While everyone locally is concerned about Brexit it is definitely not the only trade concern at present. Our own analyst Neo Wang, is from Beijing, and we asked him what the impact might be for China if a trade war were to break out. Neo noted:
The trade war between US and China has heated up in recent weeks after the world’s two largest economies have imposed tariffs on each other. On Friday 6 July, the US imposed 25% tariffs on $34bn of Chinese goods, which including over 800 products such as consumer electronics, industrial machinery, medical devices and auto parts sectors etc. Beijing immediately responded with its own tariffs on US goods worth $34 billion.
Only days later, the Trump Administration listed another $200bn of additional products it intended to target. The US president has also said America might target Chinese goods worth $500bn – the total value of Chinese imports into the US in 2017.
“The action from the US is hurting China, hurting the whole world and also hurting the US itself,” China’s Commerce Ministry said in a statement on Wednesday 11 July. Trade wars are generally “lose-lose” scenarios. Any trade war could mean huge costs for both countries and collateral damage for the rest of the world.
China as the World Factory will be especially affected. The trade battle will have a significant impact on the Chinese manufacturers, especially in the consumer electronics, industrial machinery, medical devices and auto parts sectors etc. who export products to the US. “We have started arranging plans to minimise the negative impacts of the trade war” said Mr. Chen, owner of a machinery company in Zhejiang Province, who sells 80% of goods into the US market.
Apart from the Chinese government policy, how will the Chinese manufacturers react to the trade war?
1, Push the revolution of innovation-driven manufacturing, emphasize quality over quantity.
In global trade, the growth of Chinese exporters relied on economies of scale, the low-cost export manufacturing is the main ‘weapon’ to win a deal, which result in low tech standard and value added on the products, this is the fatal weakness for the Chinese suppliers in the trade war. Therefore, in order to hold their business and negotiating position, the trade conflict will force the Chinese business to improve the quality of their products, focus on innovation instead of low cost, which will ensure they remain highly competitive in the global supply chain. This is also one of the core national strategies of Made in China 2025, which is gathering pace.
2, Open new markets followed by the new opportunities created by the Belt and Road Initiative (BRI), such as Europe and the emerging markets.
“Unity between China and Europe and co-operation between us can ensure peace and stability in the whole world,” Chinese premier Li Keqiang said at the “16+1” gathering in Sofia on 6th July. China will seek deeper co-operation with the EU if trade conflicts were to continue with the US. Chinese manufacturers are focussing on opening new markets and avoiding a reliance on a single market.
China has invested billions of euros in the infrastructure including railways, roads, ports and real estate in recent years. The transport network is intended to help bring Chinese products into Europe as part of BRI plan. This aims to develop China’s links with Africa, the Middle East and Europe along ancient trade routes.
Based on statistics from the General Administration of Customs in China, the export to the BRI route countries increased 21.9% in the first two months in 2018, which is 5.2% higher than the growth for total export. As the US tariffs become increasingly inevitable, the Chinese SMEs have to speed up to catch the new opportunities and shift their targets into the new markets.
3, Focus on domestic consumption growth.
Domestic Consumption could help relieve some of the pressure from the trade conflicts with US. China has pushed towards a consumption-driven model to help sustain the country’s economic growth at the beginning of 2018. There will be more and more Chinese goods and imports shifted to domestic consumers instead of export markets.
There are millions of middle class citizens in China moving beyond being able to afford only the basics of life. The growing number of middle class has led many export-oriented manufacturers to shift focus to the domestic market.
In our own market of UK and Ireland we are noting similar discussions and exploration of new opportunities and new markets in order to de-risk from any potential impact of Brexit. Brexit could have a considerable impact on supply chain/ trade finance in regards to VAT and customs. Growcap Finance can support companies through this process as we can fund the purchase price of the sourced product along with the logistics, duty and VAT. To find out more about supply chain/trade finance why not contact us at www.growcapfinance.com or contact us through LinkedIn at https://www.linkedin.com/company/growcap-finance-limited/. Alternatively call us on +353 1 563 4131 or +44 1245 904 066.