April 13, 2018 / 7:49 AM / 7 months ago

U.S. trade war fears ripple through China's 'workshop of the world'

DONGGUAN, China (Reuters) - Allan Chau, the general manager of a Chinese factory making precision metal parts for U.S. customers, is still calling it a “proposed” trade war, but that hasn’t stopped him from planning for the worst.

Unlike last year, when U.S. President Donald Trump sounded protectionist warnings that were largely dismissed as bluster, Chau and other factory bosses across China say the risks from this trade spat are now far more tangible.

As a result they warn of a possible wave of small factory closures, a shift of some production away from China, and the use of questionable practices to dodge increased tariffs.

“Before, we didn’t think we’re affected because we’re doing little metallic parts,” said Chau at his three-storey beige-colored-plant in Dongguan. “(Now), everybody is talking about this proposed war.”

The city of Dongguan is one of the main export hubs in southern China’s Pearl River Delta. The region has been dubbed the “workshop of the world” and accounts for around a quarter of China’s exports.

As hundreds of computer-controlled lathes hummed around him, fashioning slender aluminum, steel and brass rods into intricate parts, Chau pointed out a car valve, the size of a thumb - used in car braking systems assembled in U.S. plants - as an example of a product caught up in the storm.

Of the 1,500 or so metal parts made in Chau’s plant, including needles for espresso machines to puncture coffee capsules, he says around 200 could be hit by the proposed U.S. tariffs that stand to affect $50 billion worth of Chinese goods.

“If they’re going to propose 25 percent tax on those things, we have a lot of counter-measures we’ve got to do to keep ourselves alive,” said Chau, whose company, Tien Po International, has run factories in China for more than 30 years.

Chau says he’s now considering building a warehouse in Malaysia, Vietnam or Thailand, where he could ship his goods for re-export, or he talks of setting up a small factory in a Southeast Asian country to avoid the increased tariffs altogether.

EXACERBATE THE PAIN

China’s reliance on exports as an economic driver has declined over the past decade, with total exports as a percentage of Gross Domestic Product dropping to 18 percent in 2017 from 35 percent in 2006, according to research by Credit Suisse.

But at a more micro level, at the heart of China’s vast industrial supply chains, the tariffs stand to exacerbate the pain of already struggling plants.

Many have already been buffeted by an appreciating currency, soaring wage costs, and labor shortages as a younger generation shuns a life on the factory floor.

The Trump threat has been a further sideswipe for many exporters and soured sentiment, even as the full implications are unclear.

“The U.S. is a huge market and some of the companies, especially those less competitive, may be washed out,” said Danny He, the founder of Alpha Lighting, a small LED maker in Dongguan with 100 workers.

In interviews with six other Chinese manufacturers of LED lighting products, another affected sector, four expect some closures of Chinese factories, particularly those making more generic products like bulbs and LED panels.

A worker checks tailor-made magnetic stainless steel inside a factory in Dongguan, China April 10, 2018. REUTERS/Bobby Yip

Places like Dongguan, with large clusters of grittier industrial plants, are especially vulnerable.

Dongguan’s economic growth of 8.1 percent last year while robust, doesn’t fully reflect its long struggle to upgrade rusting factories and catch up with the likes of neighboring technology powerhouse Shenzhen.

“If you are those without special technology or products, you will die,” said Rose Qiu, a director with Zhejiang Fonda Technology, another LED maker.

Jacky Patel, the president of OM Lighting, an exporter of Chinese lighting products to several U.S. states including Florida, said the tariffs would be passed onto U.S. consumers.

“The customer will have to pay 30 to 35 percent more.”

“They won’t be happy but we have no other choice. We just have to go with the flow.”

All six LED makers interviewed by Reuters also said they would pass on any extra costs to U.S. customers.

“We are considering moving our core market out of the U.S., said James Chou, the boss of Poly Dragon, who has run an LED factory in Dongguan for the past 17 years.

“I worry even more about the global economy going into a recession under a trade war.”

Chinese manufacturers talk of being stuck in limbo.

“Over in the U.S. right now they don’t dare make new orders ... So everyone is just monitoring things and no one knows what will happen next,” said Chau from the precision metal parts factory.

GREY AREAS

Under a so-called harmonized system of tariffs - Chinese products are now coded specifically so that the same product would face higher U.S. tariffs if used in a higher-tech sector like nuclear energy, rather than a more generic category like household electronics.

“There’s still a gray area,” said one manufacturer who declined to be named, adding that there was scope for some factories to fudge such codes to avoid tariffs.

He said some U.S. customers were also proposing components be shipped to Mexico to blur the country of origin. Such a practice could technically be illegal.

More broadly, should the retaliatory trade moves escalate, and the U.S. slap tariffs on more mainstream goods like household appliances, consumer electronics or toys, the repercussions would be substantially higher.

Slideshow (9 Images)

Ye Xiaqing, with the China Household Electrical Appliance Association, told Reuters that so far, only 5 percent of household appliance exports to the U.S. were affected by the proposed increase in tariffs.

“If they impose tax on the household appliances, they’re going to raise the price and that will affect the citizens of the U.S. at the end,” said Chau, the Dongguan factory owner.

“Donald Trump doesn’t want to do that. He’s already pissed off enough people there.”

Reporting by James Pomfret in Dongguan, Additional reporting by Wyman Ma and Tina Ge in Hong Kong, Michael Martina in Beijing; Editing by Martin Howell

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