With US President-elect Donald Trump threatening to impose tariffs ranging between 10% and 60% on all goods coming from China, Chinese factories find themselves stuck between difficult choices, according to Bloomberg.
Implications of customs duties
During the previous trade war in 2018 and 2019, uncertainty caused a sharp decline in foreign investments flowing to Asia, and the share of Chinese exports to the United States declined from 20% in 2017 to 13% currently.
This time, factory managers in China have already begun evaluating preventive steps that include moving production to other countries, such as Vietnam or the United States, and shifting toward European and local markets, according to Bloomberg.
But producing goods within the United States may raise costs and reduce efficiency, while trying to enter new markets requires a long time, which makes companies lose the advantage of the American consumer market, which is the largest in the world.
As for focusing on the local market – in Bloomberg’s opinion – although it is less exposed to geopolitical risks, it puts pressure on profit margins due to internal competition that led to lower prices and exacerbated the economic downturn.
The Chinese economy is under pressure
Despite the economic incentives provided by the Chinese authorities during last September and October, the economy did not show a significant recovery.
According to data published by Bloomberg, home prices continued to decline as retail sales growth slowed to the slowest level in 3 months, while industrial production remained stable at its average annual performance.
Reports indicate that CEOs of American and European companies operating in China have become more pessimistic about the business environment for the first time since the Covid-19 pandemic.
This pessimism worsened before Trump won the elections, as American companies began taking precautionary measures such as storing goods, which was reflected in the increase in inventory last November and the stabilization of activity in the Port of Los Angeles.
Expectations of an effective increase in fees
According to an analysis conducted by Goldman Sachs and reported by Bloomberg, the average effective tariff rate on US imports from China has stabilized at 10% in recent years.
With Trump threatening to impose a new round of tariffs, Goldman expects the effective rate to rise by 20 percentage points in his second term, which could reshape global trade and increase pressure on Chinese exports.
While Chinese factories are preparing for the worst scenarios, the available options remain expensive and difficult, whether through geographical diversification of production or focusing on local markets, in the face of geopolitical tensions and strict trade policies coming from Washington.
