China’s exporters are going through the most difficult time in their modern history as they are adjusting to the impacts of deadly U.S. tariffs. Since the beginning of 2019, China’s trade with Southeast Asia has exploded. As a consequence, Southeast Asia has in recent years become China’s largest trading partner, overtaking both the European Union and the United States. The U.S. remains an extremely important market for China. With tariffs poised to rise yet again, U.S. exporters are starting to scramble.
In less than two years, the U.S. has raised tariffs on imports from China to an effective tariff rate of an astonishing 145%. This triple digit increase has radically changed the pattern of trade. Shippers are already forecasting an 80% decrease in shipments from China to the U.S. in the coming two years. As we’ve said, Chinese exporters are going to force American consumers to pay higher prices. Yet at the same time, they are accelerating their plans to diversify their operations and markets.
China’s trade with Southeast Asia has expanded rapidly over the past few years, making it the country’s largest trading partner. The European Union is a distant second, with the United States third. The American market remains key to the aspirations of many Chinese industries. This has been particularly the case for electronics, machinery, home appliances, and computers, even with recent turnarounds. More than 36% of U.S. imports from China rely on products manufactured exclusively by Chinese manufacturers. These imports are essential to the U.S. economy.
Tony Post, an American Hunan tourism textile company representative, spoke to the effect of increased tariffs on price costing.
“More than the cost of the product itself has been added in import duties just in the last few months,” – Tony Post
Yet when I pressed him, he said he didn’t know how all these price hikes were going to impact his business over time.
“I’m going to eventually have to raise prices and I don’t know for sure what impact that is going to have on our business,” – Tony Post
Ongoing U.S. tariffs are upending trade dynamics. In retaliation, many Chinese textile manufacturers are relocating their production facilities to Southeast Asian countries. This action is designed to lessen the financial effects of the tariffs and keep domestic U.S. firms competitive in the American market. Yet this shift comes with significant hurdles. Ford, one of the manufacturers most dependent on Chinese imports, even identified challenges in sourcing equivalent equipment from other suppliers in the U.S.
“We cannot obtain comparable equipment from sources in the U.S.,” – Ford
Ford went into further detail that U.S. suppliers do not have the experience or specialized experience for certain manufacturing processes.
“A U.S. supplier would not have the specific experience with the handling and heating process,” – Ford
As logistics become increasingly complex due to tariffs, Ryan Zhao pointed out that shipping products from China to U.S. supermarket shelves takes significant time.
“It takes two to four months for products to be shipped from China’s ports and arrive on U.S. supermarket shelves. In the last two months tariffs have climbed from 10% to 125% today,” – Ryan Zhao
Zhao further emphasized that there’s no way to predict how much American consumers will pay as prices go up.
“For products that continue to be shipped from China, ‘it’s impossible to predict’ by how much their prices will rise for U.S. consumers,” – Ryan Zhao
China’s Ministry of Commerce is expected to convene representatives from large business associations. They’ll stress how to increase domestic sales since exports keep going down. Economist Derek Scissors noted that the domestic market in China is not yet ready to absorb the surplus goods.
“The Chinese domestic market can’t absorb existing supply, much less additional amounts,” – Derek Scissors
Given these changes, many companies are trying to pivot and adjust rapidly to new environments. Steve Greenspon of the Alliance to Save Energy described the difficulty of creating long-term plans in such a fragile atmosphere.
“The pause allows us to continue with business as usual outside of China, but we cannot make any long term plans,” – Steve Greenspon
As China’s exporters face these mounting challenges, one thing is clear – they are at a crossroads. At the same time, Southeast Asia is emerging as a go-to, promising countercyclical long-term market. Businesses continue to consider the U.S. as an anchor to their strategies. The coming months will be essential for determining how effectively these exporters can adapt and thrive amidst ongoing economic pressures.
“It’s hard to know how to pivot as we don’t know what will happen in 90 days,” – Steve Greenspon
As China’s exporters grapple with these challenges, it is evident that they are in a period of transition. While Southeast Asia has emerged as a promising alternative market, the reliance on the U.S. remains a crucial element of their business strategies. The coming months will be essential for determining how effectively these exporters can adapt and thrive amidst ongoing economic pressures.