Brace for Impact and Take Action: Trump Administration’s Bold Tariff Moves Shake Up Fashion and Retail

With reciprocal tariffs inching upwards of 50%, targeting key trading partners that companies have pivoted to in an effort to diversify supply chains from China, the landscape is shifting dramatically. Adding to the turbulence, a new executive order will eliminate the low-value shipment (de minimis), duty-free exemption for goods of China origin starting May 2.

Fashion and retail companies and stakeholders should prepare for a transformative era in global trade dynamics and immediately explore avenues to mitigate the effects of the new tariffs. In this alert, we summarize what you need to know about these new tariffs and the strategies you can proactively take to reduce their impact on your bottom line.

Background

On February 13, President Trump issued the Reciprocal Trade and Tariffs memorandum that was designed to reduce US trade deficits in goods. The plan sought to assess “non-reciprocal trade relationships” and respond by imposing tariffs calibrated to targeted countries’ total trade barriers. To implement this policy, in accordance with the America First Trade Policy Memorandum, US agencies (e.g., US Department of Commerce, US Department of the Treasury, US Trade Representative, etc.) were investigating foreign tariffs, taxes, and other nontariff barriers, with their respective reports due to the president by April 1.

The Reciprocal Tariffs

After much speculation regarding the specific application of reciprocal tariffs, on April 2 (aka “Liberation Day”), President Trump announced expansive tariffs that will impact imports from all countries. The president invoked the International Emergency Economic Powers Act (IEEPA), citing the national emergency caused by the trade deficit, an authority that allows him to impose the tariffs without congressional approval or a notice and comment period. According to the Executive Order, the president is imposing a baseline 10% tariff on all countries and individualized reciprocal tariffs for each country included in Annex I. These higher individualized tariffs, ranging from 10% and 50%, will have a significant impact on the fashion and retail industry, highlighting the need for effective duty mitigation strategies.

What You Need to Know

• Timing: The baseline 10% tariffs will take effect on April 5 for all countries. For countries subject to the country-specific reciprocal tariffs, the rates will increase to the higher rate on April 9.
• The Reciprocal Tariffs Stack: They are in addition to standard Most Favored Nation tariffs and any additional tariffs (e.g., China Section 301), other than those listed in Annex II. For example, China imports would be subject to standard tariffs + Section 301 tariffs of 7.5% or 25% + 20% IEEPA tariffs + 34% IEEPA reciprocal tariffs. This could lead to a whopping 79% tariff before applying the standard tariffs, which are already high for fashion and retail products. Some footwear has a standard tariff of 37.5% which means that a tariff of over 100% will apply to some products.
• Canada and Mexico: 25% IEEPA tariffs continue to apply to both countries. However, the US-Mexico-Canada Agreement (USMCA) exception will continue to be available.
• Hong Kong and Macao: Treated as articles of China (e.g., subject to 34% reciprocal tariffs).
• Limited Exceptions: There are very limited exceptions to the reciprocal tariffs listed in Annex II, largely because they are, or likely will be, subject to their own tariff regimes.
• US Content Exempt: Goods composed of at least 20% US-originating material are exempt. The tariffs will only apply to the non-US content. There are specific rules regarding what constitutes “US content.”
• Goods in Transit: Ship your goods as soon as possible. Goods subject to the 10% reciprocal tariffs loaded onto a vessel and on the final mode of transit before 12:01 AM EDT on April 5 (and before 12:01 AM EDT on April 9 for goods subject to the higher individualized tariffs) will not be subject to the reciprocal tariffs.
• Up or Down? These tariffs may not remain static and could increase or decrease at any time, subject to President Trump’s negotiations with other countries.
• FTZs: Except goods eligible for admission under “Domestic status,” goods subject to reciprocal tariffs imported into a Foreign-Trade Zone (FTZ) after April 9 must be admitted as “privileged foreign status.”
• De Minimis Continues for Now… Except for China: De minimis continues to be available until the US Secretary of Commerce determines adequate systems are in place to process the shipments and collect duties (except for China).

There are still many details regarding implementation of these new tariffs that will be forthcoming. We expect that an impending Federal Register Notice and Cargo Systems Messaging Service notice will provide more details.

Fashion and Retail Sourcing Countries Targeted

Many fashion and retail suppliers moved operations from China to other countries, such as Vietnam, Cambodia, and Bangladesh, following the imposition of China Section 301 duties in 2018. However, President Trump’s April 2 reciprocal tariffs directly target those countries, making it increasingly difficult for companies to avoid increased duties. We outline below a list of the affected countries that will likely have the most significant impact on the fashion and retail industry.

Significantly, countries that are members of US Free Trade Agreements (FTA), including the African Growth and Opportunity Act and the Dominican Republic-Central America Free Trade Agreement were not exempted from the reciprocal tariffs.

De Minimis

In addition to the reciprocal tariffs, President Trump also signed an Executive Order on April 2 to remove the de minimis exemption for Chinese origin goods beginning on May 2. The de minimis exemption, which allows goods valued below $800 sent to a single consignee on a given day to enter the United States duty-free, has been a significant advantage for fast fashion and e-commerce retailers importing low-cost goods. Its removal will likely lead to increased costs for these companies, as they will now face duties on a broader range of imports. This change will likely result in higher prices for consumers and a potential disruption in supply chains, as companies may need to reassess their sourcing strategies and logistics to mitigate the impact of these new tariffs.

What Can Companies Do?

Given these developments, it is crucial for companies in the fashion and retail industry to stay on top of the ever-changing trade developments and to implement comprehensive tariff mitigation strategies.

The AFS Fashion & Retail group and International Trade team are well-equipped to advise on the development and implementation of effective tariff mitigation strategies. We are committed to helping clients adapt to the ever-evolving trade landscape.

Our team has significant experience in a variety of duty savings programs that fashion and retail companies can consider to maintain their competitive edge in the market. Some strategies could involve legally lowering the dutiable value of merchandise. In other cases, the strategy could reduce the standard tariffs, which will be impactful because the tariffs “stack”:

• First Sale: In a multi-tiered transaction, the price at the earliest bona fide sale may be used to determine customs value.
• Buying Agency: Non-production related costs may be shifted to a Buying Agent and the commissions are not dutiable if properly implemented.
• FTAs: Goods from Mexico and Canada eligible for USMCA are exempt from IEEPA duties. FTA eligible goods may also be exempt from standard duties.
• Tariff Engineering: Changing the design of a product to result in a different tariff classification with a lower duty rate.
• Tariff Reviews: Confirm the tariff classification is accurate to ensure that the correct standard duty rate is applied.
• Country of Origin Reviews: Reciprocal tariffs apply on an individual country basis. Small changes in the manufacturing scenario may change the country of origin to a more beneficial rate.
• FTZs and Bonded Warehouses: To control cash flow and avoid duties on exported goods.
• And Others….

Each of these programs has a variety of requirements for legal implementation and should be closely evaluated to determine which aligns with business needs.

We will continue to monitor developments closely and provide updates as they arise. Please reach out to the authors for assistance in responding to new tariffs and implementing tariff mitigation strategies.