Recent China tariffs are complicating the US-China trade relationship, causing many to rethink their outsource strategy. But there might be more to the story. The tariffs President Trump has imposed against China and their retaliatory tariffs are making things difficult, but there are indications China has been losing manufacturing prior to this.
China Tariffs and Trade War
2018 was a bad year for China tariffs, no doubt about it. The year began with a 30% tariff slapped on Chinese solar panels, followed by a 25% tariff on $34 billion in Chinese exports. Recently, Trump announced a 10% tariff on a full $200 billion in goods manufactured in China. This leaves only $267 billion in Chinese goods remaining outside of the tariff regime. But Trump has threatened to tax these remaining goods at the start of the next year as China retaliates with tariffs on key US markets.
The consequence of this escalating trade war is an undoubted increase in the cost of manufacturing in China. Manufacturers are now realizing they can’t afford to do business in China due to the China tariffs and escalating costs.
Manufacturing Leaving China
It has been well reported that manufacturers are now leaving China for other manufacturing locations. Many of them are considering other Asian countries. But a large number are reshoring their manufacturing operations back to the US. And many more are nearshoring just south of the border to Mexico.
The China tariffs and trade war will have a keen impact on the cost of the products made in China – a cost that will hurt sales and eat into producers’ margins. Several companies have already announced plans to leave or that they are working on exit plans should the China tariffs continue to escalate. Some of these include:
- SK Hynix
- IM Healthcare
- Mitsubishi Electric
- Toshiba Machine Co.
- Compal Electronics
- LG Electronics
- Micron Technology
“We’ve decided to shift part of our production from China because the impact of the tariffs is significant.”
More to the China Story
But there is more to the story. In fact, manufacturers leaving China has been observed for several years prior to the China tariffs. While recent China tariffs have certainly increased this trend, the shift has been occurring for a few years now. And a recent CBB International report indicates the reason for the recent surge might be more complex than simple 2018 tariffs.
CBB International stated, “Critically, manufacturing’s plight is occurring before any meaningful American tariffs have been imposed.” The group analyzed data from the China Beige Book and concluded, “Manufacturing is under fire. The sector’s multi-year rally has given way to declining revenue and sharply declining profit growth.”
The most telling red flag for China’s manufacturing economy is a spike in corporate loans. In fact, the report concluded, “the pace of borrowing – at 41 percent of firms, the highest since 2012 – sure smells a lot like panic.” China’s goods-producing sector has recently been in decline. But this has been less noticeable because of a slightly stronger services sector. In fact, China has increased spending on their services industry in a clear reorientation away from manufacturing.
And it’s no wonder why. In recent years, China’s differentiating low labor costs have risen dramatically. Quality and production speed have worsened. Oil prices have risen along with the costs of transporting goods to and from Asia. And energy costs have soared, eating into profit margins. And the country recently announced their central bank may step in to aid the struggling economy. China is still the one to beat. But China is swiftly losing manufacturing ground to other outsource destinations like Mexico. And the China tariffs are just one more obstacle for the aging manufacturing giant.