Trade War Casualties: Factories Shifting Out Of China

Friday - 12/10/2018 09:37
China-based manufacturers were already in the process of moving to lower-cost Southeast Asia. Now that trade tariffs have been enacted on at least $50 billion worth of goods, and another $200 billion likely by summer’s end, they are shifting their supply chain. It’s happening.
Trade War Casualties: Factories Shifting Out Of China
Trade War Casualties: Factories Shifting Out Of China
“With recent tariff battles, companies aren’t as eager to have production in China,” says Nathan Resnick, CEO of startup company Sourcify. The business-to-business manufacturing platform has offices in San Diego and Guangzhou. “We run production runs in India, Bangladesh, Vietnam, Philippines and Mexico right now.

Labor costs are actually more affordable outside of China, so for products like apparel where there is a lot of cut-and-sew labor, most companies are moving out of China anyway,” he says. Sourcify raised $2.5 million through Y Combinator this winter. “I’ve been going back and forth to China for years, and it is getting more expensive.

With all these tariffs coming, why not run some of your production runs elsewhere? Companies are saying that the scare of these tariffs has decreased the incentives to manufacture in China.”

Sourcify is small, but Kerry Logistics Network, a Hong Kong-listed firm owned by Malaysia’s billionaire Kuok family, is not. Kerry shifted part of its production lines from mainland China to its corporate home further south in order to avoid tariffs.

“Our clients have been shifting part of their production lines as early as March from China to other Asian countries where they already have manufacturing plants,” William Ma Wing-kai, Kerry's managing director, was quoted saying in the Hong Kong daily. “This is a reallocation of global production bases,” Ma said.

For the last couple of years, China has been moving to a more automated assembly line, pushing lower-cost manufacturing to Vietnam and elsewhere. China is now one of the world’s largest producers of robotics used in manufacturing assembly lines. As the country moves up the value chain, old-school labor like stitch-and-sew apparel manufacturing is leaving the country.

Now that the tariffs are in place, with more promised, companies that were considering relocating are doing so sooner than planned.

In recent interviews with the British press, Goldman Sachs and Trump administration alum Steve Bannon said that the nationalist policies of the new White House ultimately seek to remap global supply chains in favor of American manufacturing.

China has been reacting to Trump’s measures. Each tariff imposed on them has been met in kind by tariffs against American imports. Trump has proposed $200 billion more, but Xi Jinping, China’s leader, has not retaliated with similar numbers.

China’s Ministry of Commerce said Thursday that the country would abide by World Trade Organization rules and would like to see them fixed for the better of globalization.

“China is supportive of WTO reform and hopes the reform will address the concerns of most members and reflect their needs,” Ministry of Commerce spokesperson Gao Feng said at a press conference last week. “It’s better to avoid a trade war.”

China has responded to the current trade war by providing new fiscal stimulus, including tax breaks.

Chinese premier Li Keqiang came out of nowhere last week, saying that Beijing would do everything possible to prop up the domestic economy in light of a trade war. Mainland equities are down over 20% since their highs reached in mid-January. Investors are expecting a looser monetary policy from the central bank. But foreign investors also face a weaker Chinese currency, meaning forex risks will eat up gains in the A-shares.

GDP growth remained largely solid at 6.8% in the first half, with retail sales and property investment holding steady. Now that the trade dispute is heating up, things are seen taking a turn for the worse. A slight weakening was spotted in June industrial output and investment, and worries have been on the rise that escalating trade tensions could bite into the economy in a couple of months. A full scale trade war, wherein Trump’s high-water mark of $500 billion in tariffs is reached, is forecast to take at least a half-percent off of Chinese GDP, based on research by Matthews Asia, a San Francisco-based mutual fund company.

Tariffs are hurting China.

The country is expanding imports steadily with some items heavily reliant on the U.S. market. For instance, China tariffs on soybeans are 25%. Chinese traders are now forced to either pay 25% more for American beans or go to Brazil and pay just about the same price even without the tariff. Brazil is always more expensive than the U.S.

In the next five years, imports are expected to hit $8 trillion, a potential boon to U.S. companies ... providing China lets them in.

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