2025 is not shaping up to be what anyone had envisioned. While the apparel industry was certainly aware that tariffs were on the way, no one expected the scope and scale of the U.S. trade action. And now at the half way point of the year, it’s clear the impact of Donald Trump’s trade strategy will resonate through Q4, if not beyond.
The initial reaction by many in April was to wait to see how it all played out. Now that preliminary trade deals are coming through with not only meaningful tariff rates but also serious stipulations, the fashion must shift into a new gear.
Upstream, both buyers and sellers are each feeling hesitant and vulnerable, which is triggering major shifts in supply chain practices—and not just in terms of geography. In an attempt to build in agility and limit risk, buying practices are changing and trade relationships are forming and falling.
At the retail level, this new reality means reevaluating growth plans and pausing major capital expenditures.
“Pre-election, we were looking at a pro-business administration where we expected to have continued growth [and the] stock market was going to go up,” said Ryan Mulcunry, managing director for retail solutions firm GA Group. That expectation plus the prevailing belief that consumer confidence would remain high fueled a lot of capex plans, he said.
And the apparel sector was no different.
“A lot of the fashion and luxury players had big hopes for the U.S. business, and in that respect, I think they also had planned store openings, DCs and local headquarters,” said Achim Berg, founder and managing director of think tank FashionSights. “And therefore, I think what we see now is a stark contrast to what was expected in the first place.”
The tariff-induced impact to the U.S. market are a particularly difficult blow, given that the European retail market is stagnate and the once robust macroeconomic situation in China is no more. “There is no natural growth impulse out there,” Berg said.
Instead, retail expansion, in particular, has slowed. Mergers, too, have been hit by the uncertainty. “The M&A activity has been choppy and just hasn’t happened yet at the scale we hoped. When you look at M&A, there’s a lot of one-year, three-year, five-year planning of what margins and profitability to expect to help quantify and value the underlying businesses,” Mulcunry pointed out. “We can’t do that right now.”
Instead, apparel retailers have been forced to focus on upstream operations. At this point, protecting margins is the name of the game—unfortunately, the rules keep changing.
Just days ahead of the 90-day reciprocal tariff pause, Donald Trump began announcing new tariffs scheduled to go into effect on August 1st for specific nations that haven’t already managed to secure a trade deal with the U.S. Many countries important to the textile and apparel industry received updated threats that were roughly in line with the April announcement, with a few notable exceptions. Cambodia and Sri Lanka saw some relief with rates dropping more than 10 percent. On the other side, the potential tariff on some goods from Canada increased from 25 percent to 35 percent, Mexico shot up to 30 percent, and Brazil is now facing a 50 percent tariff in a move that was more political than economic.
Further, when asked about the new deadline, the president was reported to have said it is “firm, but not 100%.” So, the uncertainty continues.
Limiting exposure
With reciprocal tariffs starting at 25 percent, the question of who’s going to pay for them is as relevant as ever.
At the 10 percent rate, brands and retailers expected their suppliers and vendors to help shoulder the load. But it’s unlikely upstream can absorb much more of the costs. So, where does that leave production companies in high-tariff nations when the music stops on August 1? The simple answer would be an exodus of orders, as buyers seek out more economical options. But David Swartz, senior equity analyst, consumer equity research at Morningstar, said retailers who do so may come to regret that strategy.
“They don’t want to bankrupt their producers. They work with these factories, sometimes over decades, and they know that if they start canceling orders, some of those factories are going to start to get into financial trouble,” Swartz said. The resulting layoffs and closures would be bad for the production countries, but also for the brands themselves “because later they may need those factories.”
“Everybody is ready to take business, but everybody has to be cautious about safeguarding their financial exposure.”
—Ashish Tomar, Bestseller
It was just five years ago when orders were yanked out from under suppliers as a result of Covid shutdowns and cratering demand. And no one has forgotten.
In what Swartz called a “pretty extreme move” Gap was among those companies that refused to pay for orders, he said, resulting in “some serious damage.”
“If your manufacturers cannot trust that you’re going to pay for your orders, then they’re not going to want to work with you anymore,” he said.
A common misconception is factories have no choice but to acquiesce to whatever terms are offered to them. But even with low global demand and open capacity motivating some to unfavorable terms, the good facilities are often very much in demand, and thus, have options.
“Everybody is ready to take business, but everybody has to be cautious about safeguarding their financial exposure,” said Ashish Tomar, head of sourcing for Bestseller brands in India.
Even the lowest tariff rates have already put downstream players at risk.
Vidiya Amrit Khan, an incoming vice president of the Bangladesh Garment Manufacturers and Exporters Association, and deputy managing director of her family business Desh Group, is among those fielding requests to share the pain.
In one case, her factory, which produces men’s and boy’s woven shirts, faced an initial request from a buyer for a 10 percent discount. Amrit Khan pushed back. The best she could negotiate was a 6.75 percent discount on all unshipped orders. While it’s a small figure in theory, that discount takes a fairly large chunk out of Desh Group’s direct revenue. Amrit Khan explained that for every $100 that comes in, $75 goes to fabrics and accessories, leaving the company with $25—now less $6.75—to cover all overhead, including rent, utilities, taxes and salaries.
“So, my profit is immediately gone, and I am also in trouble because I have purchased my fabric and accessories knowing that I have a certain budget, and then my budget is cut,” said Amrit Khan, adding the requested discount would also impact her financing. “Bangladesh Bank doesn’t allow for deductions of more than 5 percent from a single PI.”
In an attempt to get some breathing room, she asked to amortize the value of the discount on current orders across future orders. That request was denied.
Amrit Khan said a prolonged period of discounting at this level would have grave consequences. About 60 percent of the company’s production is for the U.S. market.
Diversifying dependence
It’s easy to see how a production company could very easily end up in trouble in this current environment. So now, both buyers and sellers are more hesitant than ever to place big bets.
“I think we’re going to see a lot more propensity to chase orders, as retailers are cautious, but no one wants to miss a sale,” said Paul Walsh, CEO of sourcing firm Newtimes Development, which operates 28 offices around the globe. “We’ll probably see movement of sourcing towards countries where there’s ability to turn goods around quickly.”
This—in addition to a relatively low tariff threat—puts Latin America in the spotlight for the U.S. market. Countries like Guatemala and Honduras are gaining interest because proximity helps fashion firms address speed to market, logistics costs and sustainability, all in one.
Despite these benefits though, cost has always kept this region from gaining market share, according to Berg, who formerly produced McKinsey & Company’s annual State of Fashion report. “We did a report in 2018 on nearshoring, and even for Latin America, for Turkey and other markets, it would only work if you would massively automate some of the production processes, because otherwise, the labor cost differential between Far East production, China or Southeast Asia or India, is just too big.”
But maybe now tariffs would help bridge that gap. Even so, questions remain about the region’s raw materials access and production capacity. While building upon what’s already there is an option, the challenge—for Latin America and anywhere else sourcing executives could contemplate—is it’s impossible to make that type of commitment when you don’t know how much of this geopolitical climate will stick.
“Who would now make big plans and big investments not knowing whether the whole regime is going to be changed within days, weeks, months or years?” Berg said. “Before such a production would be up and running, you might have another set of elections for Congress, and you might even have presidential elections again.”
But retailers aren’t the only ones searching the globe for new options. Factories, too, are pitching themselves to an ever-broader array of markets. Though it would be nearly impossible for these production companies to fill the void of lost U.S. volume, the trade war has incentivized them to redouble their efforts to bring in new customers.
For Bangladesh, for instance, the U.S. represents almost 20 percent of its readymade goods exports, while the EU makes up 50 percent.
“Bangladesh is working on developing newer markets like Brazil, the Middle East, even exporting to China and India,” Amrit Kahn said, adding that trade with the latter now is hampered by a different geopolitical issue. It’s unclear what to expect from these markets. “The purchasing power of those countries is yet to be even experienced and seen.”
“How does one survive without America, especially when we’ve been surviving with America?”
—Vidiya Amrit Khan, Desh Group
While some suppliers are casting a wide net for buyers, others are finding opportunities at home.
“There are big markets coming up in Asia itself. So, to satisfy that consumption, exporters are already turning inward,” Tomar said. While he produces local for local now, Tomar spent almost a decade in export, at companies like Shahi Exports, the largest exporter in India for companies like PVH and JC Penney. “Earlier, good factories [in India] never used to like to take domestic orders. It was a matter of pride that ‘I’m exporting goods to the U.S. and Europe.’ That has changed quite a lot because of COVID.”
Tomar said because many people lost money through canceled orders, there’s a new acceptance of local business as a way to limit risk.
Going global
Meanwhile, retailers are also limiting exposure by working with suppliers that can help them pivot. In the face of constant geopolitical issues, accelerating climate emergencies and rampant inflation, the need to be able to move production has become a matter of ‘when’ not ‘if.’
“Brands should look for partners who have multinational capabilities in terms of product, in terms of geography, region, everything,” Tomar said, adding that given the advantage that production companies of this scale have, the industry should get ready for “a lot of consolidation.”
Establishing strategic relationships with vendors like this is more important than simply looking to diversify, he said.
Already brands working with some of the large Asian manufacturing groups enjoyed an edge over their competitors when tariff announcements prompted sourcing changes because those partners could respond much faster.
In this way, buying agents have a similar advantage.
“That’s a been a dying business for 10 to 12 years. But because of so much exposure and so much risk, brands will feel more comfortable keeping an agent in between rather than working directly with transactional suppliers,” Tomar explained.
While brands may maintain strategic relationships themselves, he said this is a way for them to “consolidate all the dirty work with the agent.”
Companies like these are also better positioned to deal with trade complexities, like the clauses the U.S. is pushing for in potential trade deals.
Antennas went up on July 2nd, when Trump announced the terms of the U.S. trade deal with Vietnam. At the time, the president said goods from Vietnam would face a 20 percent duty and that that rate would double for any “transshipping.” The mention of transshipping left many wondering whether Trump was using the term literally or to refer more broadly to goods with inputs from China. (It’s worth noting that Bloomberg reported on July 11th that the Vietnamese government has said Trump spoke out of turn and there is no deal in place yet.)
While no one knows for sure what Trump meant, the news reports about U.S. negotiations with Bangladesh and India could be a clue.
The Business Standard has quoted an anonymous senior commerce ministry official in Bangladesh as having said, “A key focus of the tariff talks is the Rules of Origin, requiring 40 percent local value addition to access the U.S. market.” This source also said the stipulation for India currently stands at 60 percent.
Any sort of rule of origin clause adds another level of sourcing complexity for an industry as tied to China as apparel. And it further favors some countries over others.
Should such a stipulation become part of the final agreement with India, Tomar said the country is better positioned than most to handle it. “Our main fabric is cotton, that holds more than 90 percent of our exports in textile and readymade garments. We are really not too much dependent on China, other than our activewear categories,” he said, referring to the country’s relative weakens when it comes to manmade fibers.
Tomar can see India becoming an alternative to Bangladesh in this scenario, though he admits there are limits to how much the country could benefit. “Whether we have the infrastructure to cater to the amount of orders expected on time, with the right quality, that is to be seen.”
Amrit Khan would like negotiations between Bangladesh and the U.S. to focus on solutions that could satisfy Trump’s concern about unbalanced trade without resorting to tariffs.
“If Bangladesh could set up bonded warehouses, particularly for American cotton, where it comes in and doesn’t get taxed… we could promote the import and utilization of U.S. cotton in this country. And that, of course, could have a massive positive impact on the trade that we do with the U.S.,” she said.
By reducing the export country’s reliance on China, this tactic could also preclude the need for a rule of origin clause.
Ultimately, Amrit Khan said, Bangladesh needs a favorable deal—and not just for the RMG sector’s sake.
“How does one survive without America,” she said, “especially when we’ve been surviving with America?”
