Analysis-For China and US Inc, Trump’s trade war feels much worse this time

Reuters

By Casey Hall and James Pomfret

SHANGHAI (Reuters) – Orders have evaporated for Richard Chen, who manufactures Christmas decorations in southern China for U.S. retailers, including Walmart and Costco, facing crippling U.S. tariffs.

“The orders are half of what they were last year,” said Chen, who is based in the manufacturing hub of Dongguan.

He is now in survival mode.

“There’s no more scope to cut prices. But to get orders we sometimes have to take a price cut … we have no choice,” Chen said, declining to elaborate on cuts he had agreed to.

“We’re losing money.”

On February 4, U.S. President Donald Trump applied a new 10% tariff to the $400 billion worth of Chinese goods exported annually to the United States, with an additional 10% tariff announced on March 4 and further reciprocal tariffs expected on April 2.

Chinese suppliers and their American clients are now coming to grips with the grim reality that this trade war will hit harder than in Trump’s first term in 2018.

This time is different because low-end manufacturers are already struggling with razor-thin margins, so they cannot cut prices to help their U.S. customers, and local Chinese governments that might have provided support to protect jobs are mostly too cash-strapped to give new subsidies.

THIN MARGINS

Suppliers estimate wages have grown by 2-5% since the first U.S.-China trade war of 2018, while raw material costs have climbed for some sectors and overseas competition has intensified, making Trump’s latest tariffs the final straw for many low-end manufacturers.

Liz Picarazzi, the Brooklyn-based founder and CEO of trash box company Citibin, said her goods produced in China are now subject to 52.5% tariffs and she can no longer afford to manufacture there.

“My whole business has been based on a long-term rate of 7.5%. It’s been a real shock,” she said, referring to two rounds of 10% tariff increases on Chinese goods in addition to a global 25% aluminium tariff.

“We knew this was coming but there’s no way any company can mitigate an additional 45% in tariffs.”

U.S. customers are pressing for 10% price cuts, according to interviews with 10 Chinese manufacturers and exporters and two U.S.-based retail executives with Chinese supply chain exposure.

Ongoing negotiations are yielding average discounts of 3%-7% from suppliers, they said.

“You have companies in the U.S. who have hundreds of factories that work for them sending out a mass letter asking for a blanket 10% reduction from all suppliers on all products,” said Jonathan Chitayat, the Asia boss of Genimex Group, a contract manufacturer for a range of products that derives 70% of its revenue from U.S. customers.

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