Industrial shock: how the trade war between the USA and China paralyzed production in the Middle Kingdom (continued)

IA “FACT” already wrote that the trade war between the US and China, started by Donald Trump, has dealt a serious blow to Chinese factories, especially in the fields of electronics, textiles, mechanical engineering, toys and household goods. The new tariffs have sharply increased prices for Chinese products in the US, reducing demand, forcing many businesses to close, cut production or move it to Vietnam, Indonesia and India.

The Chinese government is trying to mitigate the effects through subsidies, tax breaks, domestic market development and support for exports to other countries, but mass layoffs, strikes and economic hardship for workers have already become the new reality.

Some companies lost almost half of the volume of their orders. For example, a manufacturer of New Year’s decorations in the city of Dongguan said that their sales to the United States fell by half after the introduction of new tariffs.

Many companies do not have the money to quickly adapt to new conditions. Currently, banks are reluctant give loans to small businesses because they are afraid of risks. Because of this, many enterprises cannot invest in new technologies or look for other sales markets.

Due to lack of money and falling sales, bankruptcies became more frequent. Chinese courts are preparing for a large wave of bankruptcy cases for enterprises, especially those that worked for export and could not survive the new customs conditions.

Some companies are trying escape, looking for new customers in Europe, South America or Africa. Others are even moving their factories to Vietnam or India, where costs are lower and terms of trade are more favorable.

China is losing the US: how Vietnam, Mexico and India intercept exports and Beijing looks for new ways

After the US imposed high tariffs on Chinese goods, imports from China fell sharply. If in 2018 China provided more than 21% of all goods that the US bought abroad, now this figure has fallen to 13.4%. This means that the volume of imports from China has shrunk for $66 billion.

But American companies did not stop buying goods abroad – they just found new suppliers. One of the biggest winners is Vietnam. sales of goods from Vietnam to the USA have grown 2.5 times. Now, many things that used to be made in China—including furniture, clothing, and electronics—are made in Vietnam. Last year, Vietnam had a record surplus in trade with the US of $105 billion.

The role of Mexico has also increased. Thanks to the special IMMEX program, which allows factories to import components duty-free for further export to the United States, many manufacturers have moved part of their production to Mexico. This allowed them to be faster and cheaper supply goods to America.

Another important player is India. Apple already plans to move all iPhone production there for the American market by the end of next year. Thus, the famous technology giant tries reduce its dependence on Chinese factories.

And what about the idea of ​​producing more goods directly in the US? It sounded beautiful, but in practice it turned out to be very expensive. For example, manufacturing an iPhone in the US could be three times more expensive than in China or Vietnam, which would make the products too expensive for buyers.

Many exporters are worried about falling sales in the US. Airdog and Weking Group are at China’s largest trade exhibition, the Canton Fair told journalists that due to new high tariffs they were forced to stop sending goods to America and are now looking for other buyers.

It became especially difficult in the city of Maoming, where tilapia fish were exported. Due to the 170% tariff on Chinese fish, the supply to the US is almost stopped. Factories are closing and workers are out of a job.

But not everyone only complains. In the city of Yu, entrepreneurs are actively looking for new markets: they sell their goods to Latin America, the Middle East, and Eastern Europe. Some factories transfer some production to Vietnam and Mexico to avoid US tariffs.

Fashionable Chinese brands too change your plans Yes, Shushu/Tong and Mark Gong are now targeting Europe and the Middle East rather than the US. Some manufacturers are even considering the possibility of sewing their products in South Korea or Japan in order to more easily enter new markets without tariff barriers.

The Chinese government supports this movement: launched “double circulation” strategy. Its essence is to develop the domestic market more — that is, to encourage the Chinese to buy domestic goods — and to depend less on exports to the United States.

Due to the fact that factories in China reduced production, there were disruptions in goods all over the world. Previously, China produced almost a third of all goods in the world, and now, due to the trade war with the United States, the situation has deteriorated sharply. Due to the decline in production in China, many countries are facing with a shortage of goods and rising prices.

Especially problems arose with electronics. China has restricted the export of rare earth elements, which are very important materials for the production of chips, smartphones and other equipment. Because of this, anxiety arose in the USA and other countries: will there be enough components for new gadgets and cars?

Production problems immediately hit prices. Disruptions in the supply of chips and electronic components affected 2/3 of car and electronics manufacturers. In some cases, component shortages have halved — which means delivery delays and more expensive goods for customers.

In the US, tariffs on Chinese goods have pushed up prices even more. Americans now often are paid more than usual products, even if it is not always immediately visible in stores.

How the trade war with the US is changing China: a bet on the domestic market and its own technologies

The trade war between the US and China has long been more than just a dispute over tariffs, but a major strategic conflict in which economics, politics and technology are so tightly intertwined that even a potential political settlement looks like a very distant and difficult process.

Today, the US raised tariffs on Chinese goods to 145%, and China answered mirror – introduced tariffs on American goods in the amount of 125%. This has led to a reduction in trade between the two countries and exacerbated disruptions in global supply chains.

But tariffs are only the tip of the iceberg. The US is trying to limit China’s access to the latest technologies — from semiconductor manufacturing to artificial intelligence. Washington directly accuses Beijing of unfair competition, theft of intellectual property and state subsidies that violate the rules of world trade.

China answers symmetrically: Beijing limits export of rare earth metals. This adds even more tension to an already difficult relationship.

At first glance, both sides declare readiness for dialogue. Donald Trump publicly states that he would like to negotiate with Xi Jinping personally. But in practice, the talks are virtually deadlocked: Beijing insists that the US must first remove the tariffs before real negotiations can begin.

According to experts, even if a temporary agreement is concluded, the main contradictions are nowhere to be found will not disappear. The strategic rivalry between the US and China will continue, which means that new twists in the trade and technological war remain quite likely.

China has decided not just to suffer through the trade war with the US, but to use the crisis as a chance to change its economy. Now the authorities want the country to depend less on the sale of goods abroad and to develop its own market and technologies more.

In addition to the “dual circulation” plan initiated by the leaders of the Celestial Empire a few years ago, this year Beijing announced a new program to stimulate domestic consumption: for example, introduced subsidies for consumers and support for Chinese brands.

China is also actively developing its technologies. Already in big cities are working autonomous delivery drones and the first humanoid robots. Companies like Unitree are creating robots that can help in various areas instead of humans.

To support the domestic market, Chinese online shopping giants — Alibaba, JD.com, Pinduoduo — launched large programs to help small producers so they can sell more goods domestically, not just for export.

However, this path has its difficulties. The Chinese traditionally save more than they spend. Domestic consumption is less than 40% of GDP, while in the US it is almost 70%. Also, China now has problems with unemployment among young people and the decline of the real estate market, which inhibits the growth of domestic demand.

…Thus, the trade war between the US and China has significantly changed global economic flows: China’s share of US imports has declined sharply, and its place has been taken by Vietnam, Mexico and India. Chinese companies are looking for new markets in Latin America, the Middle East and Eastern Europe, and are moving production abroad to avoid tariffs.

At the same time, Beijing is betting on the development of domestic consumption and its own technologies. However, the structural restructuring of the economy is complicated by the low level of domestic demand, youth unemployment and the crisis in the real estate market. The strategic rivalry between the US and China continues and is unlikely to end in the near future.

Tetyana Viktorova