Chinese exporters breathe sigh of relief on tariff truce but do not expect a quick end to US trade war

Struggling exporters in China’s Pearl River Delta and Yangtze River Delta manufacturing regions believe the trade war between the US and China will not end easily or soon, but they welcomed the tariff truce – however brief – announced on Saturday.

Many export manufacturers remain trapped, facing the difficult choice of either shifting large parts of their production capacity out of China to avoid the US tariffs or doing nothing and watch as orders from their US clients dry up.

Most of the businessmen contacted by the South China Morning Post know the truce is temporary. In contrast, Chinese state media have painted the frozen tariff rate as a victory for President Xi Jinping, but neglected to mention the 90-day limit.

Under the deal, the US agreed to delay a rise in tariff rates on $200 billion worth of Chinese imports from 10 per cent to 25 per cent to permit further negotiations that might address US concerns about Chinese business practices. The US could still raise the tariff rate if there is no deal on the complicated US complaints at the end of the 90-day period, which will begin on January 1.

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The trade truce “is really a good news for our export business to the USA, as a 25 per cent tariff would be a kill shot to all of us”, said Steve Xie, who runs a trading company in Haining, Zhejiang province exporting sofa fabrics. “To be honest, we have been very anxious and confused in the past a few months” about the outlook for the business.

“We talked a lot about the possibility of relocating our factories to other countries in Southeast Asia because a 10 per cent tariff is a blow that we are able to absorb, but 25 per cent would be the death of our export market in the US,” he said.

“According to what I know, many of manufacturers in the Yangtze River Delta will definitely delay their plans to relocate, especially small and medium-sized firms, because manufacturing costs have also been soaring in Vietnam, and it costs a great deal to build a new factory there for small Chinese firms,” Xie said.

The 90-day suspension is a good delaying tactic, said Jason Liang, a sales manager of a Guangzhou-based exporter of LED products who did not want to identify his company.

“There’s a huge difference between a 10 per cent and a 25 per cent tariff. The latter would result in massive lay-offs at a large number of export-oriented companies. It could also raise the risks of residential mortgage loan defaults nationwide.

“Last month, our big American client formally informed us to prepare a list of Vietnam-based suppliers as a backup. We are planning to send a team to Vietnam this month. But now I think we can wait and see for a while. [The truce] will really save our suppliers in Dongguan. If not [for the truce], they would either have to close or move to other Southern Asian cities to keep their orders,” Liang said.

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Gloria Luo, who manages a Guangdong-based manufacturer of automotive parts and industrial moulds, said her company had been hit hard by US President Donald Trump’s tariff measures, since 40 per cent of the company’s sales were to the US and their products are on the list of those subject to the 10 per cent rate.

Luo, who also did not want her firm identified, said orders from American clients had dried up since August. “All deals are on hold. Our boss was going crazy and was about to collapse until yesterday.” Luo said.

Trump’s tweet on Monday claiming that Beijing would “reduce and remove” the 40 per cent tariff on US automobiles imported into China was another piece of good news that would help save the company’s business, Luo said.

“We are positive and have hope that orders will come back,” she added.

Other manufacturers were more sober in their assessment of the effect of the truce and the outlook for the trade war.

“Personally, I don’t think [the trade conflict] is over. But we have not met yet as a company,” said Norman Cheng, owner of Hong Kong-invested Strategic Sports, a leading helmet production company in Dongguan, Guangdong province.

“The underlying issues between China and the US have not been resolved.”

Cheng said his firm had decided to move some operations to Vietnam.

“Now, costs in Vietnam are rising. They were higher than I expected. We are not set up [there] yet. But last week we did decide to set up a simple operation. Sort of a beachhead. I don’t feel we will cancel this based on what happened in Argentina.”

“After reviewing the previous trade war between the US and Japan, we have no illusion that [the US-China conflict] will end so quick and easily. The game among the great powers will take years [to play out],” said Joe Gao, executive director of Vietnam-based Dai Viet First Investment.

“Hesitation [in shifting production] will only bring higher relocation costs for those [Chinese] factories [suffering from US tariffs].” he said.