Bad for goods
This second article on the 2025 trade crisis focuses on finished product and shows that companies and consumers everywhere, including the US, will feel pain.
Dreams of a quick calming of the storm after the US’s tariff announcements in early April seemed unlikely in the frantic first week of the month. Then, for many, calm came on April 9. Most of the new tariffs US president, Donald Trump, announced on April 2 came into effect within a few days. There was a baseline rate of 10% for almost all products coming into the US from overseas. For imported cars, aluminium and steel, there were tariffs of 25%.
Then there were escalating rates for places that President Trump said had taken the greatest advantage of previous, lenient trading regimes to rip of the US. Many of the biggest producers of leather and finished products that contain leather were on this list. There were tariffs of 46% for Vietnam, 37% for Bangladesh, 36% for Thailand, 32% for Taiwan and Indonesia, 31% for Switzerland, 29% for Pakistan, 26% for India, 25% for South Korea, 24% for Japan and 20% for the European Union.
Then, on April 9, there was a reprieve of sorts for most trading partners (but with one very notable exception). After a week of panic in government offices and on stock markets around the world, President Trump said he was pressing pause on these high levels for 90 days. He explained that this was to allow negotiations to take place on individual deals between the US and its partners, during which time their exports to the US will be subject to the 10% baseline rate.
Imported cars will still face 25% tariffs. Many products crossing the US’s northern border with Canada and its southern border with Mexico will also face 25% tariffs.
China crisis
Even among these other exceptions, China is a case apart. China was among the countries that put in place counter-measures following the announcement on April 2, which President Trump had called Liberation Day. The US had imposed an additional tariff of 34% on imports from China, so the Asian country made a similar move, adding 34% to tariffs already in place on products from the US. This sparked further White House reaction and the US said on April 8 that total new tariff levels for China would be 104%. China came back the following day with a total figure of 84% for imports into China from the US. Later that day, the 90-day pause announcement came. But while, for the time being, most other tariffs have gone down, China’s went up, reaching 125%, then 145%. China responded with levels of 125% for imports from the US. As we illustrate in a separate article in this issue of World Leather, millions of US cattle hides for the Asian country’s tanneries are among the products caught up in this. Our focus in this second article is more on the billions of dollars’ worth of cars, shoes, bags, furniture and other finished products that flow into US ports, shops and homes from overseas factories.
Roll-back of globalisation
While all this was going on, stock markets everywhere registered huge fluctuations, rallying on the 90-day news, but initially suffering heavy falls. The immediate aftermath of Liberation Day was a situation that the Financial Times described as a deepening “global rout”. In another article, it said the markets were reacting to “an aggressive push to roll back globalisation”. Mr Trump, it said, seems intent on unwinding decades of economic integration, with the risk of a 1930s-style global trade war causing the markets to panic.
The FT”s chief economics commentator, Martin Wolf, has said the US’s imposition of a new baseline tariff of 10% on almost all imports, with the steeper rates for many still looming, “injected massive uncertainty into the world economy”. He points out that this has made it difficult for companies to plan and make long-term decisions.
Speaking on BBC radio, Mr Wolf said: “We don’t know where Donald Trump’s policies are going to go. My guess is that, at the end of this, tariffs will remain much higher than they have been for close to 100 years.”
The author of an influential book called Why Globalisation Works, Martin Wolf says he fears the effects of Liberation Day will be long-lasting. He says, too, that it is trade in physical goods, which, naturally, include hides, skins, leather and finished products made from leather, that will bear the brunt of the turmoil.
Economic disintegration
“Crucially, tariffs only really affect goods,” Mr Wolf says. “They don’t have much effect on services. It is very difficult for me to imagine that [the impact of Liberation Day] is going to be temporary. This means the disintegration of the ‘goods’ part of our economies.”
He explains that this disintegration had already begun, at the time of the 2008-2009 financial crisis, and adds that this new crisis is likely to accelerate the decline.
He argues that globalisation, with a huge proportion of manufacturing activity moving from the most developed economies to developing parts of the world, has been “unambiguously good”, especially for countries in Asia. He says that, thanks to globalisation, extreme poverty in most of those countries has been “more or less eliminated”.
With the US receiving only 14% of the world’s imports, Mr Wolf also suggests that one outcome might be that the rest of the world continues to keep, and even improve, globalisation and the established multi-lateral trade system. It will probably be some time before we know if this can become reality, but even if it can, the immediate future looks to be bad for goods.
Car commotion
US economics editor of The Economist, Simon Rabinovich, argues that the early effects of all the rhetoric have included a slowing of the US economy, with consumer confidence falling to its lowest level in 12 years and wider business uncertainty “off the charts”. As mentioned, the markets went back up sharply after news of the 90-day reprieve became public, but doubts remain over how high the tariff rates will go in the end and which products will suffer the most. This is leading many companies to go into “a state of paralysis”, Mr Rabinovich says, with businesses “sitting on their hands, waiting to see what the landscape is actually going to look like”. He points to indecies that show trade-related uncertainty to be at its highest in more than half a century.
As we have seen, the automotive industry was an immediate target for tariffs. The original announcement of the 25% levy on overseas-made cars came one week before Liberation Day (which, incidentally, The Economist renamed ‘Ruination Day’). This will have a dramatic effect on the global automotive industry, Mr Rabinovich says. “The auto industry, everywhere in the world, is an integrated industry that relies on cross-border trade,” he explains. This includes the US industry, too, which is “tightly woven in” with production networks in other parts of North America. A new car might be finished in a factory in the US, but before that happens, he says, the different parts and materials that go into the product might have crossed the borders with Canada and Mexico seven or eight times.
This complex-sounding practice came about because Mexico and Canada share a free-trade agreement with the US and have done since 1994. In keeping with this, even now the White House is saying it will only apply the 25% tariffs to non-US content in the cars that continue to cross the border. But this question of identifying what is and what is not US content is complex in itself. Leather in the seats for a car’s interior is likely to have come from one of Mexico’s tanneries. But the raw material the tanners used is likely to have been US hides.
According to Simon Rabinovich, the 25% automotive tariff might be bad news for exporters in Germany, South Korea and Japan, as well as for suppliers in Mexico and Canada but, ultimately, it will be bad for the US car industry too. “Donald Trump believes that these measures will bring investment in auto factories in the US,” he concludes. “And over time he may be right because the 25% tariff is really onerous. Nevertheless, you are going to end up with a highly protected, highly uncompetitive, domestic auto industry that produces inferior vehicles at higher prices that the US is not going to be able to export to the rest of the world. This is not a recipe for success, in the short term or the long term.”
Turmoil unfolds
The automotive exporters in Germany and elsewhere that he mentions have watched in horror as the tariff turmoil unfolds. Industry organisation VDA has said the new tariff regime marks “a fundamental turning point in trade policy” for the entire industry. VDA president, Hildegard Müller, says the steps the US has taken since the start of April to control imports of cars represent a departure from the rules-based global trading order and from “the foundation for value-creation, growth and prosperity in many regions of the world”.
She insists that the measures the US has announced will be “a massive burden and challenge for companies, and for the global supply chains of the automotive industry”. But she also points out an irony. As a result of this globalisation of supply chains, the German automotive industry employs around 138,000 people at more than 2,000 locations in the US. Japanese and Korean companies also have car plants on US soil.
Footwear fears
Shoes have also featured prominently in the post-Liberation Day commentary. As in automotive, the US does, after all, still have footwear factories and produced around 25 million pairs in 2024, according to industry body Footwear Distributors and Retailers of America. But shipments of shoes from China to the US reached almost 1.25 billion pairs in the same year, about 50 times the volume of domestic shoe production. Footwear manufacturing in the US could expand, but if the trade dispute continues it is difficult to imagine how it could quickly expand by 50 times. And much of the raw materials manufacturers use, including leather, would need to be imported from somewhere else, including China.
According to a senior figure in the global footwear industry, William Wong, the first instinct of at least some US brands was to look for new overseas producing countries to outsource from. He received a spate of calls about this from brands following the tariff announcements of April 2. Hong Kong-based Mr Wong, who is president of the Global Footwear Sustainability Summit and a consultant to the Hong Kong Footwear Association, told the Wall Street Journal that callers want to know where they can turn to in order to avoid the heaviest blows that the new tariff regime will deliver to footwear.
He mentioned the Philippines and African countries as places brands are interested in. But he said Asian outsource footwear manufacturers are reluctant to invest in new operations there. He explains that it would take years to build up a big enough production base in these countries to meet the needs of US brands. Setting up a large-scale manufacturing business is “not like switching on or off the lights”, Mr Wong says.
Special consideration
Industry body the Leather and Hide Council of America (LHCA) has worked hard to help find other ways of mitigating the high tariffs importers of leather products will face. It lobbied for and has managed to secure an “accommodation”, an acceptance that imports containing material that originated in the US can receive a special consideration.
“What that means,” LHCA says, “is that leather products containing more than 20% US hides or skins by value would be eligible for a tax exemption.” It is still working with the US customs authorities “to understand and confirm the process and documentation requirements” for imported leather articles to qualify for the exemption. Implementation of this will, unfortunately, be difficult.
If 20% of the value of an imported pair of shoes, for example, is from leather made from a hide from the US, those shoes could be imported into the US with a 20% discount on any tariff payable. However, because hide prices have been low for many years, it is difficult to see how imported leather footwear could be cheap enough for the leather to represent 20% of the total value.
From the most recent figures we have seen from LHCA, US wet-salted hides had an average export value of $29.28 in the first ten months of 2024. Calculations World Leather has done in the past suggest the leather content in one pair of athletic shoes is about 2.5 square-feet. This gives us a rule-of-thumb. The grain side of one US hide will yield 50 square-feet of finished leather. This will make around 20 pairs of shoes.
A pair of shoes made from leather from US wet-salted hides would have US originating content worth around $1.50. For that shoe to earn some post-Liberation Day relief, the value of the product on being imported into the US would need to be $7.50 at most. Run the same calculation with wet blue exported from the US and the imported shoes could only qualify if their value were around $24.50 at most, taking only grain leather into account.
LHCA says it is aware that the April 2 announcement, and the imposition on the US of reciprocal tariffs by other countries, notably China, will bring challenges to its member companies and their overseas trading partners. “We are working tirelessly with our foreign association counterparts and the US government to encourage a way forward to minimise the impact on the global leather industry,” LHCA says.
Bags of trouble
Luxury leathergoods groups in Europe will have breathed a collective sigh of relief on learning, on April 9, of the 90-day pause on President Trump’s tariff of 20% on imports from the European Union to the US, halving the rates, at least for three months. The lower tariff is good news for LVMH, Kering, Hermès, Chanel and others because there is no doubting the importance of the US market to this sector.
LVMH reported full-year revenues of €84.7 billion for 2024, with €41 billion coming from its leathergoods and fashion division. It said 25% of revenues overall and 17% of its sales revenues in leathergoods and fashion had come from the US. Across all of its brands, LVMH had almost 1,200 stores in the US at the end of the year, stocking mostly products imported from France, Italy, Spain and other parts of Europe.
At Kering, the full-year revenue figure for 2024 was €17.2 billion. Grouping all of North America together, it said 24% of its revenues last year came from that market. Growth at Hermès took its results for 2024 to revenues of €15.2 billion. It gave a figure of more than €2.8 billion for the whole of the Americas, 18.4% of the total.
It is usually late May these days before Chanel reports its annual results, so 2024 figures are not available yet. In 2023, the group achieved revenues of $19.7 billion. It, too, reports the Americas as a whole, attributing just under $4 billion of its revenues in 2023 to sales in this market, 20% of the total.
Making some adjustments for the different currencies and geographies involved in these groups’ reports, we can make an educated guess at combined revenues of around €30 billion in the US. At a 10% tariff rate, imports from these four groups alone would contribute around €3 billion per year to US government coffers. If the tariff rate were to go back to 20%, the figure would be €6 billion.
Lack of support
There are bag brands on the other side of the Atlantic, some of them big. But smaller ones in particular (of which there are many in the US) are now under severe strain, if the reaction of Sarah Wells is anything to go by. Ms Wells used to be the executive director of a national non-profit organisation in Washington DC. Returning to work after maternity leave in 2015, she searched high and low for a stylish bag in which to carry around equipment she needed to express and store milk. Finding no bag that she liked enough, she designed her own and soon found herself giving up her job and launching Virginia-based Sarah Wells Bags. Some of her bags have leather, particularly in the straps. All of them are made in China and imported back into the US from there.
She says that the tariff impact on these imports of the chaotic, early-April tariff tit-for-tat was already close to 100%, according to her calculations. This was before the later escalations. She explains that she would never be able to add this to her product prices to claw back enough margin to sustain her business. “And I don’t have the cash to come up with $100,000 to release goods at the port,” she says of product that was already on the ocean. If tariff rates stay this high, she is sure many business with a similar model to hers will close.
She adds that she would love to make the bags in the US, but says the infrastructure, resources and support she would need are lacking. Even if there were the factory capacity at least to assemble the finished products, she has calculated that she would still have to import materials and components from suppliers in 14 different countries. All 14 are now subject to tariffs. Perhaps the necessary footprint can build up again in the US, but Ms Wells says it would take a number of years of paying costly tariffs for her still to be around to reap the benefit of this reindustrialisation. She doesn’t think she can do it.
Volkswagen opened this assembly plant in Chattanooga, Tennessee, in 2011. It employs 5,500 people. Globalisation of the automotive supply chain has helped the US keep car factories open.
Credit: Volkswagen AG
