Day: March 6, 2025

How Tariffs Affect U.S. Apparel Import Prices and Retail Prices? Evidence from Monthly Trade Data (2015-2024)

According to the “America First Trade Policy” released in January 2025, the Trump administration aims to leverage tariffs to achieve various policy objectives, from reducing the U.S. trade deficit to countering “unfair” trading practices.

On February 1, 2025, the Trump Administration further announced the implementation of a 25% punitive tariff on imports from Canada and Mexico, along with an additional 10% punitive tariff on goods from China, in addition to the existing duties. With over 98% of clothing sold in the U.S. imported from abroad, U.S. fashion apparel companies are likely to be among the hardest hit by the tariff increase, particularly since Mexico and China are two of the leading apparel-sourcing destinations for the country.

This study aims to explore the dynamic relationship between U.S. apparel import tariffs, U.S. apparel import prices, and U.S. apparel retail prices. Since tariff rates, import prices, and retail prices are interrelated, a vector autoregression model (VAR) was used to analyze their interactions. The analysis was based on monthly data from January 2015 to November 2024 (latest data available), including:

  • U.S. apparel tariff rate (data source: USITC; tariff rate=value of calculated duties/custom values)
  • Price index of U.S. apparel imports (data source: St. Lous Federal Reserve; January 2015=100)
  • Price index of U.S. apparel retail price (data source: St. Louis Federal Reserve; January 2015=100)
  • Index of U.S. apparel retail sales (data source: St. Louis Federal Reserve; January 2015=100)
  • Consumer Price Index for all U.S. urban consumers (data source: St. Louis Federal Reserve; January 2015=100)

The results show that:

First, from January 2015 to November 2024, the average U.S. apparel tariff rate ranged from 12% to 17%. The fluctuation of the tariff rate during that period was primarily caused by the U.S. imposition of Section 301 punitive tariffs on imports from China, along with fashion companies shifting their sourcing from China to other countries, including members of U.S. free trade agreements.

Second, the average price of U.S. apparel imports rose by approximately 6% from January 2015 to November 2024, which aligns with the U.S. apparel retail price increase of 4%. However, this increase was significantly lower than the 34% rise in the U.S. Consumer Price Index (CPI) over the same period. This pattern shows that despite overall inflation and higher operational costs, apparel exporters and U.S. retailers remained cautious about increasing prices due to intense market competition.

Third, the impulse response function (IRF) indicates that a positive tariff shock (i.e., a tariff increase) would lead to a rise in the U.S. apparel retail price. However, the magnitude of this effect is moderate, with the impact being most felt two months later. Specifically, a one-standard-deviation increase in tariffs would result in a 0.16 standard deviation increase in retail prices during Period 3. In other words, the price effect of the tariff increase typically appears in about two months. However, U.S. fashion retailers usually do not transfer the entire burden of tariffs to consumers, likely because of fierce competition in the market.  

Fourth, the impulse response function (IRF) indicates that a positive tariff shock (i.e., a tariff increase) would lead to a slight decline in U.S. apparel import prices. This price decrease would also persist for about three months. Specifically, a one-standard-deviation increase in tariffs would result in approximately a 0.01 standard deviation decrease in apparel import prices through Period 4. This result aligns with previous studies indicating that following the implementation of Section 301 punitive tariffs in 2018, some Chinese exporters agreed to reduce their selling prices to keep sourcing orders.

Fifth, the impulse response function (IRF) further shows that a positive tariff shock (i.e., a tariff increase) could hurt U.S. apparel retail sales in the short to medium term. Specifically, a one-standard-deviation increase in tariffs would lead to approximately a 0.82-2.33 standard deviation decrease in U.S. apparel retail sales from Period 3 through Period 5. This result may be driven by higher selling prices, suppressing consumer spending on clothing.  

Additionally, the variance decomposition analysis reveals that, in the short to medium term, about 50% to 80% of the variation in U.S. retail prices is explained by its own past values, underscoring the persistence of retailers’ pricing practices. Meanwhile, U.S. apparel retail sales account for about 27% of the changes in U.S. apparel retail prices. In comparison, apparel tariff changes explained only about 5% of the retail price fluctuations. In other words, market factors, particularly consumer demand, play a more significant role in shaping fashion companies’ pricing decisions than tariffs.

In summary, the study’s findings confirm the interconnections between apparel tariff rates, U.S. apparel import prices, and U.S. retail prices, although these relationships turn out to be more complex and nuanced than previously suggested. It is important to note that only apparel imports from China were subject to tariff increases during the examined period in this study. If tariffs were to increase on apparel products from a broader range of countries during Trump’s second term, the economic impact on U.S. apparel retail prices could be much more significant and persistent.

By Sheng Lu

Gap Inc.’s Evolving Apparel Sourcing Base: 2021-2024

Gap CEO talks tariff impacts (Feb 2025)

Established in 1969, Gap Inc. is a leading American clothing retailer that operates several prominent brands, including Old Navy, Gap, Banana Republic, and Athleta, catering to diverse consumer segments.

The following analysis is based on Gap Inc.’s publicly released factory list. Only factories identified as producing “apparel” products were included in the analysis.

First, like several other leading U.S. fashion companies, Gap Inc. maintained a geographically diverse global sourcing base but reduced the number of factories it sourced from between 2021 and 2024. Specifically, as of October 2024 (the latest data available), Gap Inc. sourced apparel from 24 countries, an increase from 21 countries as of March 2021. Gap Inc.’s apparel sourcing reached almost all continents, including Asia, the Americas, Europe, and Africa.

However, between March 2021 and October 2024, Gap Inc. decreased the number of apparel factories it contracts with from 548 to 502, a reduction of 46. Most of the cuts occurred in China (down 40 factories), Vietnam (down 32 factories), and Cambodia (down 8 factories).  This pattern aligned with the findings of other industry studies, which indicate that many U.S. fashion companies, particularly larger ones, are consolidating their vendor base to prioritize operational efficiency and strengthen the relationships with key vendors.

Second, Gap Inc. has significantly reduced its reliance on China and actively explored emerging sourcing destinations in the rest of Asia, Central America and beyond. According to Gap Inc.’s 2023 annual report (the latest available at the time of writing), its two largest vendors represented approximately 9 percent and 7 percent of the total dollar amount of the company’s purchases. In value terms, in 2023, approximately 29 percent of Gap Inc.’s products were sourced from Vietnam, followed by Indonesia (18 percent).

While China remained the largest source of U.S. apparel imports according to official trade statistics, China now plays a relatively minor role in supplying finished garments for Gap Inc. As of October 2024, the company sourced apparel from 36 factories in China, representing just 7.2 percent of its total apparel sourcing base, making China only the sixth-largest supplier after Vietnam, India, Indonesia, Bangladesh, and Sri Lanka. In an interview conducted in early 2025 (the video above), Gap Inc.’s CEO disclosed that less than 10 percent of the company’s products are sourced from China.

On the other hand, between March 2021 and October 2024, Gap Inc. expanded its sourcing network beyond the traditional top three (China, Vietnam, and Bangladesh), with significant growth in other parts of Asia and Central America, led by India (added 8 more factories) and Guatemala (added 9 more factories).  In 2022, Gap Inc. pledged to source around $150 million in apparel products each year from Central America by 2025.

Third, Gap Inc.’s apparel sourcing base varies by product category. For example, approximately 45% of the company’s contract factories producing denim and woven bottoms were located in Vietnam and Bangladesh, likely due to the availability of cotton and a relatively abundant low-cost labor force. In contrast, factories in Sri Lanka primarily manufactured intimates, performance wear, and swimwear (IPSS) for Gap Inc. Meanwhile, half of the company’s sweater factories were located in China, largely due to the complex manufacturing process and raw material requirements for these products. Additionally, India played a critical role as a sourcing base for Gap Inc.’s woven apparel.

Furthermore, Gap Inc.’s contract garment factories worldwide vary in size, reflecting the company’s diverse sourcing needs. Specifically, in Asia, garment factories in China are typically small or medium-sized, with fewer than 1,000 workers (94.3%). In contrast, nearly 80% of Gap Inc.’s contract garment factories in Bangladesh have more than 1,000 workers, with similar patterns observed in Vietnam (48.7%), India (50%), Indonesia (63.2%), and Pakistan (57.1%). This pattern aligns with other industry studies suggesting that U.S. fashion companies source apparel products from China primarily for orders with relatively small minimum order quantities (MOQs) and those requiring a great variety.

Meanwhile, most garment factories in Central American countries producing products for Gap Inc. have fewer than 1,000 workers, such as Guatemala (100%), Nicaragua (71%), Haiti (67%), and El Salvador (100%). A similar pattern is observed in other regions, such as Egypt (67%) and Turkey (82%). This result suggests that Gap Inc. may still need to rely on Asia to fulfill orders for large-volume items, as it takes time to expand production capacity in other regions.

by Sheng Lu