China bets its vast supply chain can muscle through Trump's tariffs

  • China’s industrial heartland expects only short-term pain from tariffs
PUBLISHED : Friday, 26 October, 2018, 9:21am
UPDATED : Friday, 26 October, 2018, 9:28am

China is banking on its dominance of global supply chains to help it ride out the pain from Donald Trump’s trade war.

Consider the case of pallet jacks made by Staxx Material Handling Equipment Co. from Ningbo on the nation’s east coast. Chinese production dominates the lower end of the market with a big price edge over western competitors, said export director Thomas Wang, speaking at this month’s Canton Fair in Guangzhou.

American buyers “don’t have good suppliers to replace China,” said Wang, who added that sales to the US account for about a fifth of the company’s production. “All the tariffs will be relayed to end users.”

In addition, the rapidly growing domestic market increasingly acts as an anchor for its global supply chain. That, and a low dependence on the US market, suggests Trump’s US$250 billion in tariffs on shipments cannot quickly upend it. Exports to the U.S account for less than a fifth of China’s total and Deutsche Bank AG estimates that overall, China’s industrial output has only a five per cent exposure to the US market.

“Chinese production serving the rest of the world is five times more important than the supply chain serving the U.S,” said Zhang Zhiwei, chief China economist at Deutsche Bank AG in Hong Kong. “The key issue is whether the US tariffs drive out supply chains from China that serve other countries. History suggests they will not.”

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A case in recent history Zhang cites is anti-dumping duties imposed by the US on large residential washing machines early in 2017. China’s exports to the US plunged as a result, but the impact on washing machine production overall was negligible because of shipments to other foreign markets and China’s consumers, said Zhang.

Trump imposed 10 per cent tariffs on a further US$200 billion of Chinese products last month, and said those could rise to 25 per cent from January. He had already imposed 25 per cent tariffs on US$50 billion worth of goods. China has retaliated and Trump has threatened to levy duties on all China’s exports.

More than a dozen makers of products from furniture to mobile phones interviewed recently in China’s industrial heartland in the Pearl River Delta in southern Guangdong province said they would face short-term pain from falling US orders when tariffs rise to 25 per cent. They also were confident that this would be a hiccup with other foreign markets and that Chinese consumers would quickly take up the slack.

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The region serves as both China’s traditional hub for manufacturing everything from toys to chemicals, as well as a higher-tech location that now hosts the headquarters of companies like Tencent Holdings Ltd.

Shenzhen Garlant Technology Development Co., which makes mobile phones and accessories including chargers, cables, speakers and headphones, does about a fifth of its US$150 million in annual sales with the US, said founder Andy Yu.

Western competitors sell their products at much higher prices, and competitors from Southeast Asia and Latin America lag far behind in technology and management capabilities, said Yu. China is the dominant supplier globally and it is unrealistic to think it can be displaced, he said.

With US tariffs on US$200 billion of Chinese products set to rise to 25 per cent in January, some US companies say they’re considering shifting purchases away from China to markets including Mexico, India and even the US itself.

But despite the imminent onset of 25 per cent tariffs on all its products, Wang at Staxx says that isn’t so much compared with its large price advantage over competitors, adding that the US market is still worth pursuing.

China still has a large cost advantage due to economies of scale and is also well established in parts of the supply chain that need hard-to-get certification, including for food, drugs, medical devices and some transport equipment, said Mary Lovely, a non-resident senior fellow at the Peterson Institute for International Economics in Washington.

“Damage from the US tariffs is bearable for China,” said Lovely. “These tariffs are unilateral and China still will supply the rest of the world.”