Worrying trend: An employee works at a textile factory that produces silk products in Fuyang. Research shows that each 1% tariff rise will impact Chinese supplier margins by 0.35%. — AFP
ORDERS have evaporated for Richard Chen, who manufactures Christmas decorations in southern China for US retailers, including Walmart and Costco, facing crippling US tariffs.
“The orders are half of what they were last year,” said Chen, who is based in the manufacturing hub of Dongguan.
He is now in survival mode.
“There’s no more scope to cut prices. But to get orders we sometimes have to take a price cut...we have no choice,” Chen said, declining to elaborate on cuts he had agreed to.
“We’re losing money.”
On Feb 4, US president Donald Trump applied a new 10% tariff to the US$400bil worth of Chinese goods exported annually to the United States, with an additional 10% tariff announced on March 4 and further reciprocal tariffs expected on April 2.
Chinese suppliers and their American clients are now coming to grips with the grim reality that this trade war will hit harder than in Trump’s first term in 2018.
This time is different because low-end manufacturers are already struggling with razor-thin margins, so they cannot cut prices to help their US customers, and local Chinese governments that might have provided support to protect jobs are mostly too cash-strapped to give new subsidies.
Suppliers estimate wages have grown by 2% to 5% since the first US-China trade war of 2018, while raw material costs have climbed for some sectors and overseas competition has intensified, making Trump’s latest tariffs the final straw for many low-end manufacturers.
Liz Picarazzi, the Brooklyn-based founder and chief executive officer of trash box company Citibin, said her goods produced in China are now subject to 52.5% tariffs and she can no longer afford to manufacture there.
“My whole business has been based on a long-term rate of 7.5%. It’s been a real shock,” she said, referring to two rounds of 10% tariff increases on Chinese goods in addition to a global 25% aluminium tariff.
“We knew this was coming but there’s no way any company can mitigate an additional 45% in tariffs.”
US customers are pressing for 10% price cuts, according to interviews with 10 Chinese manufacturers and exporters and two US-based retail executives with Chinese supply chain exposure.
Ongoing negotiations are yielding average discounts of 3% to 7% from suppliers, they said.
“You have companies in the United States who have hundreds of factories that work for them sending out a mass letter asking for a blanket 10% reduction from all suppliers on all products,” said Jonathan Chitayat, the Asia boss of Genimex Group, a contract manufacturer for a range of products that derives 70% of its revenue from US customers.
“Most people don’t have 10% to give to be honest. Maybe they can do it for one or two orders, but 7% seems to be the ceiling for most people.”
Walmart and Costco did not reply to requests for comment on this story.
When previously asked by Reuters about their negotiations with suppliers since the imposition of new tariffs, Walmart supplied a statement that said “we will continue to work closely with them to find the best way forward during these uncertain times.”
On the Chinese side, suppliers who got burnt in 2018 when some US customers refused to pay for container-loads of goods subjected to higher tariffs are now asking for payments upfront rather than waiting 30 to 90 days after sending an invoice.
“We told our US clients as soon as Trump got elected that the payment terms were 100% upfront with purchase order because we anticipated this tariff nightmare,” said Dominic Desmarais, chief solutions officer at Liya Solutions, which connects small and medium-sized companies with suppliers in China making everything from toys to furniture and titanium products.
The tariffs have rattled China’s industrial heartland and could lead to substantial layoffs as factories shutter or downsize, analysts and manufacturers said.
He-Ling Shi, an economics professor at Monash University in Melbourne, said Chinese manufacturers are succumbing to a wide range of pressures.
“I have noticed that quite a lot of enterprises have already decided to close their doors,” Shi said.
Academic research from Stanford University following 2018 showed that each 1% tariff rise impacted Chinese supplier margins by 0.35%.
That trade war also resulted in the loss of around 3.5 million Chinese manufacturing jobs, according to Reuters calculations based on Dartmouth estimates of the percentage of manufacturing jobs China lost.
Analysts said it’s too early to estimate what the toll will be this time round.
Some US customers believe Chinese authorities will step in to support their local manufacturing industries with additional tax rebates, rent and utilities subsidies or other support as they have done in the past – including in 2018.
“I have been on hundreds, maybe thousands of Chinese factory visits, and understanding how important these factories are to a local government, there will absolutely be support when push comes to shove,” said one US-based retail executive. — Reuters
Casey Hall and James Pomfret write for Reuters. The views expressed here are the writers’ own.
