Will US Supply Chain Gain if China’s Shrinks with Potential Tariff?

Higher labor costs and stricter regulations keep nudging Eric Li’s glass factory in southeast China toward insolvency, even though his lampshades are on the shelves at Home Depot. President Donald Trump’s threatened tariff on his goods may be the final shove.

Three of the four furnaces at Huizhou Baizhan Glass Ltd.’s dusty plant sit dormant, and the workforce making lampshades and vases for export to the U.S. has been slashed to 150 from about 1,000 just a decade ago. Profit margins are shrinking, and Li said the company started by his Taiwanese father in 1991 is hanging by a thread.

“If there’s a tariff, it’s game over for us,” said Li, 42. “We don’t have the ability to take on extra costs.”

Thousands of small- and medium-sized factories in China face the same predicament, with some owners considering shutting down or selling out if Trump slaps a levy on Chinese products that he said could reach 45%. These makers of clothes, toys and household goods fuel the $462.8 billion annual flow of exports to the U.S. but aren’t cash-rich, making it harder for them to take the tariff punch or pivot their operations toward Southeast Asia.

“Smaller companies tend to be focused and not diversified like big players are,” said Karel Eloot, a senior partner at McKinsey & Co. in Shanghai. “They would be the most exposed and dependent on whatever happens with U.S import duties.”

Trump has accused China of unfair trade practices and currency manipulation, and he pledged as a candidate to address both issues if elected. U.S. Commerce Secretary Wilbur Ross said in a Bloomberg Television interview on March 1 that measures will be announced “as soon as we have a proper case prepared.”

The administration’s rhetoric has softened since, with one of Trump’s top economic advisers, Steve Schwarzman, saying the president will likely temper his criticisms of China.

A tax at the top end of Trump’s campaign proposal may trigger an 87%decline in Chinese exports to American consumers, Kevin Lai, the Hong Kong-based chief economist for Asia at Daiwa Capital Markets, estimated during the campaign.

China could retaliate with its own tariffs on American products such as Boeing airplanes, iPhones and soybeans. U.S. businesses in China also could face tax or antitrust probes.

“There’s too much at stake for both countries to engage in a trade war,” said Eddy Li, president of the 3,000-member Chinese Manufacturers’ Association of Hong Kong. “Although we are concerned about such a scenario, we also feel optimistic.”

Rising Costs

Any Trump tariff likely could be absorbed by multibillion-dollar makers of iPhones and Nikes such as Hon Hai Precision Industry Co. and Yue Yuen Industrial Holdings Ltd., respectively.

Yet it could swamp smaller enterprises already struggling to withstand China’s rising wages, social-insurance mandates and tighter environmental-protection laws. Private companies, most of which are small and medium-sized companies, generated about 45 percent of the nation’s exports in January-February, according to Chinese customs data.

During the past decade, the cost of manufacturing in China increased to about 85%of that in the U.S., said Steve Maurer, managing director for consulting firm AlixPartners in Shanghai.

As a result, Chinese goods are becoming more expensive. Producer prices in February surged 7.8%, the fastest pace since 2008 and lifting the outlook for global reflation.

Hasbro Supplier

Lung Cheong Group, which Hasbro Inc. confirmed is a supplier for the toy manufacturer, already moved almost all production lines to Indonesia to escape China’s higher costs, Chairman Lun Leung said. Seventy percent of the group’s revenue comes from U.S.-based customers.

“Even a 10%tariff increase will make it difficult for Chinese factories to cover their costs,” Leung said. “If they stay, they just plan to sell their factories at a good price and end their businesses.”

At Baizhan Glass, salaries tripled to 7,000 yuan (US$1,014) a month, and the profit margin per lampshade has halved to as low as 10%from nine years ago, said Eric Li, who started working in the family business in 2001.

Li sells his products to Westinghouse Lighting Corp., and they go to Home Depot Inc., he said. A representative for Home Depot said Westinghouse is a current supplier for the home improvement chain. Lowe’s Baizhan Glass has annual revenue of about 20 million yuan.

“They can’t expect to pass the tariff on to us,” he said.

Uncertain Future

Other manufacturers in Huizhou are inching toward the cliff. (Hui Zhou) Jia Yang Industrial Co., which makes plastic exteriors of audio speakers for brands including JBL and Harman, is starting to shut down in phases, owner Bosco Chang, 34, said.

Wages rose to 8.50 yuan an hour from 3.30 yuan during the past decade, and the number of employees concurrently declined to 80 from 500.

The factory generates 10 million yuan in annual revenue, half of what it made in 2008, said Chang, whose father formed the company in 1993. Ninety percent of revenue comes from the U.S.

Chang would relocate to his home Taiwan if he could, but the factory that assembles the speakers also is in Huizhou. Plus, there are potential Trump-related costs associated with other locations.

Trump abandoned the Trans-Pacific Partnership, which would have lowered tariffs on exports from Taiwan and Southeast Asia, and is looking to renegotiate the North American Free Trade Agreement, meaning a likely increase in tariffs on products made in Mexico.

“There is no safe place,” Chang said. “We have to go with the flow, and the flow is uncertain. So, I’m giving up.”