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The Pain for Chinese Exporters Is Caused by More Than U.S. Tariffs

The Pain for Chinese Exporters Is Caused By More Than U.S. Tariffs

(Bloomberg) --

In the Chinese export heartland of Foshan, it’s not Donald Trump‘s tariffs that have Li Yuanfa fearing for the future of the bathroom supplies manufacturer he works at, but the broader economic uncertainty that they have wrought.

The U.S. only takes 5% of the toilets, showers and faucets made by Andun Sanitary Ware Co., where Li’s a sales manager. The bigger problem is that customers from the Middle East and elsewhere have stopped buying due to a global slowdown, sending total sales plunging by 30 percent last month.

“I’m not worried about the U.S. market because we can replace that 5% anywhere,” says Yi, who works in Foshan, a city that borders Guangzhou in China’s industrial heartland. “But since April nobody comes here any more. The economic slowdown is a big world-wide problem. We are really afraid.’’

The effects of the ongoing trade war and its shock escalation last month are rippling across the globe, making this week’s meeting between Trump and President Xi Jinping all the more important. While U.S. tariffs have hurt China and caused companies to shift production out of the country, it’s also coming with substantial fallout for the rest of the world economy.

“The issue of collateral damage is one of the gravest concerns for the global economy in the short-term,’’ said Yao Wei, chief China economist at Societe Generale SA in Paris. “A shock to business and consumer confidence worldwide could potentially be the largest channel of negative spillovers from the tariff war -- and this seems to be materializing.”

That shock was easy to see in interviews with two dozen manufacturers in Foshan last week. The Shunde district in the sprawling city of factories and wholesalers is a furniture production hub, home to 5,000 furniture manufacturers and 19,000 other companies supplying them with materials and components, according to Cici Nie, vice president of the Foshan Shunde Furniture Association.

At chair maker Hao Yu Xuan Co., sales manager Wang Yan says visitors to their shop are down by about 70% from a year earlier and sales “fell off a cliff” last month. Its 70 factory workers produce chairs for sale to Africa and to countries including Indonesia and India, she said.

“If it continues like this things will get very difficult,’’ she said. “One shop nearby making the same thing has shut down and several other shops in the same neighborhood also closed.’’

The Pain for Chinese Exporters Is Caused by More Than U.S. Tariffs

The U.S. accounts for less than a fifth of China’s total exports, but how exposed Chinese companies are to U.S. tariffs depends on the sector. While the furniture industry is seen by economists as highly vulnerable to U.S. tariffs, more than half of production is consumed domestically, and the U.S. takes about a third of exports, according to Bloomberg News estimates. For sanitary ware products such as those sold by Andun’s Li, about a sixth of exports are to the U.S.

“The U.S. is aiming at China but because supply chains are global it’s hitting a lot of other economies,’’ said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. “Only part of this is due to trade. But trade wars are another shock to an already slowing global economy.’’

China’s domestic market has also seen a slowdown, with an 8.5% drop in imports last month from the previous year underscoring its weakness. There was a sharp deceleration of industrial output in May just as the new tariffs hit - with production rising at the slowest pace since 2002.

With two-thirds of the wooden kitchen furniture the U.S. imported last year coming from China, according to a United Nations trade database, wooden cabinet maker Hongzhou Cabinet Co. is having to leave China to survive. The 14-year-old firm ships more than 90% of its products to the U.S. and is currently opening a new factory in Vietnam. It will shut down both its Guangdong factories -- one in Foshan and another in Jiangmen -- and lay off more than half its workers, says sales manager Elynn Lin, who declined to say how many people it employs.

The Pain for Chinese Exporters Is Caused by More Than U.S. Tariffs

Manufacturing in China isn’t viable after the U.S. imposed 25% tariffs and other anti-dumping duties, and switching to other markets is difficult because the company’s entire production line is tailored to the preferences of U.S. customers, says Lin.

What our Economists Say

Shipments of goods from China to the U.S. have fallen sharply, and while some companies are scrambling to realign their supply chains, many haven’t been able to. That gap from shrinking Chinese exports is impossible to fill, and it’s having a “a deadening impact on Chinese, American, and global business.”

- Tom Orlik and Maeva Cousin

See here for full note.

“When two big elephants fight, all the surrounding grass will be trampled on,’’ said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore. “The fate of the global economy hangs on Trump and Xi reaching some middle ground in Osaka and closing some trade deal before year-end. Failure to restart trade talks will risk sending global growth down by another leg.”

That may be too late for sanitary-ware and cabinetmaker Dessi in Shunde. It only relies on the U.S. for 10% of business but sales manager Kristin Jiang says business plunged 50% last month on weak orders from home and from the Middle East and Africa.

--With assistance from Natalie Lung and Peng Xu.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net;Xiaoqing Pi in Beijing at xpi1@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Malcolm Scott

©2019 Bloomberg L.P.

With assistance from Bloomberg