11 Sep

Trump Tariffs Hit China Where It Matters Most

WRITTEN BY Mohit Oberoi, CFA
  • President Trump announced new Chinese tariffs last month. He delayed some of the tariffs in an apparent bid to not disturb holiday shopping. However, under the current plan, nearly all of the Chinese imports would attract the tariffs before 2019 ends.
  • According to various reports, several US companies are looking at alternate supply destinations. We shouldn’t dismiss the rumors. The data has shown a sharp fall in Chinese exports to the US.

Trump tariffs

Today, citing the American Chamber of Commerce in Shanghai, CNBC reported that many US companies “are speeding up their move away from the mainland as increasing tariffs continue to hurt their businesses.” In the past, we’ve heard about US companies shifting away from China. Earlier this year, Nikkei reported that companies, including Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOG), are looking at alternate supply locations. We’ll discuss how President Trump’s tariffs impact Chian.

Why China is an attractive sourcing destination

President Trump said that companies are leaving China due to his tariffs. Last month, as the trade war escalated, President Trump asked US companies to leave China. So far, we haven’t seen a major exodus of US companies from China. Practically speaking, it takes years to build a reliable supply chain, especially for international sourcing. China was a good sourcing destination for US companies. Overall, China was cost-effective. The country offered world-class infrastructure and an enviable manufacturing ecosystem. Companies found that it was relatively easy to do business in China compared to other Asian countries. Combined with China’s mammoth population, companies also got an opportunity to sell their products to the domestic audience. However, President Trump’s tariffs have changed the equation.

Trump’s tariffs and US companies

President Trump’s tariffs prompted US companies to rethink their China sourcing strategy. Making products in China and selling them in the US isn’t an attractive strategy after the tariffs. If President Trump’s current tariff plan stays on course, most of the Chinese products will attract US tariffs before the end of the year. Several US companies like Apple, Amazon, and Alphabet have opposed the tariffs. Meanwhile, President Trump’s China tariffs received support from one of the most unexpected people—George Soros. From the US-China trade deal perspective, the backing isn’t necessarily good news.

Tariffs impact China

Now, President Trump’s tariffs have aggravated China’s slowdown. Most economic data points reflect China’s worsening slowdown. China doesn’t think that the tariffs have impacted its economy. While we could address the extent of US companies’ exodus from China, the country’s export data has a telling story. Looking at China’s August trade data, its consolidated exports fell 1.0% YoY (year-over-year). However, China’s exports to the US fell. CNBC reported that China’s exports to the US fell 16% YoY last month. China’s exports to the US fell 6.5% in July.

Tariffs hit both countries 

Notably, the US exports to China have also fallen. In August, China’s imports from the US fell 22.4% YoY. In percentage terms, that’s more than the fall in the US imports from China. However, given the massive trade imbalance between the two countries, in absolute terms, China’s exports to the US fell much more than its imports.

Most observers blame President Trump’s tariffs and the trade war for the economic slowdown in the US. Trade uncertainty impacted business investment and hiring decisions. While President Trump sees trade wars as easy wins, they’re actually a challenge. Read Trade War: Are Trump and Xi Jinping Taking Buffett’s Advice to analyze Warren Buffett’s views on the trade war.

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