By Carol Ryan

Would a Birkin handbag be less appealing if it was made in Paris, Texas, rather than the French capital?

Most luxury brands have clung tightly to their European manufacturing base, but a move stateside will make more sense if a trade war erupts.

President Trump has threatened to put higher import duties on European goods to close the U.S. trade deficit with the European Union. There is still no detail about how high any tariffs might be, or whether they would target only certain products such as German cars. But Europe's luxury-goods companies risk getting caught in the crosshairs, just as the American market becomes increasingly important for the industry.

Designer brands could deal with tariffs in a couple of ways. One option is to charge their customers more. But this strategy would be tricky to pull off now, as the luxury industry has developed a reputation for price gouging. LVMH founder Bernard Arnault said on the company's latest earnings call that customers feel "ripped off" after luxury brands raised prices aggressively in recent years.

It is also not a great time to ask American consumers for more money, as demand is fragile. After 10 consecutive quarters of shrinking, U.S. luxury spending showed signs of improvement at the end of last year, based on credit-card data from Bank of America. Brands hope that improving demand from U.S. shoppers will eventually offset weak sales to Chinese consumers, and won't want to do anything that might upset the recovery.

Moving some manufacturing stateside would allow brands to avoid tariffs altogether. Luxury companies might even save money in the long term -- energy is much cheaper in the U.S. than in Europe and subsidies are available in some states to build factories that provide local jobs.

Luxury brands already do plenty of outsourcing, but it tends to happen nearby. According to consulting firm Bain, around 55% of global luxury goods are produced in Italy, mainly by independent factories that take on work for big brands.

The "Made in Italy" or "Made in France" labels on expensive handbags and clothing do increase their appeal to some consumers. And certain luxury goods can't be manufactured elsewhere as they are tied to a specific region. Champagne production must happen in northeast France, Swiss watch manufacturing in Switzerland.

But mass-market luxury brands such as Gucci or Prada are a bit more footloose. Moncler, the maker of $3,000 Puffer jackets, manufactures in low-cost Romania. This hasn't dented its appeal, says Bernstein luxury analyst Luca Solca. Once a luxury brand operates the factory itself and keeps standards high, its customers are less likely to react badly to production in a new country.

Manufacturing outside Europe hasn't harmed LVMH-owned Louis Vuitton either. The brand already has three large factories in America that produce handbags for the local market. These purses carry a "made in U.S.A. of imported materials" label and shoppers don't seem to mind. Louis Vuitton ranked as Americans' favorite luxury brand in the latest UBS consumer survey.

LVMH's Arnault said the company might move even more production to the U.S. in the future. Tax increases in France, coupled with the threat of tariffs, make producing in America more appealing. It is also good business considering LVMH makes a quarter of its sales in the U.S. these days.

Certain labels are prized by consumers precisely because their goods are handmade in Europe -- that means Hermès probably won't be relocating to Texas any time soon. But for brands a little lower in the luxury hierarchy, American factories could turn out to be a smart defense in a more protectionist global economy.

Write to Carol Ryan at carol.ryan@wsj.com

(END) Dow Jones Newswires

February 05, 2025 05:30 ET (10:30 GMT)

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