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China's exporters run for cover as US election nears

2024-10-23 12:23:26

By David Kirton, Casey Hall and Ellen Zhang

GUANGZHOU, China (Reuters) - If Donald Trump wins next month's U.S. presidential election, Mike Sagan's toy-making company will halve its China supply chain within a year.

KidKraft, which also makes outdoor play equipment, had already shifted 20% of its production out of China to Vietnam, India and elsewhere after Trump introduced 7.5%-25% tariffs in July 2018, midway through his first term.

Now Trump threatens blanket 60% tariffs on China, which Sagan sees as a game-changing "blunt" tool.

He expects Kamala Harris to be less aggressive, but still likely to keep confronting China on trade.

"The writing is on the wall that it's going to be difficult," said Sagan, vice-president for supply chains and operations at KidKraft. The firm has reduced its Chinese suppliers to 41 from 53 at the start of this year.

"Question is: is it going to be extremely difficult or just difficult?"

The tariff threat alone is rattling China's industrial complex, which sells goods worth more than $400 billion annually to the U.S. and hundreds of billions more in components for products Americans buy from elsewhere.

Of the 27 Chinese exporters with at least 15% of sales to the U.S. Reuters spoke with, 12 were planning to accelerate relocation if Trump returned to the White House. Four others, still fully in China, said they would open factories overseas if Trump raised tariffs. The other 11 had no specific plans around the election result, but most expressed concern they might lose U.S. market access.

The producers expected higher tariffs on the world's largest exporter to disrupt supply chains and further shrink Chinese profits, hurting jobs, investment and already sagging growth. A trade war would raise production costs and U.S. consumer prices even if factories relocated, they said.

China's ministry of commerce did not respond to Reuters' questions on the impact of the U.S. election outcome on its economy, trade and diplomatic relations with Washington.

Matt Cole, who co-founded m.a.d Furniture Design in 2010, is among those who haven't moved production yet.

His due diligence in Southeast Asia in 2018 showed he would still need to import 60% of furniture components from China. The costs of logistics and other inefficiencies were roughly the same as those added by a 25% tariff.

Though he saw little value in moving six years ago, he now feels exposed.

If Trump wins, he would move as much product to the U.S. as possible ahead of the tariffs, buying himself time to explore other bases.

"Some people made a good decision going into third countries. I'm pretty sure they are not as worried about the U.S. election as I am," said Cole. "I might be on a flight to Malaysia or Vietnam very, very soon."

KidKraft's Sagan says his production costs outside China are about 10% higher and likely to rise. But lower standards are the bigger worry.

If Harris wins, the relocation would proceed at a more considerate pace to reduce that risk.

Quality is "one of the biggest trade-offs that you make in the very beginning because it takes time to secure the sub-supply chain" and "find the right people," he said.

"You really risk your integrity."

SURVIVAL THREAT

The 2018 tariffs benefited Southeast Asia, which emerged as the preferred assembly point for U.S.-bound products that rely on Chinese supply chains.

But they did little damage to Chinese growth and nothing to alter global economic reliance on U.S. consumption and Chinese production.

China has in fact grown its share in global manufacturing since the tariffs, as it redirected credit to factories from the property sector, as part of President Xi Jinping's push for new productive forces.

The tariffs had a smaller impact on the U.S. trade deficit with China than the latter's 2022 COVID-19 lockdowns, further evidence of their economic interdependence.

But a Trump trade war 2.0 would be a moment of reckoning for many Chinese exporters, whose profits are dwindling under heavy deflationary pressure, caused by state-directed investment into factories at the expense of consumers.

"If it's 60% tariffs, nobody can handle it," said Zeng Zhaoliang, the head of Guangzhou Liangsheng, which sells 30-40% of its low-margin cookers to the U.S.

Tariffs also push costs higher elsewhere, says GL Wholesale president Lance Ericson, who has been sourcing goods from China for 30 years and is now scouting suppliers in India, Vietnam and Cambodia to replace the 40% in business lost since Trump's presidency.

"The Indians are already raising prices by 10%," he said. "It's going to be bad for China. It's going to be bad for me."

Exports where China has an edge, such as electric vehicles, face high tariffs in the U.S., Europe, and elsewhere. Trump threatens to chase Chinese EV makers with 200% tariffs if they sell to the U.S. from Mexico, where BYD (SZ:002594) plans new factories.

While backlash against Chinese exports targets mainly solar panels, EVs and batteries, some markets such as Indonesia and India are raising tariffs on China-made clothing, ceramics or steel.

Other industries are taking notice.

"We're building factories overseas not just because of the U.S. market, but to prepare for changes in the global landscape," says Cheng Xinxian, an executive at appliance-maker Hangzhou Yongyao Technology.

CHINA RESPONSE

The earliest a 60% tariff could come into force would be mid-2025, economists say, reducing Chinese growth by 0.4-0.7 percentage points next year through diverted investment and jobs and output cuts.

Beijing can mitigate this with more stimulus, export controls and a weaker currency, although these steps carry risks such as capital flight, debt and further trade conflict.

"If Beijing is planning on giving rebates to factories and things like that, the tariffs are just going to go higher and higher," said Larry Sloven, who has been sourcing and manufacturing products across Asia for international companies since the 1970s.

"If you’re not spreading yourself, you’re dead, you’re in great danger."

Almost all exporters hoped Trump would moderate his stance if he wins.

Yang Qiong, an executive at Chongqing Hybest Tools Group, which makes hand-drills, air nailers and staplers, says her firm would expand Vietnam facilities if Trump returned, but stay put if Harris became president.

Mark Williams, chief Asia economist at Capital Economics, says a second Trump term would undermine China's near-term growth through "challenges to a global economic order that has helped China prosper." But it also risks splintering a U.S. coalition of allies from Europe to east Asia that are increasingly like-minded on Beijing.

If Harris kept allies onside, "China would probably be more constricted economically over the medium term," he said.

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