Wednesday, August 21, 2019
Home > News > Trade War: More American companies are leaving China

Trade War: More American companies are leaving China

BLOOMBERG – Assuming Trump makes good on his promise to tariff all China goods at 10% starting Sept 1, with the very real possibility of those tariffs hitting 25% soon after, then it looks like more companies will move their supply chain.




For a long time, China has been the world’s low cost, low regulation, manufacturer of choice. Even though multinationals would like to keep it that way, some 40% of U.S. companies are relocating at least some of their supply out of China, according to a May 2019 AmCham Shanghai survey.

“This shows the disruptive effect the trade war is having on supply chains. If new U.S. tariffs do take effect September 1, the increased tensions will likely accelerate the relocation trends we are seeing now,” says Kenneth Jarrett, a senior advisor at Albright Stonebridge Group, a Washington DC based strategic advisory firm.

China is a crown jewel of American multinationals. Even before it became a member of the World Trade Organization, U.S. policy was designed to make China open up as a manufacturer of low cost American consumer goods. Everything from Nike sneakers to Happy Meal toys were made in China, often by subsidiaries of American companies, or joint ventures where the American firm maintained a sizable position.

About 50% of China exports to the U.S. are actually exports by wholly foreign owned companies or joint ventures with Americans.

“A lot of U.S. companies have outsourced jobs to China or are operating their own China affiliates and send back those components to the U.S. as part of the chain of production. So when the tariffs are imposed on everything next month, more than half of the companies that will bear the burdens are multinational companies, which hypothetically speaking are mostly American companies,” says Dennis Yang, a University of Chicago trained economist now a professor of business administration at the Darden School of Business at the University of Virginia.




“US companies could relocate to friendly allies. The tariff burden on the producer side is not entirely born by Chinese companies, but by American companies,” says Yang. “When those 10% tariffs on the remaining $300 billion worth of Chinese imports goes into effect, it will be on consumer goods that have so far been untouched.”

Recent depreciation of the Chinese yuan seals the deal on decoupling as there is simply no chance that Trump will reverse the tariffs if China’s currency depreciates.

A weaker economy means there is no way market forces alone don’t push the yuan weaker against the dollar. It settled at 7.06 to the dollar on Wednesday, though that could change today as Shanghai stocks were up in the mid-morning hours.

American businesses now have a month to prepare their supply chains for the impending tariff changes. Companies that do well will be the ones who have taken Trump at his word, rather than to doubt the Disruptor-in-Chief’s position on China. Further disruptions are coming to the U.S. supplier network, impacting how equity analysts view companies, recommend their stocks, and — in a broader sense — impacting the business cycle, already long in the tooth.

“The additional tariffs have increased downside risks for the U.S. and global economy, and reinforces the Fed’s logic for delivering insurance cuts,” say BNP Paribas economists led by chief U.S. economist Daniel P. Ahn.




Ahn thinks another 25 basis points rate cut from the Fed should be sufficient to offset an escalation even to the full 25% tariff rate on the rest of Made in China goods. American companies will either have to eat the margin, or find new suppliers.

A year after the existing tariffs on some $250 billion worth of goods, and there has been no meaningful increase in inflation, or job loss. How long that can continue is anybody’s guess, but to date, tariffs have not had a significant impact on the U.S. economy.

READ: US, Australia, & Japan join hands in financing infra projects in Asia to counter China