How Tariffs work and how they affect business.
Updated: Feb 1
I'm not the biggest fan of the BBC these days, but this article here really shows the power of the tariff especially in the garment manufacturing business. You can read the original here https://www.bbc.com/news/business-54164397 if you so wish, but I was going to just break it down a bit and evaluate how powerful tariffs can be when imposed on other nations.
Rwanda as it happens, has established itself as a prominent and established garment manufacturer in Africa, albeit with the help of the investment of Chinese money and factories opening up there as they circumvent the rising blue collar wages and rents that come with China's economic growth.
Rwanda, a smallish country nestled in East Africa between the almighty giants Congo and Tanzania imposed an import tariff on second hand clothing, referred locally as chagua. Which they argued were impeding the growth of their domestic garment manufacturing sector. Some 2/3rds of the population were buying second hand clothes, so you could argue it was really stifling opportunities for growth and employment.
Previously Rwanda and some other East African counterparts collectively known as the EAC (East Africa Community) had been allowed to export to the US, a huge market, tariff free. Every other country except Rwanda in the EAC backed out, Rwanda in effect doubled down and slapped a $4 USD per KG tariff on used clothing. In turn the US responded by putting a 30% Tariff on Rwandan clothing. Previously under the free trade agreement there had been none and garment manufacturing was bi-lateral and reciprocal.
This effectively killed, overnight Rwanda's garment manufacturing for export business. So the shift focused to other export markets and of course servicing the need of the domestic market. The ban on second hand imported clothes forced garment manufacturers to expand into manufacturing clothes for the local market.
There is a double-edged sword to this, whilst Rwanda is now able to focus on other markets and grow domestically, servicing the emergent middle class, it has also made Rwanda less of an attractive base for companies looking to set up their garment manufacturing base internationally. Namely Chinese entrepreneurs. One such example of this is the Chinese firm C & H, which closed its factory shortly after the US retaliated with tariffs.
In order to counter this, the Rwandan government has removed all import tariffs on raw materials required for manufacturing garments and new factories get grants and loans. However this in itself hasn't really worked as now Rwanda is importing cheap clothing from China, sellers have switched from buying cheap second hand Chagua to new imported clothing.
What does this tell us about the international economy. Firstly, it is very responsive and tariffs do impact on garment manufacturing. Companies can relocate, stop producing, change their buying patterns very quickly. Something similar is and has been happening in China since tariffs were imposed on them.
The effect has been a little bit different, but also worthy of taking note of. Firstly big factories have suffered. Output has fallen drastically as clothing production moves close to the US mainland, Mexico, Guatemala, Colombia all have blossoming garment manufacturing businesses.
Smaller garment factories in China have done well, as they are able to service lower orders at lower costs and have benefited off the back of the tariff increases that have crippled the larger factories.
They too have also started to explore other markets for export and shift away from the dependency on the US market which has been the core of Chinese manufacturing for so long.
Anyway I wanted to keep this brief and not too complicated so its simplified so to speak. If you have any questions about garment manufacturing in general use the form to get in contact with us and we will be in touch.