US trade war could hit Chinese suppliers harder

Orders have evaporated for Richard Chen, who manufactures Christmas decorations in southern China for US retailers, including Walmart and Costco, facing crippling US tariffs.

“The orders are half of what they were last year,” said Chen, who is based in the manufacturing hub of Dongguan.

He is now in survival mode.

“There’s no more scope to cut prices. But to get orders we sometimes have to take a price cut ... we have no choice,” Chen said, declining to elaborate on cuts he had agreed to.

“We’re losing money.”

On February 4, US President Donald Trump applied a new 10% tariff to the $400 billion worth of Chinese goods exported annually to the United States, with an additional 10% tariff announced on March 4 and further reciprocal tariffs expected on April 2.

Chinese suppliers and their American clients are now coming to grips with the grim reality that this trade war will hit harder than in Trump’s first term in 2018, according to Reuters.

This time is different because low-end manufacturers are already struggling with razor-thin margins, so they cannot cut prices to help their US customers, and local Chinese governments that might have provided support to protect jobs are mostly too cash-strapped to give new subsidies.

Suppliers estimate wages have grown by 2-5% since the first US-China trade war of 2018, while raw material costs have climbed for some sectors and overseas competition has intensified, making Trump’s latest tariffs the final straw for many low-end manufacturers.

Liz Picarazzi, the Brooklyn-based founder and CEO of trash box company Citibin, said her goods produced in China are now subject to 52.5% tariffs and she can no longer afford to manufacture there.

US customers are pressing for 10% price cuts, according to interviews with 10 Chinese manufacturers and exporters and two US-based retail executives with Chinese supply chain exposure.

Ongoing negotiations are yielding average discounts of 3%-7% from suppliers, they said.

On the Chinese side, suppliers who got burnt in 2018 when some US customers refused to pay for container-loads of goods subjected to higher tariffs are now asking for payments upfront rather than waiting 30-90 days after sending an invoice.

The tariffs have rattled China’s industrial heartland and could lead to substantial layoffs as factories shutter or downsize, analysts and manufacturers say.

He-Ling Shi, an economics professor at Monash University in Melbourne, said Chinese manufacturers are succumbing to a wide range of pressures.

Some US customers believe Chinese authorities will step in to support their local manufacturing industries with additional tax rebates, rent and utilities subsidies or other support as they have done in the past – including in 2018..

Several suppliers interviewed by Reuters said, so far, new support had not been forthcoming.

Economics professor Shi said the heavy debt loads of local governments, many weighed down by an ongoing property crisis, will prevent them from being as generous with subsidies as they have been in the past.

The message from Beijing is that exporters can pivot to other markets and China’s own 1.4 billion customers, but that too is a difficult strategy in a time of overcapacity and depressed domestic demand.

While one of the stated aims of Trump’s tariff regime is to draw manufacturing back to the US, Citibin’s Picarazzi says she has looked into the possibility at least half a dozen times and it remains unfeasible from a cost and quality perspective.

For now, as she prepares to move 100% of her manufacturing to Vietnam, she says she has already advised her customers to expect higher prices.

“This is just a really unfair thing for the American government to do to American companies and American consumers,” she said. “There is no patriotism in ruining American companies.”