The trade landscape between the United States and China is once again under scrutiny as the US prepares to impose a new round of tariffs on Chinese goods. Currently, tariffs vary widely, with electric vehicles facing a staggering 100% levy and steel and aluminum subject to 25%. As the US continues to use tariffs as a strategic tool, Chinese businesses are rapidly adapting to these challenges by expanding their manufacturing footprint beyond domestic borders. With the upcoming 10% tariff set to take effect on February 1, tensions between the two economic powerhouses are rising, making the US-China trade relationship a focal point in American political discourse.
China's export sector remains robust, driven by significant investments in high-end manufacturing sectors such as solar panels and artificial intelligence. This strategic pivot has allowed China to maintain a competitive edge globally, with the country boasting a record trade surplus of $992 billion last year, fueled by an almost 6% year-on-year increase in exports. Labor-intensive production and a cost-effective supply chain have solidified China's position as the world's leading manufacturer. However, many Chinese businesses are proactively relocating production facilities to countries like Cambodia and Vietnam to mitigate potential US tariffs and diversify their operational risks.
Despite relocating manufacturing operations, financial benefits continue to accrue back to China. Approximately 60% of materials used in clothing production in Cambodian factories originate from China, underscoring the intricate supply chains that underpin global manufacturing. This strategy of spreading production across Southeast Asia is not unique to Cambodia, as other nations in the region also attract Chinese investment, contributing to a more diversified manufacturing base.
The imposition of tariffs is not limited to the US alone. The European Union has also levied tariffs on Chinese electric vehicle imports, citing concerns over state subsidies that allegedly fuel excessive production. Meanwhile, sentiment among Chinese businesses reflects growing unease over potential trade conflicts with the US. A recent survey by the American Chamber of Commerce in China revealed that over half of respondents are apprehensive about further deterioration in US-China relations.
In light of these challenges, Chinese companies are exploring new markets and production avenues. Kenny Yao suggests considering areas previously unexplored, such as Africa or Latin America, as viable alternatives despite their inherent difficulties. The decision to move production overseas is not taken lightly, as it impacts both business operations and employee livelihoods. Mr. Peng, one such business owner, emphasizes his commitment to his workforce, stating:
"Our boss is determined not to abandon these employees" – Mr. Peng
Mr. Peng's sentiment reflects broader concerns within the industry regarding potential disruptions from new tariffs and what a second term for President Trump might entail. As Mr. Peng muses:
"Mr Peng asks, uncertain of what Trump 2.0 means for him, his colleagues – and China" – (no attribution)
The looming possibility of a trade war has prompted several businesses to re-evaluate their strategies. Mr. Huang highlights the potential impact on pricing and retail dynamics:
"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" – Mr. Huang
This example illustrates the cascading effect tariffs can have on consumer prices and purchasing power, ultimately affecting market demand.
The US-China trade relationship remains a pivotal issue in the upcoming US presidential election. President Trump has utilized tariffs as a negotiating tool, leveraging them to gain concessions from China in trade discussions. However, the absence of a comprehensive trade deal could lead to an escalation in hostilities between the two nations, setting the stage for a more confrontational relationship between President Trump and President Xi Jinping.
Chinese businesses remain on edge as they navigate this complex geopolitical landscape. Mr. Peng expresses his feelings of uncertainty and anxiety due to shifting market dynamics:
"It was once a constant cycle of inspecting goods and shipping them out – I felt fulfilled. But orders have decreased, which makes me feel quite lost and anxious" – Mr. Peng
These sentiments are echoed by many within the industry who are bracing for further changes in trade policies.