Tag: manufacturing

US-China Trade War Reshaping Global Economy

 

 

 

As a result of the ongoing trade war between the US and China, we expected data to show that imports from China had dropped and affected companies are relocating production back to the US. In reality, Chinese exports are not dropping, and production is not returning to the US but rather it is moving to places like Vietnam, India, Mexico and Thailand.

 

The Numbers

Before digging deeper into this phenomenon, let’s look at the chart below, compiled by the BBC, to get a grasp of the magnitude of the tariff situation.

 

Painful Start To The Transition

That doesn’t mean that this global supply chain transition currently taking place has been painless for the impacted Chinese & American firms. The American Chamber of Commerce in China conducted a survey last month. The results showed that “the vast majority (74.9%) of respondents said the increases in U.S. and Chinese tariffs are having a negative impact on their businesses. The impact was higher for manufacturers at 81.5% for U.S. tariffs and 85.2% for Chinese tariffs. The impact of the tariffs is felt through lower demand for products (52.1%), higher manufacturing costs (42.4%), and higher sales prices for products (38.2%).… Approximately 40.7% of respondents are considering or have relocated manufacturing facilities outside China. For those that are moving manufacturing out of China, Southeast Asia (24.7%) and Mexico (10.5%) are the top destinations. Fewer than 6% of members said they have or are considering the relocation of manufacturing to the U.S.”

Why Isn’t Production Returning to the US?

In our era of interconnected global supply chains and technology connectivity, several countries are involved in the production of every item. Deterioration in business or trading relations between one pair of countries is simply going to put others in a more advantageous position – let’s call it the yin and yang effect. The US-China tariffs are paving the way for better business in other countries that have been patiently waiting for an opportunity to shine or were already involved in the supply chain anyway. As a result, the White House’s policy is modifying the global supply structure rather than enabling a rise in domestic production. US imports and associated production are simply transitioning from China to other parts of the globe.

Who Are Or Could Be Some Of The Big Beneficiaries?

Vietnam is now one of the top choices, with its low wage levels, high standard of education, government-subsidized industry and other benefits that we can recall from China’s ‘awakening’ two decades ago. Vietnam has been receiving direct foreign investment for years and this tendency is continuing. While imports from China into the US are falling, those from Vietnam are rapidly rising. The chart below shows just how much this change means to Vietnam and, if the current trend continues, it would become the 7th largest importer into the US by year-end.

 

China’s Loss Is … China’s Gain???

Another critical element to remember is that, consciously or not, China has been preparing for the current circumstances with the US for years. How? By placing the geographical focus of its Belt and Road Initiative and corresponding production capabilities in some of the very countries where US companies have been transitioning their supply chain.

An example in Vietnam is the China-Vietnam Economic and Trade Cooperation Zone. One element of their ‘cooperation’ consists of an industrial park in the northeastern manufacturing hub of Haiphong, Vietnam that is 100% owned by the Shenzhen city government. The park is just one multi-billion-dollar example of how Chinese and foreign companies can avoid tariffs and have Chinese quality goods and pricing. Launching cheap hubs in Southeast Asia, including Vietnam, is proving to be a logical way forward and, when looking at the chart below, is unlikely to stop at Vietnam.

* Note that EDS International has a local presence in the countries highlighted on the chart.

What’s Next

The trends mentioned above run contrary to many people’s expectations, as one of the many objectives of the tariffs was for some of China’s production to return to the US. Global market analysts believe that factories and production relocating from China to other low-wage countries in the Southeastern region should not be a concern to the Trump administration. They contend that while developing more and more technologically advanced domestic production, the US should let others engage in labour-intensive manufacturing. However, the wheels of the global supply chain have already been set in motion so we see no end in sight to a continuation of the yin and yang effect.

Are you looking to transition part or all your supply chain outside China?

In addition to procurement and sourcing service, EDS international has been moving production lines around the globe for the last 35 years. If you are considering a move to one of the countries mentioned in this article, we are likely to have a local office to greet you. Our goal is to reduce your costs and improve the efficiency of your supply chain. Click here to check our services and past projects or to get your free quote today!

Spring in China: reduction in VAT rates provide long-expected savings for both consumers and businesses

The results of the summit held by the National People’s Congress and the Chinese People’s Political Consultative Conference has been a hot topic over the past month. They represent two of the most influential assemblies in the world, held each year at the beginning of March.

At this meeting, known as the Two Sessions, China’s 2019 economic and political course was presented. Among the major announcements was the reduction in the current VAT rates of 16% and 10% to 13% and 9% respectively, according to a government report by Chinese Prime Minister Li Keqiang.

During the year, the VAT rate will be reduced as follows: from 16% to 13% for manufacturing; from 10% to 9% for transport and construction; unchanged at the 6% for the service industry, but there will be other tax benefits coming for the service sector.

Allowing for the aforementioned cut, the total VAT rate will have dropped by almost 25% over the last 12 months by May 1, 2019. Specifically, it fell from 17% to 16% from May 1, 2018, and this time from 16% to 13%. To compare, the average figure in the OECD member countries is 19%.

Meanwhile, there are more changes coming to Chinese VAT rates. The expectation for 2019 and 2020 is that the number of VAT rate levels will be reduced from three (6%, 9% and 13%) to just two. The specifics of this change are not yet public.

In addition, manufacturers and service providers will soon be able to enjoy easier access to loans, and other benefits that will improve their bottom line.

Why has the Chinese government decided to focus on a reduction of VAT rates? The answer is very simple – they seek to tackle a slowdown in growth which has reached a level not seen for the last 28 years. Last year, GDP growth was at 6.6%, but some analysts say the actual number may be even lower. At the same time, FDI rose by just 3% versus 7.9% in the previous year. This slowdown is due to the trade stand-off with the USA. In 2019, Beijing hopes to see GDP grow by 6.0% to 6.5%, but this projection seems too upbeat to many.

The government also aims to boost economic growth through spending. This includes a higher deficit target of 2.8% of GDP versus 2.6% in 2018. Prime Minister Li Keqiang said that to bolster the economy, China’s fiscal policy will become “more forceful” because the government will cut taxes and fees for companies by almost 2 trillion yuan per year ($298.31 billion).

We can already see the VAT decrease reflected in prices of famous brands such as Apple and Gucci, which cut prices for their goods in China from April 1, 2019.

On Apple’s Chinese website, prices have been reduced by up to 500 yuan ($74.44) for some of the latest iPhone models. Notably, as their sales at the end of last year did not match expectations, some retailers dropped prices for the most recent models of iPhones by up to $120 back in January 2019.

According to media reports, Italian brand Gucci cut prices by 3 percent. A Louis Vuitton representative confirmed that they also revised prices accordingly, being “fully supportive of the Chinese government’s ongoing efforts to narrow the price gap between China and overseas.”

Hermes also reported that, given the reduced VAT in China, their prices will be reduced by 3% from the beginning of April.

BMW and Mercedes-Benz also said their prices for certain models will fall after the tax changes in China take effect.

Analysts believe that current changes in the taxation system will help accelerate economic growth and increase both domestic and foreign demand for goods.

What does all of this mean for us at EDS and our clients? From April 1, 2019, we are conducting negotiations with all our suppliers to revise the prices for current and upcoming projects commensurate with the tax rate changes. These changes will bring considerable relief to our clients and make them more competitive in their respective markets.