Will Trump’s tariffs on Chinese imports make the next Christmas more expensive for Americans?
The weather is overcast on the second day of the 124th session of the Canton Fair in Guangzhou -perhaps fitting for the massive trade show for Chinese exporters as global trade wars threaten the economic outlook.
But the place is packed, and the line to get in through the main entrance is massive. Thousands of companies are set up here this week to showcase their products with the hope that they might be able to pick up some new business while they catch up with their existing customers from all over the world.
Ningbo Staxx Material Handling Equipment, a manufacturer of pallet jacks, is experiencing a short-term boom as its customers try to get ahead of US tariffs, says Jeremy Chow, a sales manager at the company. It’s a good illustration of the front-loading of orders that analysts said explained the surprise acceleration in export growth in China’s September trade data.
The company exports manual, semi-electric, and fully electric pallet jacks to US customers. The fully electric models have been subject to a 25 per cent tariff since earlier this year as part of one of the initial rounds of duties the US imposed on imports from China.
So they’ve found a workaround: instead of shipping the fully electric models, they’re converting them to semi-electric ones by removing the motor. Then, when the US customer receives the product, it’s converted back. This adds about 10 per cent to the cost, and the semi-electric models are still subject to a 10 per cent tariff, but it’s still a bit cheaper to do it this way.
The opportunity for such arbitrage will go away next year when the 10 per cent tariff rises to 25 per cent. But Thomas Wang, the company’s exports director, isn’t too worried about a slowdown in sales, given how cost-competitive he thinks the company’s products are, even taking the tariffs into account.
Christmas 2019 could be tricky.
Holiday decorations are the type of low-margin, labour-intensive consumer goods for which the companies that manufacture them would suffer if the US subjected them all to tariffs. So far, Zhuguang Group Sanmen Christmas Arts & Crafts has avoided getting dragged into the trade war, but Haze Jiang is concerned Trump will eventually follow through on his threat to impose tariffs on all 100 per cent of US imports from China.
Jiang, who is handling North American sales for the company’s booth at the Canton Fair, said the industry is already struggling amid rising labour costs, which in recent years have spurred a relocation of production to southeast Asian countries where it’s less expensive, like Vietnam.
But companies are having trouble building out capacity quickly enough to meet demand, and margins, at just 5 per cent to 10 per cent, are already too thin for producers to make concessions on price, Jiang says. The bottom line: if tariffs end up covering their products, US consumers will just have to pay more.
Cash Liu is running the booth for Shenzhen Kingston Sanitary Ware (SKSWC), a Chinese hot tub manufacturer where he is a sales director.
Exports make up 95 per cent of the company’s sales. About 80 per cent of those hot tubs go to Europe, while 20 per cent are sold in the Australian market.
SKSWC does not sell in the US, so American tariffs do not apply to its products. What’s hurting them are the retaliatory tariffs imposed by China on US imports. American-sourced acrylic and control systems comprise 65 per cent of SKSWC’s costs, Liu says.
Liu says the company has already paid the 10 per cent tariff which was implemented on September 24 on its latest purchases of acrylic and control systems. Right now they’re content with absorbing the higher costs, but Trump has said the 10 per cent tariff on Chinese exports to the US will become 25 per cent on January 1.
And if the Chinese government responds in kind, SKSWC will have to pass on some of that extra cost, which Liu fears may drive away customers.
In the meantime, they’re starting to switch away from US inputs - they’re buying more control systems from Canada and using Chinese-sourced acrylic, but 40 per cent of their existing customer base still prefer the US-sourced product, he says.
The company had a great kick-off to the year in the first three quarters of 2018 but the fourth quarter is off to a slow start, and the IMF’s downgrade of global growth forecasts has Liu a little worried. The first three months of 2019 will be pivotal for determining the effects of the trade war on demand, he says.
Big farm tractors line the entrance to the agriculture and construction machinery section at the fair. For Shandong Yuntai Machinery, one of the exhibitors, the deepening trade war with the US is making business prospects for the coming year uncertain following two years of solid growth in the American market.
The company’s products, which are sold in more than 60 countries, range in size from heavy-duty disc harrows used for tilling soil to a variety of disc blades as small as 300 millimetres in diameter - the latter comprising their main export to the US market.
Amy Mao, a sales manager staffing Yuntai’s Canton Fair booth, says the US market, which the company entered two or three years ago, still makes up a relatively small share of their business. But the annual growth rate of around 10 per cent that they’ve achieved since they started selling there probably represents an upper bound on what the company can hope to achieve in the coming year, given the tariffs US President Donald Trump has put in place, which cover Yuntai’s products.
That also makes it harder to judge which markets will be the biggest drivers of growth going forward, Mao says.
After all, no one predicted the trade war before it broke out earlier this year, and it’s not clear what the overall impact will be on a complex, global economy.