Free trade always sounds like a good idea, until you're forced to compete against low-priced competition in foreign countries. It's at that point that higher-priced domestic producers see too much of a cheap thing as "dumping" and go to the government, even to the "free trade" Bush administration, in search of protectionist remedies.
That's the case right now in the U.S. textile industry, which has sought protection under the safeguard provision of the WTO agreement after imports from Chinese textile producers surged following the end of global quotas last January. According to a CNN story quoting the president of the national Association of Textile Organizations, China and the U.S. have agreed to a new schedule of import restrictions on many textile and clothing categories.
In fact, this dispute already meant late-summer import embargo on many categories of apparel that American consumers find irresistible, including pants, shirts, knitwear, and undergarments.
The question for investors has been whether or not it would cause disruptions in supply for companies like Guess? (NYSE:GES), bebe (NASDAQ:BEBE), Urban Outfitters (NASDAQ:URBN), and Hot Topic (NASDAQ:HOTT), as some analysts predicted -- incorrectly, it seems. Even companies without undue reliance on Chinese textiles may have to shift their buying patterns if the upcoming curbs disrupt worldwide sourcing patterns. That will likely mean fancy footwork for everyone from Abercrombie & Fitch (NYSE:ANF) to Wal-Mart (NYSE:WMT).
The resulting scramble might get investors worried about whether protectionist rules might pinch margins by forcing American firms to go to higher-priced producers. That, of course, is a situation that would be harder to measure, since margins can swing wildly during any given quarter based solely on the price you're getting for your goods. All the cheap duds in the world won't add up to gross profits if they're unpopular and you're forced to put them all on sale.
For that reason, I'd argue that investors should be aware of the situation but not overreact to it. The retail clothing industry is always dynamic and fast-moving, and import restrictions -- new and old -- are just some of the many variables that successful firms have learned to handle. Keep your eye on what your companies are doing on the top and bottom line, and let management cope with the details of government red tape.
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At the time of publication, Seth Jayson had shares of Guess? but no positions in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
