China and the European Union — both key markets for fashion — are fighting back against the Trump administration’s tariffs blitz.
After the latest US tariffs went into effect at midnight on 9 April, hitting China with eye-watering 104 per cent duties on imported goods, China announced its own measures following a meeting among officials: 84 per cent retaliatory tariffs on US goods. China’s decision to add 50 per cent to its existing 34 per cent tariffs on US imports is the latest sign that China won’t bow to aggressive measures. It also signals the escalation of a trade war between the two biggest markets in the world.
“The potential US-China trade war may create a further economic headwind for the two largest global economies and regions of luxury growth,” Deutsche Bank analysts said in a note on Wednesday, before China’s retaliatory tariffs were even announced. They added that, “Europe, Asia and the Middle East likely can’t pick up the slack.”
The same morning, the EU approved its first set of retaliatory measures worth €22 billion, ranging from 10 to 25 per cent. Other nations, like Japan, South Korea and Italy, are reportedly heading to Washington DC to negotiate with the President, before implementing any retaliatory measures. CEOs of multinational companies have also been in communication, CNN reported on Tuesday.
Declines among stock futures dipped further following China’s announcement. The S&P 500 is now on course for a 1.6 per cent decline, from 0.5 per cent earlier in the day; the Nasdaq is set for a 1.3 per cent drop, down from 0.2 per cent; and the Dow Jones industrial average looks to drop 1.7 per cent, down from 0.7 per cent. Luxury stocks are also down. Deutsche Bank downgraded its share price for Richemont, LVMH, Moncler and Kering; Hermès was the only stock it upgraded.
The escalation bodes badly for global luxury. When uncertainty is high, consumers spend less. Even wealthy shoppers temper their spending when the macroenvironment is doing poorly — particularly given they often base financial outlooks on the stock market, according to Bain. Judging by Wednesday’s market performance, spending on fashion isn’t looking good. This same logic feeds into spending on luxuries from travel (airfare purchases are down) to dining out.
In a note sent on 9 April, HSBC analysts said they are cutting sales estimates by 5 per cent and EBIT estimates by 12 per cent across the board. That said, they flagged Hermès, Richemont and LVMH as “good businesses that remain solid competitors”, and called out Moncler, Burberry and Prada as favourable “less risk-averse” businesses.
China is already in a precarious position, coming off of years of flailing post-pandemic growth. Chinese consumers are already facing economic pressures, and consumer confidence remains low in the region. Even last year, spending on luxury goods in China was close to flat. (At that time, Chinese consumers were increasing their luxury expenditure abroad. This began to slow at the end of the year, and is all but sure to fall even further now.) But what Chanel president Bruno Pavlovsky referred to as a “normal crisis” (China’s slowdown) last November is no longer normal — and will only get worse. The tariffs have officials, brands and consumers on high alert, the consensus being that the growing trade war will do the opposite of boost consumption and support markets.
“The way this ends well is if other countries reduce tariffs and the US pulls back its own tariffs,” says Neil Saunders, managing director of retail at Globaldata. “We could then end up with a more free system. But this looks a long way off and it might not even be the ultimate agenda.”
The impact of China’s hardline response isn’t limited to retaliatory tariffs. China’s reaction to fast fashion retailer Shein’s bid to diversify its supply chain is also indicative of its intended efforts to bolster its local agenda. China’s Ministry of Commerce has reportedly reached out to Shein and other companies to advise against expanding their sourcing, per Bloomberg. No longer able to rely on the de minimus loophole that enabled it to skip import taxes and customs inspections on shipments valued at $800 or less, for Shein to be limited to China could decimate its low-cost advantage.
The still-pending TikTok deal is also illustrative of China’s resistance to US measures. When Trump announced another ban delay on 4 April, he wrote that he understands China is unhappy about the tariffs. “This proves that tariffs are the most powerful economic tool,” he wrote, adding: “We do not want TikTok to ‘go dark’. We look forward to working with TikTok and China to close the deal.”
Experts aren’t so sure on the efficiency of these types of bargaining chips. “China will use all tools it can to strengthen its position,” Saunders says. “This now goes beyond simple trade and there might be other fallout including on the treatment of US companies or restrictions on doing business within the country.”
Judging by today’s tariffs, TikTok’s fate remains hanging in the balance. It’s a small uncertainty relative to that which the country’s fashion industry is feeling on day one of enforcement.
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