failure of the sourcing strategies,” he said.
While Birnbaum is clear on what should happen, he’s equally certain that what’s likely to take place will be quite different.
The crucible of crushing tariffs on top of inflation and cashflow issues is the perfect breeding ground for bad actors—or at least bad actions. “It’s called submarine, and it’s a big business,” he said, describing the practice of transshipping or shipping goods from the production country to a nation with more favorable trade terms before sending them onto the final destination. And with an agency as inundated with shipments as the U.S. Customs and Border Protection, “it gets through 99 percent of the time,” he said.
“The effects could be long term, and that will change consumer spending habits… and eventually lead to unemployment in the production countries.”
Barry Tariq, Kay and Emms Global
Practices like these aren’t new but experts agree they’re sure to worsen as livelihoods up and down the supply chain are now threatened.
“What will you do if the retailer will not stick to their commitment or will not accept a price increase? They will try everything to survive,” Schlossmann predicted.
He expects underinvoicing to be up, saying it’s just too easy to misrepresent the value of a carton of T-shirts. While there are some players that are technically too high profile to blatantly traffic in illegal practices, that hasn’t necessarily stopped them in the past. “A lot of supply chain services are actually delegated and decentralized. So, I think that will continue,” Schlossmann said. The difference now is that rather than primarily concentrated on goods originating in China, these activities will include garments from a large number of countries squeezed by tariffs.
But that’s not to say all strategies designed to lower duties will be nefarious.
Tariff engineering has been around since the dawn of the harmonized tariff schedule system, which sets the parameters for each product and its corresponding duty rate. But in light of the looming retaliatory tariffs, the industry is expected to employ it more frequently to find ways to make the HTS system and country of origin regulations work in their favor. Birnbaum said making small changes to products could ultimately add up. “A T-shirt is a T-shirt, except if it’s white and has no pocket, in which case it’s underwear,” he noted, by way of example.
Further, Schlossmann expects the industry to lean into more tariff optimized sourcing like executing specific processes on each garment in a low tariff and/or duty-free country to qualify them for the most favorable tariff rates. Consider a product made in China, but then finished in a nation that’s only subject to a 10 percent tariff increase like the UAE or Turkey—think of a substantial amount of embroidery, digital printing, labeling and packaging—before it arrives in the U.S. The tariff rate of 10 percent from Turkey vs 30 percent in China offers a clear advantage, assuming those countries either don’t have their own import duties on China-made goods or have provisions for goods imported for export.
The nature and extent of the tariffs may also impact more than just the sourcing route. “My fear is that now people may start dumbing down the product,” Gupta said, adding the danger is particularly high at lower tiers. “Some of the premium brands if they’re running a T-shirt at $75, they may just tag on another $10 and the consumer doesn’t care. But the product which comes into a [mass market brand or club] may end up being cheapened further.”
And bargain shoppers may not be the only victims of the tariffs. Increased costs could also take a toll on the planet. “A lot of sustainability efforts, which have gone into making the product a little more expensive because factories have really invested in wastewater discharge, for example, or hiring or giving better wages, could go back to the Dark Ages again,” Gupta said.
For production companies that own multiple factories, Gupta can foresee a scenario in which the more environmentally advanced facilities are reserved for non-U.S. product, while the more basic facilities service this market. Moreover, cost pressure could lead to more subcontracting, which by extension means even less regard for environmental and social compliance. “It’s the way business used to be done 30 years ago,” he said.
Everybody’s vulnerable
In the meantime, factories are strategizing for their own survival. “We are fearful of a recession and retailers going out of business,” Tariq said. “The effects could be long term, and that will change consumer spending habits… and eventually lead to unemployment in the production countries.”
To stave off losses, factories are already doing what they can to replace any business they may lose in the U.S. “I think definitely, as it stands right now, a lot of manufacturers are running to the EU brands. They are running to them,” Gupta said, adding while understandable it may not prove fruitful. “EU growth has been very slow. So, a lot of brands there are not growing at a pace, and they certainly don’t have the bandwidth and the market that the American brands have.”
Looking further afield, Schlossmann said new economies in the Middle East, India, Korea and Japan plus Russia could compensate for some of the potential loss. Additionally, those regions will come out as winners. “[Factories] will be having empty capacities or less production, they will be willing to reduce prices. Maybe not to the extent the U.S. importer needs it, but maybe to the extent the Russian companies, the Indian companies, the Middle East companies, or the European companies need it.”
Schlossmann points out one potential unintended consequence of the tariffs. U.S. based brands could ultimately lose market share in the long run. For instance, in the case of Inditex which derives less than 20 percent of its revenue from the U.S. today, factory vulnerability could work in its favor, lending it an advantage over struggling U.S. companies. “If companies in America cannot survive and are fading away, you make other players somewhere else in the world very strong, like the Primarks, like the H&Ms, like Inditex. And once [domestic retailers] have faded away, they can enter your country,” he said.
And this shift may already be happening. Tariq characterizes EU brands as “very bullish” since the announcement. “Their business is strong, and they feel this is going to make their business even stronger, especially because of the tariffs,” he said. “Chinese manufacturers are offering European buyers prices you can’t even imagine because they have to keep employment, whether it’s through government-backed incentive rebates or manufacturers doing it on their own.”
It’s scenarios like this that illustrate why the government—both federal and local—needs the industry to provide feedback. It’s the only way to ensure they’re operating with a “solid, sober understanding of the facts,” according to the AAFA’s Lamar. And this extends beyond U.S. lawmakers to officials in supply chain partner governments as well, as they’re developing responses to Washington’s actions.
Thus far, he said, Trump has found it easy to use tariffs to attempt to bend will toward his desired outcomes because he’s been met with little resistance. “Maybe that’s sort of a message to all of us that there needs to be more concerted pushback to say, ‘Nope, that’s not the way this tool is actually supposed to be used.’”
From Lamar’s perspective, the president’s strategy seems to be to keep shaking things up, which flies in the face of typical trade strategies. “We should be looking at free trade agreements as carefully thoughtful, organized negotiations that lead to a durable outcome.” Lamar said. “We don’t have that environment right now, not even close.”
