Chinese Exporters Fight To Resist Impact Of Steep US Tariffs While Considering Relocation

Chinese Exporters Fight to Resist Impact of Steep US Tariffs While Considering Relocation

From the beginning of this year, many of Zhang Shun's clients from the United States started to try to negotiate with him on how both sides can handle the looming 25 percent tariffs his products could face when imported into the US market

MOSCOW (UrduPoint News / Sputnik - 19th June, 2019) From the beginning of this year, many of Zhang Shun's clients from the United States started to try to negotiate with him on how both sides can handle the looming 25 percent tariffs his products could face when imported into the US market.

"Many of my US clients began to ask us about the issue [with possible tariffs]. Initially, they wanted us to share about half of any possible US tariffs our products could face. I turned that down. Then they wanted to convince me to share at least five percent out of the expected 25 percent tariffs. I refused that as well. In the end, we agreed to negotiate again when my products will actually be subject to new US tariffs," Zhang, president of China Dive Company based in Huizhou in Southern China's Guangdong province, told Sputnik on the sidelines of China Commodity Fair in Moscow on Tuesday.

Zhang's company specializes in producing swim goggles and scuba diving equipment such as scuba goggles and scuba diving wetsuits, which have not yet been included in the list of Chinese goods Washington targeted amid escalating bilateral trade tensions.

After US President Donald Trump decided to slap steep tariffs of 25 percent on $50 billion worth of Chinese goods in July 2018, bilateral trade tensions escalated quickly between the world's two largest economies in the following months.

Despite Trump agreeing to halt a planned tariffs hike in January this year, following his meeting with Chinese President Xi Jinping at the G20 summit in Argentina last November, subsequent trade talks between the two countries broke down in May, when 25 percent tariffs began to be charged on Chinese goods valued at $200 billion.

Trump threatened to introduce 25 percent tariffs on the remaining Chinese goods valued at around $300 billion, if both countries failed to reach a trade deal in the near future. Following a phone conversation with Trump on Tuesday, Xi agreed to meet with the US president again during the upcoming G20 summit to be held in Japan on June 28-29.

With exports to the United States accounting for about 30 percent of his company's total exports globally, an additional 25 percent tariffs on his products in the US market could deal a huge blow to Zhang's business.

However, Zhang has made plans to deal with the looming steep tariffs by adjusting his company's production capacity, as its low profit margins would not be able to absorb the impact of any new tariffs.

"The possible new tariffs would have a bigger impact on our low-end products, which account for about 10 percent of our overall exports to the United States. We have prepared countermeasures for possible tariffs on such products. If our US clients want us to absorb some impact from new tariffs, we would simply give up on such products and divert the production capacity to other products," he said.

The scuba diving gear manufacturer is betting on the competitiveness of his products in the global markets to avoid sharing the burden additional tariffs with his customers from the United States.

"For our high-end products, it would be difficult for our US clients to find similar products. Even if they can find similar products, I would sue them because our products hold a lot of patents. If they don't choose our products, it'll be their losses too as they'll face supply shortage. We're one of the top three scuba gear manufacturers in the world," he said.

Zhang admitted that even for his high-end products, the low profit margins would not allow him to share any of the additional import duties with his US clients.

"For our high-end products, it's impossible for us to share 10 percent out of the 25 percent tariffs, as our profit margin is at about 10 percent. If this is the case, we can't do this business anymore. We can't make such sacrifices to just serve our US customers," he said.

Other Chinese manufacturers shared similar views on how to handle new tariffs with their US clients.

"Our US clients are definitely worried that if they import the products [with 25 percent tariffs], they won't be able to sell with higher prices. But our products are also irreplaceable in the global markets. Our products are also daily necessities that US consumers can't live without. We have already offered a good price for the products with excellent quality. If we lower our prices, we won't make a profit anymore. Our profit margin is in single digits," Yang Bin, director of Kemei Electric Appliances based in Yiwu in Eastern China's Zhejiang province, told Sputnik on the sidelines of China Commodity Fair in Moscow.

Yang's company specializing in producing personal care products such as trimmers and hair clippers, which were included in the list of Chinese goods valued at $200 billion and began to face 25 percent tariffs from May.

To get around steep tariffs when exporting to the United States, Yang noted that some of his smaller competitors began to move production to neighboring countries such as Vietnam or even Turkey.

"Some manufacturers in our industry have moved to Vietnam or Turkey. But even after the relocation, most of the key components are still being produced in China. We usually need to send the parts to the new factories in those countries and complete the final assembly there. That's also because the labor cost and land expenses are much lower in those countries," he said.

Yang explained that the relocation of production out of China is also the result of rising labor costs in China.

"The Chinese workers' salaries have become so high in recent years, especially in the past three years. Our production line worker can make about 5,000 Yuan [around $725] a month now, while the average salary for them was around 2,000-3,000 yuan per month five years ago," he said.

As a result, Yang began to focus on improving automation at his factories to reduce the burden from rising salaries. The number of workers at his company has dropped to about 300 from the peak of over 1,000.

Nevertheless, the Yiwu-based businessman admitted that incentives offered by foreign governments in Turkey or Vietnam would be still very appealing to Chinese manufacturers.

"The advantage of those manufacturers who moved to those neighboring countries comes from the subsidies offered by foreign governments, who welcome and try to protect Chinese investors willing to relocate there. For example, in Turkey, the average salary for the workers is about 2,400 yuan a month and the Turkish government offers 1,300 yuan subsidy per worker each month to the Chinese investors. The water and electricity are also cheaper in Turkey compared to that in China," he said.

But Yang pointed out that most of the Chinese companies that have moved production overseas come from labor intensive industries such as textile manufacturing, while industries with higher technology requirement would take longer to be relocated to other countries because the whole supply chain needs to be moved at the same time.

In addition to reducing production cost through automation, Yang also began to focus on building its own brand after serving as the original equipment manufacturer (OEM) for major international brands such as Philipps, Panasonic and Braun for many years.

"Before, many Chinese manufacturers had low awareness about their own brands and preferred to become OEMs for foreign brands. But as we become more confident about the quality of our products, we began to focusing on selling our products under our own brands. Today, we sell 90 percent of our products under our own brand Kemey. If our clients want us to use their brands, we would raise the prices by 30 percent," he said.


The bankruptcy of top US retailer Toys "R" Us dealt a sizable blow to its Chinese suppliers such as Goldlok Holdings, a toys manufacturer based in Shenzhen in Southern China's Guangdong province. As one of the long-term suppliers for US retail giants like Walmart, the looming steep US tariffs have pushed the Chinese toy producer to come up with countermeasures to deal with the new challenges with its US partners.

"Amid the trade war between China and the United States, companies in both countries need to find a way to survive. Companies like Walmart would also prepare for countermeasures. If it wants to lower the cost, maybe it's possible to adjust the packing and make it simpler to reduce the total cost of the product. This could be one of the countermeasures to deal with the tariffs. I don't know the details yet. But as a supplier for Walmart, we need to negotiate with them," Doris Li, key account manager at Goldlok Holdings, told Sputnik on the sidelines of China Commodity Fair in Moscow.

Li believes Chinese authorities could also introduce policies to support companies facing troubles from steep US tariffs.

"You know, about 70 percent of the toys in the world are made in China. For the Chinese government to invite us to come here to take part in expos under the Belt and Road Initiative like this, it can help us find new options and boost our confidence in the emerging markets. I believe Chinese government will release new policies to support this industry in response to the steep US tariffs. Chinese government will find ways to support Chinese companies. I believe the government would have a good solution to the problems. Otherwise, it'll be a complete winter for all Chinese exporters, which would definitely hurt China's economic growth. I don't think Chinese government has no countermeasures," she said.

Following consecutive years of rapid growth, Yang from Kemei Electric Appliances said he would be satisfied if his company can post similar revenues this year as it did in 2018, as he expects the trade tensions between China and the United States to hurt demand and market confidence globally.