On August 24, the day after President Trump “ordered” American companies out of China, we wrote Repeat After Me: There Will be No US-China Trade Deal that put forth the following:
- The US-China Trade War is and will be the New Normal (reinforcing what we have been saying for a year now).
- Tariffs on both sides will increase costs for those who manufacture product in China for sales to the United States and vice-versa. As to who will pay those costs and what you can do to try to reduce those costs, See Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Price.
- President Trump’s “ordering” US companies to start looking for alternatives to China shows his overriding position on China. He wants a decoupling.
- Companies must stop believing there will be a solution to the trade war that will allow them to go back to doing business with China the way they used to do business with China. They instead need to recognize that this situation is the New Normal as between the United States and China and things are more likely to get worse than they are to get better.
We concluded that post by saying that our next trade war post would set out what your business should do if you manufacture your products in China for sale to the United States. This is that post.
This past Friday, the Trump administration exempted more than 400 products from tariffs and the decisions on what to tariff and what not to tariff were made largely based on what can and cannot be sourced outside China. The 400+ products exempted from tariffs were essentially deemed not to be reasonably source-able from anywhere but China. On the flip side, the products still subject to the US tariffs against China can generally be sourced outside China. With this recent round of decisions and with President Trump having “ordered” American companies to get out of China, the Trump Administration has made clear that if you are importing products from China that can be made outside China, you will pay a high price for choosing to have those products made in China when you could have had them made elsewhere. If you truly have no choice but to have your product made in China, there is a good chance you will escape a high tariff. This dividing line is a perfect place to start in determining whether to manufacture in China or not. For a good article on these new tariff exemptions, check out Trump grants tariff exemptions to plastic straws, dog leashes and more from China.
Over the last year, Chinese manufacturers have been facing a steady and increasing onslaught of American buyers eliminating or reducing their China purchases. This has caused Chinese manufacturers to become wary of American buyers and American buyers are paying the price for this.
Chinese factories are less interested in doing business with American product buyers. This has led some Chinese factories to be unwilling to reduce their prices for American companies, even though their costs have declined. This has also led some Chinese factories to reduce their prices for European and Japanese buyers, but not for American buyers. Lastly, some Chinese factories are saying that “dealing with American companies has become too difficult.” All this has meant American companies have lost some of their pricing leverage.
IP theft against American companies has also increased in the last year. Chinese companies always have done a cost benefit analysis to determine whether to steal IP from their buyers. Being a long term buyer with a good contract decreases your risk of being victimized by IP theft. On the flip side, being perceived as a short term buyer increases that risk. American companies are widely believed to be short term buyers. For more on these new risks, check out Has Sourcing Product From China Become TOO Risky? and China Trademark Theft. It’s Baaaaaack in a Big Way. Product quality problems are also on the rise for the very same reasons.
But what exactly should you do if you are having your products made in China for sale to the United States? If your products are free from high tariffs, the odds are good that your best bet is to keep your manufacturing in China, while slowly continuing to look at other options. But if your made in China products are subject to high tariffs, the odds are good that your products will remain subject to high tariffs and that you will be at high risk from your Chinese manufacturer. You are also at great risk of having your prices undercut by competitors that have moved or will move their manufacturing out of China.
If you are looking to move your manufacturing out of China, the following articles should prove helpful to you:
- Moving Your Manufacturing Out of China: The Initial Decisions
- How to Stop Manufacturing in China: Try Harder
- How to Leave China AND Survive
- Overseas Manufacturing Contracts (OEM, CM and ODM)
- Moving Manufacturing from China: Where you Gonna Run?
- Moving Supply Chains From China to Southeast Asia/South Asia: It’s Not as Easy as it Looks
What are you going to do?