Financial markets may be on tenterhooks as they await the outcome of US-China talks aimed at ratcheting down their trade dispute, but Chinese exporters are not waiting around for the result. 

Our survey of Chinese exporters reflects optimism that agreement can be reached, with 63 per cent of 204 respondents saying they expect the dispute to be resolved in the first half of this year. However, 9 per cent said the spat was here to stay, while follow-up interviews with companies that sell mostly to the US found widespread unease about the trajectory of bilateral relations, despite their confidence in a deal being done in the short term. 

A graphic with no description

“It’s getting harder to sell to Americans,” said the owner of a steel forging factory based in Jiangsu province, on the east coast. “This is going to be with us for a long time.” 

Liu He, President Xi Jinping’s chief economic adviser, is scheduled to visit Washington this week to add momentum to get a deal signed before the March 1 deadline when US tariffs are set to rise again. But recent reports suggest the two sides are struggling to find agreement on fundamental issues and the risk of failure is real. 

A graphic with no description

Although Chinese exports have been surprisingly resilient since the trade war began last year, companies have begun to feel the pinch. Four-fifths of respondents who said the US was their biggest customer said the trade dispute was having a negative impact on their business, while 70 per cent said sales were flat or down on a year ago. Small firms, with revenues of Rmb400m ($59m) or less year, have been the hardest hit — none said their business had increased over the past year. 

In Yiwu, an export hub in Zhejiang province near Shanghai, Jiayin Sports Equipment reported a 35 per cent drop in US orders after tariffs rose to 25 per cent last November from just 3.8 per cent previously. The company relies on the US market for half of its sales. 

“We need a plan B if this trade war continues,” said a Jiayin official who asked not to be identified. 

Back from the brink

After months without contact between the two sides, Presidents Donald Trump and Xi Jinping agreed a 90-day ceasefire in early December. Mr Trump has reportedly been alarmed at the impact the intensifying dispute has had on US stock markets, while Chinese household and corporate sentiment have proven vulnerable to threats of ever-higher US tariffs. 

Mr Trump last year threatened to impose tariffs on all Chinese goods entering the US if China does not accept his demands for a more equitable trading relationship. If the two sides are unable to agree by the March 1 deadline, 10 per cent tariffs on $200bn of US imports from China are set to rise to 25 per cent, almost certainly triggering serious volatility for the global economy and financial markets. 

Wei Yanxin, who owns a factory making LED lights in Zhejiang, said his firm was able to shrug off the imposition of 10 per cent tariffs because of the huge cost advantage Chinese LED-manufacturers enjoy over their competitors. But a rise to 25 per cent would push his company into losses. 

“It would have a devastating impact on the whole industry,” he said. 

A graphic with no description

Even before the deadline, most respondents said their companies were taking steps to counter the impact of the dispute. More than 30 per cent of all respondents, and nearly 60 per cent of those who said the US was their biggest customer, said they were trying to sell into new markets. 

Jiayin is aiming to reduce its reliance on the US to 20 per cent of sales from 50 per cent and is looking to expand into Europe and south-east Asia. However, the US accounts for such a large chunk of Chinese business that there is concern that other markets will not be big enough to offset the impact of higher tariffs.

A third of respondents said they had been able to share the burden of higher tariffs with US buyers, though this only works if margins are large enough. Sun Kang said the medical equipment company he runs in Shenzhen agreed to split tariff costs 50:50 with his US buyers, resulting in the firm’s profits dropping by only 13 per cent. 

No longer made in China?

But the trade dispute has also accelerated relocation to lower-cost countries, with 15 per cent of respondents saying they have moved at least some production overseas. The government of Jiaxing, another traditional Zhejiang manufacturing centre, gave approval to 61 local firms to open facilities overseas in the first 11 months of last year, up from 37 a year earlier. 

In Cambodia’s Sihanoukville Special Economic Zone, a third of the companies came from Zhejiang. Chenyang Luggage and Bag opened a plant there to process goods for export to the US. “Chinese exports may pick up if this becomes a trend,” said Chenyang president Zhao Qifa. 

But offshoring is limited to large companies able to absorb the considerable costs involved in finding and managing new bases of production, while around 60 per cent of China’s exporters are small and medium-sized enterprises. 

With most of China’s exporters stuck at home, the government is having to lend assistance. Export tax rebates have increased, while 1 in 10 of the firms interviewed said they were receiving direct cash subsidies from local governments worth up to 10 per cent of their annual sales. Not every company benefits; Li Lei, who manages a Shenzhen-based solar-panel maker, has had subsidy requests rejected four times because his firm operates in an industry deemed to be in overcapacity. 

A last resort is cost cutting. A third of respondents reported a decline in worker numbers since last year, while 27 per cent said they intended to continue cutting this year. Mr Li’s solar company has already laid off a fifth of its workers while Jiayin, the Yiwu-based sports equipment manufacturer, has cut production shifts to two from three and cannot rule out job losses if business does not improve after the lunar new year holiday. 

“The trade war will have a long-term impact on our business — we cannot guarantee continued growth in this environment,” the official said.

Sun Yu, head of network research, FT Confidential Research

scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in East Asia, South Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research.

Get alerts on US-China trade dispute when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article