Latest Developments in the US-China Trade War
The ongoing trade tensions between China and the United States, the world's two largest economies, have intensified significantly.
Donald Trump's "Liberation Day" strategy has been fully implemented, resulting in China facing tariffs as high as 104%. This includes an initial 20% tariff, an additional 34% announced last week, and a further 50% imposed shortly after Beijing refused to lift its retaliatory tariffs on US goods.
According to an amendment to Trump's executive order, the White House has confirmed that, effective 2 May, inexpensive Chinese small parcels will no longer be exempt from tariffs. These items will be subject to a tariff rate of 90% of their value or $75 per item, increasing to $150 from 1 June.
Previously, goods valued under $800 from mainland China and Hong Kong benefited from minimal exemption, allowing them to enter the US duty-free.
This change will most notably impact fast-fashion brands such as Shein and Temu.
China calls Trump’s new tariff threat ‘a mistake upon a mistake’
In response, China stated, "“The US threat to escalate tariffs on China is a mistake on top of a mistake. "Once again exposes the blackmailing nature of the US" “China will never accept it. If the US insists on its own way, China will fight to the end.”
Beijing has shown no signs of backing down and has pledged to impose tariffs on US imports.
Furthermore, Trump has imposed a 10% "baseline tariff" on all countries, effective from 12:01 AM ET on 5 April. Additionally, he plans to levy higher, customised tarrif for "worst offenders" " on nations with which the US has significant trade deficits, effective from 12:01 AM ET on 9 April.
All other countries will continue under the original 10% baseline tariff.
How Will Increased Tariffs Affect US Prices?
The US Trade Representative's office reports that China has been the largest supplier of goods to the US, accounting for 16% of total imports in recent years. China dominates the markets for smartphones, computers, and toys—products likely to experience significant price increases under the new tariffs, potentially making them unaffordable for many Americans. Combined with tariffs imposed during the Biden administration, China now faces an effective average tariff rate of 125%.
As the US imposes additional tariffs on imports from countries with significant trade deficits, many American consumers are concerned about rising prices for everyday items such as clothing and food, leading some to begin stockpiling.
For instance, if you're looking to purchase a new pair of Nike trainers, typically imported from Vietnam (where the company produces half of its footwear), these imports now face a 46% tariff. Prior to Trump's announcement, the rate was only 14%.
Value Changes Due to These Tariffs:
- Before: Trainers priced at $114
- After: Trump's tariffs increase import costs to $146
The final retail price will depend on how much of this cost Nike (or any importing company) decides to pass on to consumers.
What About Companies That Previously Relocated to Southeast Asia?
The US has now imposed a 46% tariff on Vietnam and a 49% tariff on Cambodia, with slightly lower rates for countries like Singapore (10%) and the Philippines (17%). This diminishes Southeast Asia's cost advantage; for example, manufacturing costs in Vietnam have surpassed those in mainland China. In electronics manufacturing, post-tariff costs are 12–18% higher than in Shenzhen.
Consequently, companies are considering several options:
- Relocating within Southeast Asia: Moving to countries like Bangladesh, which, despite a 37% tariff, offers lower labour costs.
- Returning to China: For industries requiring stable supply chains, such as semiconductors and precision manufacturing, returning to regions like the Yangtze River Delta and Pearl River Delta is being considered.
- Shifting to North America: Utilising the US-Mexico-Canada Agreement (USMCA) for tariff exemptions or moving operations directly to the US aligns with Trump's objectives.
- Diversifying to Other Countries: Exploring options in India, Saudi Arabia, and the UAE, each with its own set of challenges.
Alternatively, companies may focus on localisation strategies, enhancing local marketing and resource integration.
Is North America Now the Only Option for Chinese Companies Expanding Abroad?
While not the sole option, North America serves as a crucial short-term strategy to circumvent tariffs. Goods compliant with the USMCA can obtain exemptions. However, initial investment costs and risks are significant, and Chinese companies face cultural differences and team-building challenges when entering the North American market.
Other potential markets, such as Russia, Central Asia, the Middle East, and Africa, also warrant attention—for example, Russia's automotive industry, Africa's construction machinery, and Saudi Arabia's home appliances.
How Should Export-Oriented Manufacturing Enterprises Respond?
The escalating trade war necessitates that manufacturing enterprises, in addition to enhancing products and technology, consider the following strategies:
- Diversifying Target Markets: Reducing reliance on any single market.
- Supply Chain Adjustments: Exploring the "China + Mexico + Southeast Asia" model.
- Currency Hedging: Mitigating the impact of US tariffs through exchange rate strategies.
- Strategic Patience: Observing other countries' responses to US tariffs before making significant moves.
In the future
Big sweeping tariffs don’t just shake up global trade, they also shift the balance of supply chains. And when things start to move, that’s often when new doors open.
Right now, the picture’s still unclear. So let’s keep a close eye on how things play out, and stick with us for the latest updates.