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Europe's tax on jeans threatens L.A. jobs

After a tariff more than triples, U.S. companies worry about competition and consider moving production elsewhere

May 03, 2013|Ricardo Lopez
  • Workers in South Gate make premium denim pants for AG Jeans. An AG executive said the company will do what makes “the most business sense,” which might include shifting some production to Mexico.
Workers in South Gate make premium denim pants for AG Jeans. An AG executive… (Anne Cusack, Los Angeles…)

There's a wrinkle in the outlook for expensive women's designer jeans.

Europe has more than tripled a tariff on the high-end denim creations, which could snag the boom for pricey pants.

Beginning Wednesday, the European Union duty on women's denim trousers manufactured in the United States jumped to 38% from 12%.

The hike, if passed along to customers in the form of price increases, could put a damper on denim exports to Europe, currently a growing market for U.S. denim makers.

But it is expected to disproportionately affect California denim makers, who make roughly three-quarters of American high-end denim. Low-end jeans are primarily manufactured abroad because of cheaper labor costs.

"When you look at the international markets and growth potential

The tariff hike, which was announced April 17, is seen as retaliation by the EU against the U.S. for failing to fully comply with a 2002 World Trade Organization ruling against the Byrd Amendment, which was a law that allowed the U.S. to levy additional duties on "unfairly traded" goods.

Critics say the United States has continued to adopt additional tariffs, and as a result, other countries are raising tariffs on U.S. goods.

The trade stand-off is expected to slow sales of American jeans brands that have cachet with European fashionistas.

The women's "premium" jeans business -- involving pants that cost $75 or more -- accounts for 22% of the global jeans market, according to San Francisco research firm Global Industry Analysts Inc.

The recession put a damper on jeans sales, but demand has rebounded, led by demand for premium denim.

"The economic crisis did transform purchasing behavior, [but] customers continue to exhibit strong preference for products offering maximum value," the research firm said in an October 2012 analysis.

Consumer research group NPD said premium denim is the fastest-growing segment of the jeans market, with estimated sales of $1.4 billion for the year that ended February, up 17.3% from a year earlier.

The biggest threat from the tariff is that other countries might jump at the opportunity to carve into the U.S.' market share.

Even if U.S. manufacturers relocate production to avoid the tariff, "a new start-up factory isn't going to beat existing factories in other countries," said Marshall Cohen, chief industry analyst at NPD.

Competitors will say, "Let's go steal that business," he added.

Ilse Metchek, president of the California Fashion Assn., a Los Angeles-based trade group, said she is rallying local jeans makers to urge elected officials to put pressure on Europe to reverse the tariff.

She is also rallying support from local wash and dye houses, sewing contractors and textile fabricators that work with Southern California companies.

"The retaliation is easy to do on the apparel industry," Metchek said. "We have no lobby in Washington."

Metchek said she is worried the tariff will cause the Los Angeles area to lose jobs at a time when the county's unemployment rate is 10.2%.

The group sent a letter Thursday to federal and state officials urging action on the tariff because California manufacturers are "facing a significant blow to an important and growing export market and an increased employment base for the region."

Others echo those fears, saying jeans makers might move production out of the country to avoid paying the tariff, which is to be in effect through April 2014.

If the tariff puts American jeans out of European consumers' reach, "everyone's going to think of moving production overseas," said Samuel Ku, vice president and creative director at AG Jeans, which is based in South Gate. "That's going to directly mean less jeans made in L.A. That's no question."

Ku said AG executives speak with the company's European distributors daily and will make decisions that "make the most business sense."

One option could be shifting some of its production to a plant in Aguascalientes, Mexico, he said.

In Europe, Ku said, AG's jeans start around 200 euros, the equivalent of about $260.

"There are a great deal of jobs here in L.A. that relate or revolve around premium denim," said Thimio Sotos, executive vice president and chief financial officer for J Brand Jeans, a Los Angeles denim company.

Sotos said his company employs about 200 people but contracts with other companies to make its jeans. He estimated that could include as many as 3,000 workers.

"This is an issue of jobs," Sotos said. "Is a consumer in Europe going to be able to absorb a dramatic increase in jeans? If the answer is no, ultimately that's going to work its way through the process."

Sotos declined to say how much his privately owned company exports, but he said J Brand jeans are sold throughout Europe.

"The export business is an important business," he said. "The EU is a very important market to us -- and to many people in the industry."

--

ricardo.lopez@latimes.com

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