Pain for Chinese exporters caused by more than US tariffs

Container ships docked at the Port of Oakland in Oakland, California, on March 6, 2019.
Container ships docked at the Port of Oakland in Oakland, California, on March 6, 2019.PHOTO: AFP

BEIJING (BLOOMBERG) - In the Chinese export heartland of Foshan, it's not Donald Trump's tariffs that have Li Yuanfa fearing for the future of the bathroom supplies manufacturer he works at, but the broader economic uncertainty that they have wrought.

The US only takes 5 per cent of the toilets, showers and faucets made by Andun Sanitary Ware Co, where Li's a sales manager. The bigger problem is that customers from the Middle East and elsewhere have stopped buying due to a global slowdown, sending total sales plunging by 30 per cent last month.

"I'm not worried about the US market because we can replace that 5 per cent anywhere," says Li, who works in Foshan, a city that borders Guangzhou in China's industrial heartland. "But since April nobody comes here any more. The economic slowdown is a big world-wide problem. We are really afraid.''

The effects of the ongoing trade war and its shock escalation last month are rippling across the globe, making this week's meeting between Trump and President Xi Jinping all the more important. While US tariffs have hurt China and caused companies to shift production out of the country, it's also coming with substantial fallout for the rest of the world economy.

"The issue of collateral damage is one of the gravest concerns for the global economy in the short-term,'' said Yao Wei, chief China economist at Societe Generale in Paris. "A shock to business and consumer confidence worldwide could potentially be the largest channel of negative spillovers from the tariff war - and this seems to be materializing."

That shock was easy to see in interviews with two dozen manufacturers in Foshan last week. The Shunde district in the sprawling city of factories and wholesalers is a furniture production hub, home to 5,000 furniture manufacturers and 19,000 other companies supplying them with materials and components, according to Cici Nie, vice president of the Foshan Shunde Furniture Association.

At chair maker Hao Yu Xuan Co, sales manager Wang Yan says visitors to their shop are down by about 70 per cent from a year earlier and sales "fell off a cliff" last month. Its 70 factory workers produce chairs for sale to Africa and to countries including Indonesia and India, she said.

 
 

"If it continues like this things will get very difficult," she said. "One shop nearby making the same thing has shut down and several other shops in the same neighborhood also closed."

The US accounts for less than a fifth of China's total exports, but how exposed Chinese companies are to US tariffs depends on the sector. While the furniture industry is seen by economists as highly vulnerable to US tariffs, more than half of production is consumed domestically, and the US takes about a third of exports, according to Bloomberg News estimates. For sanitary ware products such as those sold by Andun's Li, about a sixth of exports are to the US

"The US is aiming at China but because supply chains are global it's hitting a lot of other economies," said David Loevinger, a former China specialist at the US Treasury and now an analyst at fund manager TCW Group Inc in Los Angeles. "Only part of this is due to trade. But trade wars are another shock to an already slowing global economy."

China's domestic market has also seen a slowdown, with an 8.5 per cent drop in imports last month from the previous year underscoring its weakness. There was a sharp deceleration of industrial output in May just as the new tariffs hit - with production rising at the slowest pace since 2002.

With two-thirds of the wooden kitchen furniture the US imported last year coming from China, according to a United Nations trade database, wooden cabinet maker Hongzhou Cabinet Co. is having to leave China to survive. The 14-year-old firm ships more than 90 per cent of its products to the US and is currently opening a new factory in Vietnam. It will shut down both its Guangdong factories - one in Foshan and another in Jiangmen - and lay off more than half its workers, says sales manager Elynn Lin, who declined to say how many people it employs.

Manufacturing in China isn't viable after the US imposed 25 per cent tariffs and other anti-dumping duties, and switching to other markets is difficult because the company's entire production line is tailored to the preferences of US customers, says Lin.

 
 

Bloomberg economists Tom Orlik and Maeva Cousin said: "Shipments of goods from China to the US have fallen sharply, and while some companies are scrambling to realign their supply chains, many haven't been able to. That gap from shrinking Chinese exports is impossible to fill, and it's having a "a deadening impact on Chinese, American, and global business."

"When two big elephants fight, all the surrounding grass will be trampled on," said Chua Hak Bin, a senior economist at Maybank Kim Eng Research in Singapore. "The fate of the global economy hangs on Trump and Xi reaching some middle ground in Osaka and closing some trade deal before year-end. Failure to restart trade talks will risk sending global growth down by another leg."

That may be too late for sanitary-ware and cabinetmaker Dessi in Shunde. It only relies on the US for 10 per cent of business but sales manager Kristin Jiang says business plunged 50 per cent last month on weak orders from home and from the Middle East and Africa.