China Exporters Reel as U.S. Tariffs Imperil World’s Supply Hub

“I’m lost and perplexed,” said Chinese furniture maker Ben Yang as he reeled Friday from news that U.S. tariffs on his products were hiked to 25% from 10%. “We probably have to switch to making something else or shut down altogether.”

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

That raises the specter of substantial disruption to China’s dominant role in the global supply chain with painful adjustments rippling across the world after 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 U.S. tariff hike threatens to dislodge China from the global supply chain,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore. “The current China-centered supply chain will likely break up and shift towards Southeast Asia and disperse more widely across the globe.”

As exporters struggle to digest the news of Trump’s increase last week on $200 billion of exports, the affected group is set to get even bigger. The U.S. Trade Representative’s office Monday released a list of another $300 billion worth of Chinese goods including children’s clothing, toys, cell phones and laptops that are being threatened with a 25% tariff. If that hits, practically all of China’s exports to the U.S. 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, Trump’s tariffs “have thrown everything into uncertainty” said marketing manager Ellen Lee.

Thin Margins

“We only have a profit margin of 10% — 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-colored hair dryers and curling irons to the U.S. The 25% tariff hike will slash that share to about 30%, according to sales representative Ryan Tao. With a profit margin of 20% to 30%, the company will reduce prices by 5% to 10% 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%. Three hundred had profit margins of more than 10%, and the rest were below that.

Increasing tariffs to 25% on about $200 billion of goods will reduce China’s exports by 2.7%, drag on growth by 50 basis points over the next two to three years, and cause 2.1 million jobs to be lost, said Liu Ligang, chief China economist at Citigroup Inc. in Hong Kong in a May 10 note.

https://www.bloomberg.com/news/articles/2019-05-13/china-exporters-reel-as-u-s-tariffs-imperil-world-s-supply-hub?srnd=economics-vp

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