China Economy

Trump wants US companies to leave China. Here's what it could mean for Chinese businesses

Key Points
  • Wei Jianguo, a former vice minister at the Ministry of Commerce, told CNBC on Sunday that while the Chinese side awaits a fair and equal trade deal, the country has made preparations to counter any negative impact from trade tensions.
  • Analysts noted that one consequence of the trade tensions may be that Chinese companies gain greater market share, at the expense of U.S. businesses.
  • While there are challenges to conducting business in China, leaving the market is not the answer, said Jake Parker, vice president of China operations at the U.S.-China Business Council.
A Chinese denim factory
STR | AFP | Getty Images

BEIJING — As trade tensions rise, American firms are facing an increasingly complex environment in China, while Chinese companies are looking for ways to adapt — all that may present new opportunities for Chinese businesses, analysts say.

On Friday, China announced plans to impose additional duties on $75 billion worth of American goods on Sept. 1 and Dec. 15. In response, U.S President Donald Trump tweeted later that day his administration would also raise tariffs on $550 billion of Chinese imports.

The latest round of tariff announcements in the last few days means that by the end of the year, essentially all Chinese goods exported to the U.S. will be subject to duties.

I’m convinced the China-U.S. trade tension ... is a long-term situation.
Wei Jianguo
former vice minister, Chinese Ministry of Commerce

Although that adds to the burden on Chinese companies, which already face pressure from a slowdown in the domestic economy, data and other analysis indicate businesses in the mainland are finding ways to remain resilient — even if it sometimes means absorbing the costs of tariffs.

"I'm convinced the China-U.S. trade tensions is a long-term situation," said Wei Jianguo, a former vice minister at the Ministry of Commerce. He told CNBC on Sunday that while the Chinese side awaits a fair and equal trade deal, the country has made preparations to counter any negative impact from trade tensions.

"We are not afraid," Wei, who is currently vice chairman and deputy executive officer at Beijing-based think tank China Center for International Economic Exchanges, said in a Mandarin-language phone interview translated by CNBC.

He laid out four ways in which China is bolstering its own businesses. They are:

  1. Increasing government support;
  2. Opening channels to other international markets through programs such as free trade zones and the Belt and Road Initiative — a Beijing-led massive infrastructure project;
  3. Developing a higher-quality operating environment for state-owned and foreign enterprises; and
  4. Implementing policies such as tax and fee cuts.
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The world's two largest economies have been embroiled in an escalating trade conflict for more than a year. While the dispute initially focused on the large U.S. trade goods deficit with China, the discussions have widened to complaints including unequal foreign access to the massive Chinese market and forced technology transfer.

What it means for China businesses

The latest retaliatory tariffs mark a reversal from an agreement between Trump and Chinese President Xi Jinping at their meeting in late June, when they agreed not to levy duties on goods from each other's country.

"That breach, and the limited movement from the US in relaxing restrictions on Huawei, means that Xi has effectively given up on efforts to curry favor with Trump," Michael Hirson, practice head, China and Northeast Asia, at consulting firm Eurasia Group, said in a note Saturday Beijing time.

"China's leaders have likely not made a definitive decision yet to rule out a trade deal with Trump until after the US election," Hirson said. "However, they are increasingly skeptical about Trump's viability as a negotiating partner and (are) no longer willing to make significant concessions to appease him."

In the short term, increased U.S. tariffs will have a negative impact on the profitability of Chinese enterprises. In the long term, if the China-U.S. trade tensions continue, they will impact the structure of the global industrial chain.
Wang Zhe
senior economist at Caixin Insight

U.S. stocks plunged Friday, with the Dow Jones industrial average falling more than 600 points.

If investors are concerned about the impact of escalating trade tensions to American corporations, Chinese companies may start finding more business opportunities.

"In the short term, increased U.S. tariffs will have a negative impact on the profitability of Chinese enterprises," Wang Zhe, senior economist at Caixin Insight, said last Monday in written commentary to CNBC.

"In the long term, if the China-U.S. trade tensions continue, they will impact the structure of the global industrial chain," Wang added, according to a CNBC translation of the Chinese-language comments. "Of course, this will also force domestic companies to change their production methods and promote transformation and upgrading (of their operations)."

Analysts noted that another consequence of the trade tensions may be that Chinese companies gain greater market share, at the expense of U.S. businesses. Already, data and company reports indicate how Chinese companies are shifting agricultural purchases away from the U.S. to other countries, especially those in Latin America.

"For companies with sales exposure, they are absorbing some of the tariff cost or trying to pass it on, but they are losing business to competitors from other countries — something that is already happening," said Jake Parker, vice president of China operations at the U.S.-China Business Council. "Ability to pass along those costs will depend on margin, availability of alternative sources, and supplier contract terms."

Trump urges US firms to leave China

On Friday, Trump said in a tweet that U.S. companies "are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA." It was not immediately clear under what authority or how the president could implement such orders.

"If it does however result in US companies, to one degree or another, vacating the China market that would presumably open opportunities for Chinese companies to fill the void," Stephen Olson, research fellow at the nonprofit Hinrich Foundation, said in an email Sunday.

More significantly, he said "such a move would be an unprecedented rupture in the trade and economic relationship between the two largest economies in the world" that would create uncertainty that's bad for both Chinese and U.S. companies.

While there are challenges to conducting business in China, leaving the market is not the answer, said Parker.

"It is important to keep in mind that US business has been a positive example for progress in China ... American companies bring ideas, values, and examples that are pervasive, consistent catalysts for progress," said Parker. On the other hand, if U.S. companies left China, they would miss out on a major global growth opportunity.

"The only way to resolve the many challenges US companies face operating in the China market is for the two sides to continue negotiations and find a compromise that removes tariffs and sets the relationship on a more stable, predictable and constructive trajectory."

China firms looking for ways to adapt

Trump's administration has centered on tariffs as the primary tool of action in the trade dispute. But it's not clear how effective they are in getting China to budge.

Analysis from Chris Rogers, researcher at Panjiva, the supply-chain research unit at S&P Global Market Intelligence, found that prices for some categories of goods — such as chemicals and furniture — dropped, as tariffs were applied.

"(Some) Chinese companies are cutting some of the prices at which they sell to the U.S.," he said in a phone interview earlier this month.

Year-over-year change in US import prices from China by industry

Source: Panjiva, the supply-chain research unit at S&P Global Market Intelligence. Calculations based on figures by the U.S. Bureau of Labor Statistics.

Wei said Sunday that some Chinese companies were absorbing the cost of the tariffs, but not many. Rather, he said most businesses were waiting for some resolution in the trade talks.

Last week, Parker from the U.S.-China Business Council, also said that most companies were still evaluating how long tariffs will be in place before making significant business changes.

"Companies with supply exposure to tariffs are considering their options," he said in an email Aug. 20. "Some are moving their sourcing. Some are maintaining their current supply chains and either deal with a cut in margins or pass on as much of the tariff cost as they can."

The U.S. and Chinese trade delegations remain in communication, China's Ministry of Commerce spokesperson Gao Feng said Thursday. The two sides held a high-level phone conversation on Aug. 13 and planned to hold a similar call within two weeks, ahead of an expected in-person meeting in September, Gao said last week.

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