A beef cow stands at a ranch in Texas, U.S. Photographer: Daniel Acker/Bloomberg.

German Cars and American Steak: Early Trade War Victims Emerge

(Bloomberg) -- China’s retaliatory tariffs on U.S. goods struck just as one of its biggest meat importers was rushing a shipment from California through Shanghai customs. Now Suzhou Huadong Foods Ltd. is saddled with a stack of unaffordable American steak.

Only three containers of frozen produce including prime rib and pork loin came through before the new levy slapped as much as 500,000 yuan ($75,000) on each of the remaining half-dozen crates, according to Gong Peng, the importer’s general manager.

“We have no choice. We have to eat the costs," Gong said in an interview. “We are guaranteed to dramatically lower our purchases of meat from American ranchers.”

Triggering what China calls "the largest trade war in economic history," the U.S. on July 6 imposed a 25 percent duty on $34 billion of Chinese imports. Beijing immediately responded with tariffs on U.S. soybeans, meat and vehicles. Suzhou Huadong, which supplies supermarkets such as Walmart Inc.’s Sam’s Club in China, is just one of the early victims. For automobiles and whiskey makers to companies along the complex global supply chain that defines modern manufacturing, it is a moment of reckoning as they grapple with higher costs and whiplashes from some of the earlier business decisions.

The ability of tariff-hit companies to weather the conflict may partly depend on the amount of stock they managed to import before higher levies kicked in. But once those supplies run down, they’ll have to absorb the tariffs or pass them on to customers.

Take Ford Motor Co. and Tesla Inc. Both automakers announced price cuts in China only weeks ago, making their Lincoln and Model S sedans within the reach of more consumers after China lowered tariffs on all foreign vehicle imports to 15 percent. Starting July 6, those same models -- if they are made in the U.S. -- are subject to a 40 percent levy.

Tesla raised prices for its Model S and Model X by 150,000 yuan to 250,000 yuan after the additional tariffs, according to a sales representative. That would take the retail price of a Model S to as much as 1.47 million yuan. Ford said it will refrain -- at least for now - from raising prices. The top-of-the-end Lincoln Navigator model costs 1.16 million yuan.

BMW AG and Daimler AG also face higher costs because they import luxury models to China from their U.S. assembly plants. BMW says it won’t be able to absorb the higher levies completely and is calculating the necessary price increases. Daimler declined to comment beyond saying it aims to offer competitive conditions to buyers.

President Donald Trump is eyeing tariffs on another $16 billion of Chinese goods, and he indicated last week that the final total could surpass $500 billion.

Trump’s course of action only means more U.S. companies will lose out in China as the country opens up, the People’s Daily, the Communist Party’s flagship newspaper, said in a commentary on Monday. The zero-sum mentality of U.S. policymakers will not only hit economic and trade cooperation between China and the U.S., but also brings further uncertainty to the world economy, it said.

With neither side backing down, the prospect of a tax on almost every China-made product entering the U.S. and reprisals by China means many more businesses could come in the cross hairs.

"Businesses hate uncertainty," said Jacob Parker, vice president of China operations at the U.S.-China Business Council. "If you are uncertain, you don’t invest; if you are uncertain, you don’t hire. Companies don’t know how big this may get, or how it will end.”

Hemp Fortex Industries Ltd. isn’t going to wait. The Chinese maker of clothing and natural fabrics -- and a supplier to U.S. and European brands -- says it is seeking to move manufacturing outside China. More than half of the company’s revenue comes from American customers, potentially exposing them to any future U.S. tariffs on China-made goods.

“Our big clients now are very actively discussing with us on how to shift more production from China to Southeast Asia,” said Ding Hongliang, founder of the Qingdao-based company. “The U.S. is a great market that cannot replaced by anywhere else.”

Just Play LLC, a closely held maker of toys for brands like Disney Princess, is also exploring moving production out of China, according to its co-founder Geoffrey Greenberg. But he’s also worried about the time it will take and how he can replicate the same levels of production at another location.

Chicago-based GMM Nonstick Coatings, which makes non-stick coating for brands including KitchenAid and Black & Decker, said many of its U.S. customers aren’t expanding production in China. “We have pretty much stopped hiring in China because so many of our U.S. clients have shifted their production elsewhere," Chief Executive Officer Ravin Gandhi told Bloomberg Television.

At Suzhou Huadong, the importer that lost its race to bring all the American meat onshore before the new tariffs took effect, Gong says customers will look for alternative suppliers if he tries to pass the tariffs onto restaurants and supermarket chains.

"There’s a high-end portion of 10 percent: restaurants where people pay thousands of yuan for a steak, who said they still need American beef. But the vast majority say they cannot accept any cost increase," Gong said. “If we try to even push 5 or 10 percent of the cost to them, they will switch to other types of beef."

Suzhou Huadong, which has annual revenue of about 3 billion yuan, has suspended any further deliveries from U.S. ports. “We are not going to let them onto the sea if this is not resolved,” Gong said.

Copenhagen-based A.P. Moller-Maersk A/S, owner of the world’s largest container line, warned that new tariffs “could have a serious negative impact” on global trade and threaten jobs. Distilled Spirits Council, a U.S. trade group, said a 25 percent tariff on U.S. whiskeys heading into China could put the brake on $8.9 million of annual whiskey exports and hurt Chinese consumers and U.S. farmers.

Trump’s levy on July 6 targeted China-made goods such as farming plows and airplane parts. He has already imposed duties on foreign steel and aluminum imports, and is considering duties on automobiles.

“There’s a point where all nations will say, ‘we can’t keep doing this, so let’s sit down and work out a deal,”’ said Kevin Tynan, an analyst at Bloomberg Intelligence. “I don’t know when that is, but what China has coming here is more than what we have going there."

China imported $130 billion of U.S. goods last year, less than a third of the value of U.S. imports from China. That means in an all-out, tit-for-tat trade war, China may have to retaliate with measures other than tariffs. One of Chinese President Xi Jinping’s biggest weapons could be boycotts of American brands by his country’s legion of consumers.

In earlier conflicts with foreign countries, Chinese citizens inflamed by nationalistic news coverage boycotted high-profile international brands like Toyota Motor Corp. and Hyundai Motor Co., hurting corporate profits and boosting Chinese leverage.

It may still be early days for this trade war.

On Saturday afternoon in Beijing’s popular Sanlitun district, outlets of U.S. retailers such as Abercrombie & Fitch Co. and Nike Inc. were teeming with shoppers, with the usual long queues at checkout counters.

"This is top political showdown between two countries and the average people go on with their lives," said Adison Zhou, a Beijing resident in his twenties, as he sipped iced tea at a Starbucks coffee shop. "I am not sure if the tension will have a tangible impact on my life going forward. So far it doesn’t."

©2018 Bloomberg L.P.

With assistance from Editorial Board

Bloomberg
Stay Updated With Business News News On BloombergQuint