In China’s manufacturing heartland around the Pearl River Delta, US President Donald Trump’s 10 percent tariffs are causing little concern.
The 25 percent duties that loom next year are another matter.
Ben Yang, a furniture maker producing contemporary designs out of his facility in Dongguan — about 48km from Hong Kong — said that if those higher charges materialize from January as planned, the US share of exports from his Sunrise Furniture Co could plunge from 90 percent to less than one-third.
“Our major rival is Vietnam and 10 percent tariffs aren’t enough to make the difference,” said Yang, 48, who supplies retailers including Rooms To Go Inc. “But 25 percent tariffs are a worry. There will definitely be a short-term impact; Americans may have to accept higher prices.”
Yang’s situation mirrors that of the economy as a whole as it heads toward the close of the year: The negative headlines that have dominated the year have not yet translated into a sharp contraction of output, but rather the gradual slowdown that had already been expected.
It is what comes next that is preoccupying business owners, as interviews with about a dozen manufacturers in the delta over the past 10 days showed. The region serves as both China’s traditional hub for manufacturing everything from toys to chemicals, as well as a higher-tech location that hosts the headquarters of companies like Tencent Holdings Ltd.
Exporters there are now seeking ways to adjust by diversifying sales to other overseas markets and domestic consumers.
“Going beyond 10 percent, the disruption increases exponentially,” said David Loevinger, a former China specialist at the US Department of the Treasury and now an analyst at fund manager TCW Group Inc in Los Angeles.
The Chinese government has effectively shelved its campaign to curb indebtedness and added limited stimulus measures, and the approach of tariffs has actually helped boost sales abroad as exporters rush to beat the higher charges.
“The impact of China-US trade frictions on Chinese companies is limited overall and the risks are controllable,” Chinese Ministry of Commerce spokesman Gao Feng (高峰) said.
Most companies are confident and all levels of government are introducing measures to help companies through these tough time, he said at a news briefing on Thursday.
“To those whose products are highly competitive and difficult to replace, the impact is little. To those whose products can be replaced, the impact is that the costs have increased and the orders have reduced. Only very few companies face the danger of shutting down and cutting jobs,” he said.
Third-quarter economic data, released on Friday, shows the muted impact of Trump’s tariffs.
The economy, in the throes of a policy-induced slowdown, ticked down a notch, expanding 6.5 percent from a year earlier, compared with 6.7 percent in the previous quarter. It was the slowest quarterly expansion since 2009.
Trump last month imposed 10 percent tariffs on a further US$200 billion of Chinese products, including on furniture, and said those could rise to 25 percent from January.
He had already imposed 25 percent tariffs on US$50 billion worth of goods. China has retaliated and Trump has threatened to levy duties on all Chinese exports.
The US government opened another front in its campaign to change the economic relationship with China on Thursday, announcing plans to withdraw from a postal treaty that the US administration says gives Chinese companies an unfair advantage over US firms.
While the US might not leave the treaty if it can force a renegotiation, the action is likely to hurt Chinese companies by raising costs for shipping to the US via the postal service.
The domestic slowdown and that rising external pressure is prompting Guangdong manufacturers to gird for a more difficult 2019.
Domestic furniture supplier Baker Perfect in Dongguan is facing tougher competition, with exporters turning to the domestic market just as it feels “a chill wind” from the slowing economy, founder Li Shuiqing said.
The furniture industry is delaying expansion plans and refraining from new investment, he said.
“But it’s not a matter of survival, it’s just getting through a rough patch,” said Li, 37. “It’s about keeping money safe in bank deposits rather than investing in stocks or property. During difficult times you will be conservative, not expand or invest as much.”
There likely is worse to come. For the full year, investment growth is seen slowing to 6.5 percent and to 6 percent next year, according to Bloomberg surveys.
That is despite support measures being rolled out by the government that have included tax cuts, increased infrastructure spending, a recent cut in the required reserve ratio for banks and faster bond issuance by local governments.
Guangdong’s government early last month also announced a slew of measures to help manufacturers, including tax cuts, reduced costs for land use, reductions in power and transportation charges, social security fees and financing costs.
In contrast to the robust exports this year, a gauge of new export orders based on a survey of manufacturing purchasing managers that the Chinese government published late last month fell to its lowest level in two years.
That indicator tends to lead the official data on exports and might indicate a coming slowdown, said Betty Wang (王蕊), a senior economist at Australia and New Zealand Banking Group in Hong Kong.
Nevertheless, underpinning the confidence of Guangdong companies to ride out the storm is the dominance of China’s supply chain.
Furniture, electronic components, appliances and networking gear are among the products hit by tariffs where the US relies most heavily on China, said Panjiva Inc, a unit of S&P Global Market Intelligence that specializes in supply chain data and analysis.
“Supply chains are sticky, with China the hub of choice because of its scale, speed of delivery and also closeness to the Chinese market itself,” said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. “I don’t see US tariffs, even at 25 percent, upending that proposition.”
Shenzhen Garlant Technology Development Co makes products including mobile phones and their accessories, and does about one-fifth of its US$150 million in annual sales with the US.
Founder Andy Yu, 39, has added Trump’s 10 percent tariffs onto the prices of his products and said he would do the same again with 25 percent tariffs in January, even though US sales declined 20 percent this year.
“The pain is short-term,” Yu said. “We can adjust our sales strategy and expand our businesses in Southeast Asia, Africa and Latin America. That can easily make up the loss.”
Additional reporting by Yinan Zhao
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