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China suppliers suffer cash flow shortages due to the current trade war on tariffs

Posted on July 20, 2019 in International Trade

In 2014, long before President Trump's 2015 campaign, he tweeted, "Remember, China is not a friend of the United States!” (Source: Twitter.) While running for president, China remained one of his major focuses. 

On January 22, 2018, the trade war of tariffs began. President Trump made good on his campaign promise to punish China suppliers for what he called unfair trade practices. More than a year later, as the tariffs continue, China suppliers feel the pinch as they suffer cash flow shortages due to the new rules on trade restrictions.

Thousands of product groups in China are affected by tariffs

A recent article published by Bloomberg Economics stated that more than 10,000 product groups made in China were impacted by the tariffs. As a result, their value for shipping to the U.S. fell by 26 percent in the first quarter of 2019.

China's Growth Domestic Product (GDP) shows a record low rate yet growth in certain sectors

China's GDP figure of 6.2 percent for the second quarter of 2019 is the lowest on record since they began tracking the GDP in 1992, according to a report in South China Morning Post.

Other economic areas grew such as retail sales that showed an increase of 9.8 percent compared to 8.6 percent in May. From January to June 2019, real estate and other fixed asset investments including machinery and infrastructure increased by 5.8 percent. That's compared to 5.6 percent in the January to May period. 

China's Association of Automobile Manufacturer's reported retail sales in China's automobile industry grew by 17.2 percent from January to June.

Imports from China declined by 7.3 percent in the second quarter of 2019. Property development investments grew only by 10.8 percent from January to June compared to January to May's growth rate of 15.8 percent.

China suppliers try to prevent more dents in their cash flow caused by the tariff trade wars

To make up for the cash flow shortage, China suppliers are raising retail prices, taking in fewer profits on products they sell or thinking of alternatives to get by.

While a number of suppliers in China are hiking up prices on their products, others are doing the opposite. For example, a Forbes article mentioned that suppliers are lowering prices to deal with their American customers in order to help them pay for their Chinese products. 

To save money, some suppliers in China are outsourcing their manufacturing tasks or relocating their factories. They're utilizing lesser-skilled labor in places like India, Bangladesh, Malaysia, and Vietnam. These changes indicate the tariffs are hitting companies' income streams hard.

China's firms are having tariff trouble importing American goods too. An example of this is illustrated in a May 2019 Reuters article. A Shanghai, China executive who imports wine is transporting all the firm's wines made in America to the free trade zone in the city. Otherwise, those wines will have stiffer tariffs soon. When they’re enforced, the executive says it won’t profit the business to pay the fees. The wine seller is concentrating on developing business relationships with suppliers from other countries.

Suppliers that have decided to remain in China hope to outlast the tariffs

Not all of China's suppliers who export want to use cheaper labor in other Asian countries to cope with the high customs fees imposed by the U.S. One article in the Los Angeles Times speaks of a business owner in the Guangdong province of China. The business specializes in making stainless steel fittings for bathrooms and kitchens. 

The owner wants to expand in the U.S. because of the high percentage of sales made in exporting; however, due to the cash flow shortage, decided not to go that path if the tariffs continue. The alternative, the owner said, is to look at other markets.

The Chinese have slowed down in purchasing of U.S. manufactured products

The United States Department of Agriculture showed consumers in China due are watching their Yuan due to the tariffs. The end of the first quarter caused a huge $2.1 billion or 44 percent drop in product shipments of U.S. agriculture to China.

Other ways the China economy is coping with the effects of the long-standing tariff trade war


China is relying on the economic surge in the industrial sector which includes real estate and other fixed asset investments. The retail sector's growth also showed promise in the second quarter of 2019. 

To encourage spending, China reduced the reserve requirement ratios (RRR). The RRR is the amount of money commercial banks are required to set aside.

Tariffs increased in May 2019 and the trade war endures

President Trump increased tariffs on $200 billion Chinese products to 25 percent on May 10, 2019. It was 10 percent prior. In response, China raised tariffs on U.S. products valued at $60 billion.

Forecast of the tariff trade wars

In the near term, predictions are that China will continue with the stimulus for economic growth. The counter-tariffs of China will carry on as long as the tariff trade wars do. Furthermore, growth targets in China might be set even lower to show more realistic attainable goals during this turbulent time of China's economic uncertainty.

Meanwhile, some China suppliers will proceed to relocate their businesses from China to nearby Asian countries where the labor costs are lower and the regulations are more relaxed. 

Conclusion

The tariff trade wars between the U.S. and China have been going on for more than a year. At present, there's no easy solution. What’s needed is a compromise in which both parties agree and remain committed. Until then, more talks will take place in hopes of reaching a peaceful arrangement. Meanwhile, China suppliers try to stay afloat and look for ways to stimulate cash flow in an economic environment of a peculiar kind of which they've never experienced before in history.