Trump tariffs and China: Companies brace for affect

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Laura Bicker

China correspondent

Reporting fromJiangsu, China, and Phnom Penh, Cambodia

Inside the factories that may very well be hit by Trump’s China tariffs

A hiss and puff of compressed air shapes the sleek leather-based, bringing to life an all-American cowboy boot in a manufacturing facility on China’s jap coast.

Then comes one other one because the meeting line continues, the sounds of stitching, stitching, reducing and soldering echoing off the excessive ceilings.

“We used to sell around a million pairs of boots a year,” says the 45-year-old gross sales supervisor, Mr Peng, who didn’t want to reveal his first identify.

That is, till Donald Trump got here alongside.

A slew of tariffs in his first presidential time period triggered a commerce struggle between the world’s two largest economies. Six years on, Chinese companies are bracing themselves for a sequel now that he’s again within the White House.

“What direction should we take in the future?” Mr Peng asks, unsure of what Trump 2.0 means for him, his colleagues – and China.

A battle looms

For Western markets which are more and more cautious of Beijing’s ambitions, commerce has turn into a robust bargaining chip – particularly as a sluggish Chinese economic system depends ever extra on exports. Trump returned on a marketing campaign promise that included crushing tariffs in opposition to Chinese-made items, and has since threatened a ten% levy that’s anticipated to take impact on 1 February.

He has additionally ordered a evaluation of US-China commerce – which buys Beijing time and Washington, negotiating room. And for now, harsher rhetoric (and better tariffs) appear to be directed in opposition to US allies equivalent to Canada and Mexico.

Trump might have pressed pause on the looming battle with Beijing. But many imagine it is nonetheless coming. It’s onerous to search out a precise determine on what number of companies are fleeing China, however main companies equivalent to Nike, Adidas and Puma have already relocated to Vietnam. Chinese companies too have been shifting, reshaping provide chains, though Beijing stays a key participant.

Mr Peng says his boss, who owns the manufacturing facility, has thought of shifting manufacturing to South East Asia, together with lots of their rivals.

It would save the agency, however they might lose their workforce. Most of the employees are from the close by metropolis of Nantong and have labored right here for greater than 20 years.

Mr Peng, whose spouse died when their son was younger, says the manufacturing facility has been his household: “Our boss is determined not to abandon these employees.”

Xiqing Wang/ BBC A worker at the factory sits at a wooden bench with an old sewing machine on it, sewing brown leather cowboy boots. She is wearing a pink and white jacket, and there are large blue containers next to her full of boots.Xiqing Wang/ BBC

Mr Peng says the manufacturing facility used to promote one million pairs of shoes a 12 months…

He is conscious of the geopolitics at play, however he says he and his employees are simply attempting to make a residing. They are nonetheless reeling from the affect of 2019, when a fourth spherical of Trump tariffs – 15% – hit Chinese-made shopper items, equivalent to garments and footwear.

Orders have since dwindled and employees numbers, as soon as greater than 500, have dropped to only over 200. The proof is within the empty work stations, as Mr Peng exhibits us round.

All round him, employees are reducing the leather-based into the best form at hand it to the machinist. They need to be exact as a result of errors will destroy the costly leather-based, most of which has been imported from the US.

The manufacturing facility is attempting to maintain prices low as a few of their American consumers are already contemplating shifting enterprise away from China and the specter of tariffs.

But that may imply shedding expert employees: it will probably take as much as per week to make one pair of shoes, from flattening the leather-based to giving the completed boots a closing polish and packing them for export.

This is what turned China into the world’s high producer – labour-intensive manufacturing which can also be low-cost when it is scaled up and supported by an unrivalled provide chain. And this has been years within the making.

“It was once a constant cycle of inspecting goods and shipping them out – I felt fulfilled,” says Mr Peng, who has labored right here since 2015. “But orders have decreased, which makes me feel quite lost and anxious.”

Once crafted to overcome the Wild West, these cowboy boots have been made right here for greater than a decade. And it is a acquainted story within the south of Jiangsu province, a manfucaturing hub alongside the Yangtze River that produces nearly every little thing, from textiles to electrical automobiles.

Xiqing Wang/ BBC Two female workers making white cowboy boots, which are sitting on a green travellator.  The women are dressed warmly in coats and thick jumpers, while most of the factory behind them appears to be in darknessXiqing Wang/ BBC

… and make use of double the variety of employees it presently has

These are among the many lots of of billions of {dollars} value of products that China ships to the United States yearly – a quantity that steadily ballooned as Washington grew to become its largest buying and selling companion.

That standing slipped beneath Trump. But it was not restored beneath his successor Joe Biden, who stored most Trump-era tariffs in place, as ties with Beijing frayed.

In reality, the European Union too has imposed tariffs on electrical automobile imports, accusing China of creating an excessive amount of, typically with the help of state subsidies. Trump has echoed this – that China’s “unfair” commerce practices drawback international comeptitors.

Beijing sees such rhetoric as Western makes an attempt to stifle its development, and it has repeatedly warned Washington that there will likely be no winners in a commerce struggle. But it has additionally mentioned it is prepared to speak and “properly handle differences”.

And President Trump, who has described tariffs as his “one big power” over China, actually needs to speak.

It’s unclear as but what he would possibly need in return. During Trump’s honeymoon interval with China in his first time period he got here to Beijing to ask for Xi’s assist in assembly North Korea’s chief Kim Jong Un. This time it’s believed he would possibly want Xi’s help to make a take care of Russian President Vladimir Putin to finish the struggle in Ukraine. He just lately mentioned that China had “a great deal of power over that situation”.

The menace of a ten% tariff is pushed by the assumption that China is “sending fentanyl to Mexico and Canada”. So he may demand that it do extra to finish that stream.

Or, given he welcomed a bidding struggle over TikTok, he might wish to negotiate its possession – or the prized know-how that powers the app – as a result of Beijing would wish to comply with any such sale.

Xiqing Wang/BBC A row of three cowboy boots in orange, back and blue. They are in a box, facing forward. They are patterned on both the leather and the material topsXiqing Wang/BBC

But the tariffs imply that the boots – made right here for a decade – usually are not as in demand as they as soon as had been

Whatever the deal could also be, it may assist reset US-China ties. However, the absence of 1 may abruptly finish the possibility of a second honeymoon, organising Trump and Xi for a much more confrontational relationship.

Already enterprise sentiment is nervous: an annual survey by the American Chamber of Commerce in China confirmed simply over half of them had been involved in regards to the US-China relationship deteriorating additional.

Trump’s seemingly softer stance on China provides provides some aid. But his hope continues to be that the specter of tariffs will assist drive consumers away from China and transfer manufacturing again to the US.

Some Chinese companies are certainly on the transfer – however to not America.

Moving store

An hour outdoors Cambodia’s capital Phnom Penh, businessman Huang Zhaodong has constructed a brand new manufacturing facility to cater to a flood of orders from US giants Walmart and Costco.

This is his second manufacturing facility in Cambodia, and collectively they produce half one million clothes a month, from shirts to underwear. Hangers carrying cotton trousers roll previous us on an automatic line, shifting from one station to the subsequent because the elastic waist is inserted and hemlines are completed.

Xiqing Wang/ BBC An aerial shot of a factory. The room is largely grey, with brightly-lit white work benches. People sit at each work bench. There is yellow and black warning tape on the floor.Xiqing Wang/ BBC

Many companies have relocated out of China to keep away from the elevated prices

Now, when potential US prospects lob the primary query, which he has come to anticipate – the place is he based mostly – Mr Huang has the best reply. Not in China.

“In the case of some Chinese firms, their customers have told them: ‘If you don’t move production overseas, I’ll cancel your orders’.”

The tariffs increase robust decisions for suppliers and retailers, however it’s not all the time clear who will bear the brunt of the fee. Sometimes will probably be the client, Mr Huang says.

“Take Walmart as an example. I sell them clothes at $5, but they usually mark it up 3.5 times. If the cost increases due to higher tariffs, the price I sell to them might rise to $6. If they mark it up by 3.5 times, the retail price would increase.”

But often, he says, it’s the provider. If his manufacturing line was in China, he estimates an additional 10% tariff may take an additional $800,000 (£644,000) from his earnings.

“That’s more than what I make as profit. It’s huge and we can’t afford it. If you’re making clothes in China under such tariff conditions, it’s unsustainable,” he says.

Current US tariffs on Chinese items fluctuate from 100% on electrical automobiles to 25% on metal and aluminium. Until now, a number of top-selling objects have been exempt, together with electronics, equivalent to TVs and iPhones.

But the ten% blanket tariff Trump is proposing may have an effect on the worth of every little thing that’s made in China and exported to the US. That applies to numerous issues – from toys and tea cups to laptops.

Xiqing Wang/ BBC A woman walks down a road in front of the glass walls and doors of a business, with red writing in Cambodian, Chinese and Western scripts. Inside two men appear to work at a wooden desk while fridges with food and drink sit at the back of the storeXiqing Wang/ BBC

In Cambodia, Chinese indicators have appeared on store fronts

Mr Huang says this is able to encourage extra factories to maneuver elsewhere. Several new workshops have sprung up round him and Chinese firms from textile manufacturing heartlands equivalent to Shandong, Zhejiang, Jiangsu and Guangdong are shifting in to make winter jackets and woollen clothes.

Around 90% of clothes factories in Cambodia are actually Chinese-run or Chinese-owned, in response to a report by perception and evaluation group Research and Markets.

Half of the nation’s international funding flows from China. Seventy p.c of roads and bridges had been constructed utilizing loans Beijing distributed, in response to Chinese state media.

Many of the indicators on eating places and retailers are in Chinese in addition to Khmer, the native language. There’s even a hoop highway named Xi Jinping Boulevard in honour of the Chinese president.

Cambodia just isn’t a lone recipient. China has invested closely in several components of the world beneath President Xi’s Belt and Road Initiative – a commerce and infrastructure mission that additionally will increase Beijing’s affect.

That means China has decisions.

Chinese state media claims that greater than half of China’s imports and exports now come from Belt and Road international locations, most of them in South East Asia.

Xiqing Wang/BBC A female worker in a brightly lit factory sits behind a sewing machine. Behind her, more sewing machines can be seen. Xiqing Wang/BBC

It is believed 90% of Cambodia’s factories are Chinese-run or owned

This has not occurred in a single day, says Kenny Yao from AlixPartners, who advises Chinese companies on the best way to take care of tariffs.

During Trump’s first time period, many Chinese companies doubted his tariff menace, he advised the BBC. Now they ask if he’ll observe the provision chain and slap tariffs on different international locations.

Just in case he does, Mr Yao says, it might be clever for Chinese companies to look additional afield: “For example, Africa or Latin America. This is more difficult, but it is good to look at areas you have not explored before.”

As America pledges to take care of itself first, Beijing is doing its greatest to look a steady enterprise companion, and there’s some proof it’s working.

China has edged previous the US to turn into the prevailing alternative for international locations in South East Asia, in response to a survey by the Iseas Yusof-Ishak suppose tank in Singapore.

Even although manufacturing has moved overseas, cash nonetheless flows to China – 60% of the supplies being made into garments at Mr Huang’s factories in Phnom Penh come from China.

And exports are thriving, with Beijing investing extra closely in high-end manufacturing, from photo voltaic panels to synthetic intelligence. Last 12 months’s commerce surplus with the world – on the again of a virtually 6% year-on-year leap in exports – was a report $992bn.

Still, Chinese companies – in Jiangsu and Phnom Penh – are making ready themselves for an unsure spell, if not a turbulent one.

Mr Peng hopes the US and China can have an “amicable and calm” dialogue to maintain the tariffs “within a reasonable range” and keep away from a commerce struggle.

“Americans still need to purchase these products,” he mentioned, earlier than driving off to satisfy new prospects.

Read extra about China’s economic system

With inputs from BBC

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