Shanghai-based fruit importer Lucas Liu is on the front line of the US-China trade war. The cost of American cherries, for example, has risen by roughly half, prompting him to cut back on what he orders from the United States.
Liu, who sells American cherries, apples, oranges, prunes and plums to Chinese consumers, is continuing to buy from the US to maintain his long-standing relationships with his suppliers – but he is also looking elsewhere.
This month he is planning a trip to Uzbekistan to assess the possibilities for cherry plantations there.
“I am buying much less than last year, but I won’t stop buying from American suppliers,” he said. “Turkey, Canada and Central Asia have quickly made up the shortfall as alternative suppliers.”
The US-China trade war has forced dealers and producers in China to diversify their markets, with no sign of an imminent solution to the dispute as it drags into a second year.
Liu’s decision to look west is aided by Beijing’s westward economic strategy: the Belt and Road Initiative, designed to connect China with Europe and Africa through transcontinental infrastructure investment. As part of the initiative, traders can benefit from streamlined customs clearance when doing business with belt and road partner countries.
That’s an attractive prospect for traders like Liu who are confronted by rising costs elsewhere.
“The tariffs are high and the market is unstable because of the trade war,” Liu said. “We are forced to look into other options. Central Asia has cheap labour and fine weather, and it is close to China, which can save on transport and storage costs.”
Even optimists regarded a trade deal between China and the US as a remote possibility after US President Donald Trump dropped a bombshell by announcing additional 10 per cent tariffs on US$300 billion of Chinese imports, effective September 1.
On Friday and over the weekend, Trump again boasted that China “badly” wanted a deal because thousands of businesses were leaving the country, but said he was not ready to strike one with Beijing. Chinese officials warned they were prepared to retaliate if Trump’s threatened tariffs were implemented.
While China cannot match the US by escalating tariffs dollar for dollar, it still has ammunition to harm American business interests “in ways that are potentially even more damaging than tariffs”, said Stephen Olson, a research fellow with the Hinrich Foundation, an Asia-based organisation focused on promoting sustainable global trade.
He said China could increase regulatory barriers to create headaches for US companies, such as a longer customs inspection process, extensive paperwork clarification, tougher safety inspections and more time-consuming licensing, as well as using its “unreliable entity list” to limit US companies’ commercial opportunities in China.
Rivalry is growing between the countries on multiple fronts as they clash over economic, technological and military matters, as well as human rights issues including mass detention of Muslim minorities in internment camps in Xinjiang, in China’s far west, and the handling of anti-government protests in Hong Kong.
The trade war has taken a toll on China’s overall economic growth. Its GDP grew 6.2 per cent in the second quarter, its weakest in at least 27 years. Exports to the US fell 7.8 per cent year on year in June, the first full month showing the effect of the US raising tariffs on US$200 billion of Chinese products from 10 to 25 per cent in response to the collapse of trade talks in May.
With a bigger fall in imports from the US, which slumped 31.4 per cent in June, China still had a trade surplus with the US that rose 11 per cent from May’s US$26.9 billion to reach US$29.9 billion.
The US economy also slowed in the second quarter, but GDP still rose 2.1 per cent, slightly above the expected 2 per cent.
Despite the downward pressure, the country’s overall economic performance was acceptable to Beijing, according to Chinese government adviser.
“It is also a test to see which economy can stand firm for longer, China’s or the US’,” he said, speaking on condition of anonymity because of the sensitivity of the matter.
According to an estimate by Louis Kuijs, a Hong Kong-based economist with Oxford Economics, Trump’s latest 10 per cent tariffs, once imposed, could cut 0.1 percentage points from China’s growth in the second half of the year and a further 0.2 percentage points next year.
“Such additional US tariffs will put further pressure on growth in China, but probably not enough to make Beijing panic,” he said.
“With room for some possible additional policy easing, this seems manageable from a policymaker’s perspective. Of course, if the tensions escalate further, with further tit-for-tat measures, the impact could be more severe.”
Lu Xiang, a researcher on US issues at the Chinese Academy of Social Sciences, found that the sentiment was unexpectedly calm during his recent conversations with scores of small- and medium-sized enterprise owners in the eastern Zhejiang province, one of China’s economic powerhouses.
“The worst scenario for them is a reduction of profits,” he said. “They are very calm about the current situation and they don’t have plans to lay off workers – only to reduce extra working hours. The workers also feel that it is a good chance for respite after years of overwork.”
This was echoed by Lei Congrui, an underwear producer in Lianyungang, a port city in the neighbouring Jiangsu province. Exports to the US used to account for 40 per cent of his total business.
“I don’t expect the trade war to end abruptly or early,” said Lei, who expected the instability and tension to continue for at least a decade. “I have already made production decisions based on the worst scenarios.”
He said he had lowered selling prices to his US partners by about 10 per cent to absorb the impact of the higher tariffs, “trying to find a balance between us and US distributors”.
Lei said that China’s textiles industrial cluster was globally significant and that helped to cushion it from the extra tariffs, but producers with greater export exposure to the US market might suffer more.
“We don’t cut sales hastily because it will affect our capacity, but prices are adjustable,” he said. “We are quite flexible and can be quick to meet small orders.
“The US is an important market, but it is not all that we have. We have treated export to the US as a non-profitable market, but we will maintain the US market while we expand into markets in Europe, the Middle East and Africa. China’s domestic market also has great potential.”
The US is strong in chemical fibre technology, which is vital in special textiles and military garments, and its restrictions on hi-tech exports to China have pushed Chinese textile producers to turn to Japan and European countries to learn from and acquire their technologies, Lei said.
Kuijs, of Oxford Economics, said Trump’s latest threat had made any trade deal less likely to happen.
“We expect this step to make China less keen to achieve a deal and more determined to prepare itself for long-term economic tension with the US,” he said.
Observers have said it would now be difficult for China to make any major concessions without being seen as yielding to US pressure, while the US’ still resilient economy had given it a strong foothold in talks.
A US industrial source who has been briefed on the talks by the US government said the tariffs imposed on Chinese products had succeeded in putting pressure on China, and expected Trump to continue to apply that pressure at a time when he is also seeking re-election in 2020.
“Trump is immune from [criticism over] China issues during the presidential election campaign as long as the trade conflicts continues because he’s been the hardest president in US history,” he said.
“It is in Trump’s political interest to let trade tensions play out as long as they can, while the economy is OK. If the stock market or economy tanks, then that’s a different story. But as long as they are good, he can wait and it benefits him politically.”
Joerg Wuttke, president of the European Union Chamber of Commerce in China, said EU companies had to be realistic about the trade war and plan for an extended stand-off.
“The path of least resistance is for the two sides to muddle through, avoiding the economic damage of further escalation but not making the political sacrifice to complete a final agreement,” he said.
“China needs wide-ranging reforms [to achieve that], and the right amount of strategic pressure can help move things in that direction, but there doesn’t appear to be anything strategic about the latest tariffs,” Wuttke said.
“At a time when the US-China economic relationship is badly in need of thoughtful and meaningful repair, this tariff wrecking ball, which will effectively impact everything Americans buy from China, will only empower Chinese voices calling for self-reliance and disengagement.”
Some foreign companies have relocated their production outside China or slowed their China investment plans because of the trade war, but the Chinese government has played down concerns over a wave of production cuts, claiming there were only sporadic cases.
China International Capital economists Liang Hong and Yi Huan estimated that China’s industrial sector lost 5 million jobs last year, including 1.8 to 1.9 million as a result of the trade war – accounting for 1.2 per cent of the total employed in manufacturing.
Their report said that the computer and telecoms equipment sector had been hit the hardest and that a number of multinational companies had closed some or all of their factories in China because of rising labour costs and US tariffs.
Sony Mobile closed its Beijing factory in March, and South Korean phone maker Samsung is expected to close its Huizhou plant in the southern province of Guangdong.
Among US companies taking part in the China business climate survey published by the American Chamber of Commerce in China, the technology and telecommunications, automotive and services sectors were among the most pessimistic about US-China relations.
In the technology hardware sector, 40 per cent of survey respondents reported no plans to expand investment in China in 2019. The sector expressed “high levels of pessimism” about the outlook of US-China ties, but “notable optimism” for China’s domestic market growth.
“Companies planning to invest less cite uncertainties in the US-China economic relationship and bilateral tariffs, concerns about an uncertain Chinese policy environment and market access barriers as primary reasons,” the report said of the pessimism.
The survey also showed that a quarter of surveyed member companies in the sector had relocated capacity away from China in the past three years and another 12 per cent of respondents were considering moving capacity to other countries in the next three years.
But the close intertwining of the economic interests of China and the US was seen as too extensive to abandon.
“China is also still a huge market, and US companies will keep investing to tap into it,” said Arthur Kroeber, research head with Gavekal Dragonomics, a financial services company headquartered in Hong Kong.
He cited examples such as ExxonMobil receiving the green light to set up a petrochemical plant in China and Tesla increasing its presence there while shutting down other plants in Asia.
“In many sectors, revenue growth [of US firms in operating in China] continues to be in double digits,” he said. “Even as some companies pull back, others are doubling down.”
More from South China Morning Post:
- China slowdown persists as industrial economy posts worst growth since February 2002
- Chinese consumers shrug off impact of trade war on economy with increased spending to improve quality of life
- China braces for tough second half of 2019 as it increases focus on domestic economy in escalating trade war
This article ‘Trade war could last a decade’: why Chinese firms are preparing for long haul first appeared on South China Morning Post