Chinese businesses had begun to react to the Trump administration’s tariff threats even before they came into force.
Some Chinese producers looked to cut costs and so reduce prices enough to offset the impact of tariffs on buyers. Others accelerated their plans to move production to other Asian countries where the tariffs presumably would not apply. Both actions might sustain the flow of goods to the United States. However, neither fits with Chinese leader Xi Jinping’s ambitions to make China’s economy dominant and invulnerable to foreign economies.
Since taking office, President Donald Trump has twice raised tariffs on Chinese imports to the United States: On Feb. 3, he levied a 10 percent duty on all Chinese products. He imposed an additional 10 percent levy on March 10. The White House has also proposed fees on Chinese shipping companies and China-built ships entering U.S. ports. Trump has further threatened more tariffs, though he has not mentioned the 60 percent tariffs he floated during the election campaign.
Probably with an eye to future negotiations, Beijing’s response was muted. It announced it would place 10 to 15 percent tariffs on select American goods, including coal, liquified natural gas, crude oil, agricultural machinery, pickup trucks, and some agricultural products. The Chinese tariffs involved the equivalent of some $35 billion in U.S. exports compared with the $525 billion in Chinese goods that the new U.S. tariffs would affect. Xi has, of course, also threatened more.
As indicated, some Chinese producers have made plans to cut costs and prices enough to offset the tariff burden on American buyers. Presumably, such steps will maintain volumes. This approach seems to be the most popular among retail and electronics companies.
Other companies, such as Qingdao-based Lenston Tyre, already face thin profit margins that preclude such steps. This company and others like it are looking for a more fundamental solution, such as moving production facilities out of China to locations that will avoid tariffs. Choices are mostly in Southeast Asia, such as Vietnam, Indonesia, Thailand, and Malaysia. These companies are taking care to examine tariff structures in the designations to be sure that they do not suffer in the Trump administration’s plan to retaliate point for point against any country that imposes tariffs on U.S. goods and services.
In many ways, Trump’s tariffs have little changed basic planning at Chinese companies. Rather, they have accelerated trends already in place and for other reasons. Even before the original Trump tariffs went into place in 2018 and 2019, Chinese producers were looking to locate abroad to avoid the relatively steep rise in Chinese wages. At last measure, basic wages in China are almost 150 percent above those in Vietnam, for example. Such a difference prompted Western and Japanese buyers, as well as investors, to go elsewhere, and Chinese producers have followed them.
Reinforcing the wage-induced change were the effects of the COVID-19 pandemic and especially the zero-COVID policies imposed by Beijing for years afterward. The lockdowns and quarantines imposed during this multi-year period severely impacted China’s ability to provide reliable deliveries to Western and Japanese buyers. As these buyers searched for more reliable venues, Chinese producers followed.
It is noteworthy in this regard that in 2023, long before Trump could impose additional tariffs or even count on election victory, direct investment by Chinese manufacturing in ASEAN (Association of Southeast Asian Nations) production facilities topped the equivalent of $25.1 billion, an almost 35 percent surge over the previous year.
As these Chinese business responses unfold, currency markets might offer Chinese producers something of a reprieve. When the last set of Trump tariffs took effect in 2018 and 2019, the yuan fell about 10 percent against the dollar, lowering the cost of Chinese products to dollar buyers and effectively offsetting much of the impact of those tariffs and sustaining the volume of product flow from China to the United States.
Even if the yuan were to move dramatically down against the dollar, Chinese companies are likely to continue their relocation plans. They are well aware that currency trends are notoriously volatile and unpredictable. Besides, those plans reflect more than just tariff avoidance, notably the ongoing supply chain diversification among Western and Japanese buyers, as well as pronounced wage differences between China and Southeast Asia.
What may be most significant is the responses of Chinese companies that could thwart Xi’s ambitions for China’s economy. He seeks Chinese economic dominance and invulnerability to foreign economic actors. The movement of production facilities abroad might help Chinese companies keep up sales in the United States. Still, it will nonetheless take away from domestic Chinese productive power by moving it to Thailand, Indonesia, and elsewhere. Though many of these transplanted factories will still source material and parts in China, it is high-end manufacturing that fits into Xi’s ambitions, not materials.
