'Lost and perplexed': China exporters reel as US tariffs imperil world's supply hub

The US Trade Representative's office on Monday (May 13) released a list of another US$300 billion worth of Chinese goods including children's clothing, toys, mobile phones and laptops that are being threatened with a 25 per cent tariff. PHOTO: EPA-EFE

BEIJING (BLOOMBERG) - "I'm lost and perplexed," said Chinese furniture maker Ben Yang as he reeled from news that United States tariffs on his products were hiked to 25 per cent from 10 per cent. "We probably have to switch to making something else or shut down altogether."

Furniture makers like Mr Yang's Sunrise Furniture Co, based in the industrial heartland of Dongguan in southern China, already had wafer-thin profit margins after years of battling rising labour and other costs. A Bloomberg Economics analysis of almost 1,000 companies in major export sectors found "not many" can survive tariffs of 25 per cent.

That raises the spectre of substantial disruption to China's dominant role in the global supply chain with painful adjustments rippling across the world after US President Donald Trump escalated the trade war last week. China's best hope is that it can soften the blow by selling more to the rest of the world and in its rapidly expanding home market.

"The US tariff hike threatens to dislodge China from the global supply chain," said Dr Chua Hak Bin, a senior economist at Maybank Kim Eng Research in Singapore. "The current China-centred supply chain will likely break up and shift towards South-east Asia and disperse more widely across the globe."

As exporters struggle to digest the news of Mr Trump's increase last week on US$200 billion (S$274 billion) of exports, the affected group is set to get even bigger. The US Trade Representative's office on Monday (May 13) released a list of another US$300 billion worth of Chinese goods including children's clothing, toys, mobile phones and laptops that are being threatened with a 25 per cent tariff. If that hits, practically all of China's exports to the US will be drawn into the trade war.

For cable maker Jiangyin Haocheng Electrical Appliance Wire and Cable Co based in the east coast province of Jiangsu, Mr Trump's tariffs "have thrown everything into uncertainty", said marketing manager Ellen Lee.

"We only have a profit margin of 10 per cent - it's so thin that we can't reduce prices any more," she said in a telephone interview. Her only comfort was that most of her competitors are also based in China and so everyone will be hit.

Taizhou Jinba Health Technology Co in Zhejiang province on the east coast sells half of its brightly coloured hair dryers and curling irons to the US. The 25 per cent tariff hike will slash that share to about 30 per cent, according to sales representative Ryan Tao. With a profit margin of 20 per cent to 30 per cent, the company will reduce prices by 5 per cent to 10 per cent to keep customers, he said.

That puts them at the top of the companies Bloomberg Economics examined. Fewer than 60 companies out of 1,000 listed exporters in the study had profit margins higher than 25 per cent. Three hundred had profit margins of more than 10 per cent, and the rest were below that.

Increasing tariffs to 25 per cent on about US$200 billion of goods will reduce China's exports by 2.7 per cent, drag on growth by 50 basis points over the next two to three years, and cause 2.1 million jobs to be lost, said Mr Liu Ligang, chief China economist at Citigroup Inc in Hong Kong in a note last Friday.

Still, exports to the US account for around a fifth of China's total and Deutsche Bank AG estimates that China's industrial output overall has only a 5 per cent exposure to the US market.

Chinese production serving the rest of the world is five times more important than the supply chain serving the US, Deutsche Bank China economist Zhang Zhiwei in Hong Kong said last year. The key issue is whether US tariffs drive out supply chains from China that serve other countries and history suggests they will not, he said.

But companies will still have to adapt.

"Global supply chains will be reshaped, with the likely relocation of clusters and producers to avoid tariffs," said Mr Zhuang Bo, chief China economist in Beijing at research firm TS Lombard. "Trade frictions would deter business investment in China or incentivise companies to re-allocate capacity to other regional economies or back to the US."

The long-term threat for China is how its role as the core of the world's supply chain holds up. Tariffs of 25 per cent are set to give that role probably its biggest ever test. Beijing hasn't said how it will react to the US plan to impose tariffs on all imports.

Some Chinese firms will dodge Mr Trump's latest blow, as they have already shifted production overseas. Wenzhou Changjiang Automobile Electronic System Co in Zhejiang province will not be hurt because it set up a factory in Brazil years ago and its China production serves only the domestic market, says sales manager Vincent Ren.

"Our China factory is running day and night to catch up with the local orders," said Mr Ren, whose company makes car electronics. "We are increasingly focusing on the domestic market.

But for furniture makers like Mr Yang, and numerous other companies with slim profit margins, the outlook is grim. The share of US sales in Mr Yang's exports may plunge from 90 per cent to less than a third with tariffs at 25 per cent, he told Bloomberg News in October. He doubts sales to the domestic market can be his saviour.

"Will there still be a market?" he asked via the messaging app WeChat. "Domestic consumption may shrink as well."

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