President Donald Trump’s threat to impose tariffs on Mexico has already set off another selling wave on Wall Street, with the Dow Jones Industrial Average closing more than 350 points today.
In a series of tweets on Thursday, the president vowed to slap a 5% tariff on all imports from the United States’ southern neighbor unless it took measures to stop the influx of Central American migrants illegally crossing the border. The duties would go into effect on June 10, and the rate could increase up to 25% if the White House’s policy demands fail to be met.
Shortly after the announcement, trade organizations, including the Footwear Distributors & Retailers of America and the American Apparel & Footwear Association, spoke out in opposition to Trump’s move, particularly in light of his previous threats to increase duties on footwear imported from China.
Matt Priest, president and CEO of FDRA, said in a statement today, “The President’s most-recent announcement on Mexico threatens further harm to U.S. footwear consumers and companies. The value of U.S. footwear imports from Mexico jumped 20% in 2018 to $500.2 million, the second-biggest year on record. Mexico serves as a strategic sourcing location for certain brands wanting to make quality leather shoes close to market. Adding higher costs on these shoes from Mexico not only raises rates, but it will start to limit product we see on store shelves. The shoe consumer is losing across the board if we see higher tariffs, and there is nowhere around it.”
Individual businesses — particularly those that have parts of their supply chains in Mexico — were also troubled by the news. Among them was Berkshire Hathaway Shoe Holdings Inc., which has been sourcing shoes in the country since the mid-1970s. (The Greenwich, Conn.-based company is the parent of nearly two-dozen brands, including Born, Sofft, Carolina Boots and Kork-Ease.)
“The potential for this escalating tariff on goods imported from Mexico will definitely be a disruption,” said president and CEO Jim Issler. “If the tariffs continue to increase, it will be a further imposition on the American consumer and a fragile industry concerned about the pending Chinese tariffs. There is no doubt that this is a situation that we would like to avoid and hope that negotiations will begin immediately to resolve this issue.”
After trade negotiations with Beijing fell apart early this month, Washington increased levies from 10% to 25% on $200 billion worth of Chinese products. The Office of the U.S. Trade Representative also released a separate list of imports, including footwear, that could be hit with another proposed 25% hike in tariffs. Companies whose supply chains are based in China have already begun the process of relocating to nearby countries or are considering hiking prices for consumers in order to meet costs.
Footwear firms that manufacture or source materials in Mexico are still assessing their options.
Direct-to-consumer brand Thursday Boot Company produces the majority of its boots in León, a city in the central state of Guanajato, and does not expect an immediate shift in production back to the U.S. because there are still higher-quality factories in Mexico.
“We consider ourselves lucky to have a strong set of high-integrity and level-headed partners in Mexico with whom we are collaboratively working to ensure we do right by each other and our customers,” CEO Nolan Walsh told FN.
However, he added: “Macroeconomic and regulatory uncertainty are some of the hardest factors to take account for in planning. While our partners in Mexico are worried, and reasonably so, there is also a potential scenario in which — even if there are tariffs for products coming from Mexico — there will still be an acceleration of brands producing in Mexico due to the trade war with China. At the end of the day, net profit margin is relatively low in footwear and retail generally; therefore, it is difficult for both brands and manufacturers to take the margin haircut, and unfortunately customers are likely going to end up paying higher prices.”
Canaccord Genuity analyst Camilo Lyon also explained the potential impact of the threatened tariffs on publicly-traded U.S. footwear companies, such as Steven Madden Inc.
As Lyon explained to FN, Steve Madden — which recently started transitioning a portion of its footwear production from China to Mexico — could seek support from factories, retail partners and, if necessary, through pricing. (The company has previously indicated that it would have to raise prices in order to accommodate the rising levies on Chinese goods.)
“While tariffs on Mexico might make us rush to stockpile good tequila, we believe the impact to [Steve Madden’s] business is small,” Lyon shared. “That said, tariff noise is loud and certainly could impact consumer spending in a broader way if pricing actions by all companies affected ensue. In our view, the threat to consumer demand is the one we are more concerned by.”
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