Trade Policy May Put U.S. Consumers on the Hook

U.S. consumers should get ready to pay significantly more for their wardrobe if the Trump administration follows through on its proposed trade policy changes. Trump has heavily criticized the North American Free Trade Agreement (NAFTA) as "the worst trade deal ever approved in this country." He has also floated the idea of imposing a 20-percent tariff on Mexican goods entering the country. If either of these positions leads to significant trade policy changes, it would cause considerable increases in consumer apparel costs.

 

How NAFTA Keeps Clothing Costs Low

Los Angeles' close proximity to Mexico has allowed L.A. to become a hub for the apparel industry, particularly denim brands. These companies design and market their products from L.A., but they manufacture much of their clothing in Mexico to stay competitive in the price-conscious era of fast-fashion.

It's estimated that a pair of jeans may cost $15 to manufacture in Mexico, but $35 to manufacture in the United States. If the Trump administration pulled out of NAFTA, each pair of cotton jeans imported into the United States would be subject to a 16.8 percent tariff. For half cotton/half synthetic jeans, which is a popular blend for many women's jean's manufacturers, the tariff would be 32 percent.

 

The Impact of a Proposed Tariff on Apparel Made in Mexico

A 32-percent tariff on apparel could easily send clothing prices soaring, but the Trump administration's proposed tariff to pay for their border wall could make prices even higher. If a 20-percent tariff was enacted, the U.S. consumer would pay for at least some of the tariff in the form of higher clothing costs.

Denim-Manufacturing-Process.jpgSome larger apparel companies may be able to absorb some of the tariff without increasing prices a full 20 percent, but consumers should expect that their favorite jeans will come with a higher price tag. Smaller companies with narrower profit margins may be forced to pass the entire cost of the tariff directly to consumers. It may also make it harder for younger designers to find affordable manufacturing.

 

Will Trade Policy Changes Increase Jobs in the United States?

The Trump administration has touted these trade policy changes as a way to boost manufacturing jobs in the United States. However, experts doubt that either of these initiatives will significantly change manufacturing in the United States. The Harvard Business Review notes that an increase in manufacturing productivity and automation has played the largest role in declining U.S. manufacturing jobs, not free trade agreements.

Trade agreements take years to negotiate and ratify, so time will tell what impact the Trump administration has had on manufacturing in the U.S. and Mexico.  In the meantime, uncertainty can still have negative consequences as corporations delay large capital investments until after the air clears.

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