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An analysis by the Tokyo-based investment bank Nomura looked at a sample of more than 50 manufacturers that have already left China in order to avoid President Trump’s tariffs and found the departures will have huge implications for the Chinese economy.
“It is not just short-term trade diversion; medium-term production relocation has also started,” Nomura research analysts Sonal Varma and Michael Loo wrote in a note published Wednesday. Trade diversion occurs when companies divert production from China. Production relocation is the establishing of new supply chains.
Companies leaving China, including manufacturers of electronics, apparel and electrical equipment, are heading to neighboring Vietnam, Taiwan and Thailand in droves. They're also reloacting in places like Mexico and the U.S.
The New York-based shoemaker Steve Madden recently announced 30 percent of its handbag production will be shifted to Cambodia, and the action-camera maker GoPro in June began producing its U.S.-bound cameras in Mexico. Both decision were made in the wake of U.S. tariffs on Chinese exports.
But it’s not just foreign companies that are leaving China. Local ones are leaving, too. The Huizhou-based electronics maker TCL and the Zhejiang-based yarn producer Zhejiang Hailide New Material are among the Chinese companies that are relocating factories to Vietnam.
Some companies, like Lite-On Technology, have cited the trade war morphing into a technology war as reason for leaving China.
"While rising trade tensions and the need to mitigate risk is a key reason for production relocation away from China, some companies also cited cybersecurity risks as a reason," the Nomura analysts wrote.
A continued exodus of companies will put further pressure on Beijing to reach a trade deal when talks start up again in October.
Beijing was already grappling with economic headwinds before the trade war began when President Trump on March 1, 2018, announced tariffs on imports of steel and aluminum.
China's economy grew in a tight range between 6.6 percent and 6.7 percent for the two years from mid-2016 to mid-2018, before slowing to a 6.2 percent growth rate in the second quarter of this year.
The Chinese economy is expected to slow even further – especially if the trade war drags on.
A team of Hong Kong- based economists at Bank of America Merrill Lynch says tariffs will stay in place until the end of next year, and it sees China’s economic growth slowing to 5.7 percent in 2020.
“With more extensive and higher US tariffs activated, we expect stiffer headwind on Chinese exports, which will likely thwart capex demand further and become the catalyst for policy turnaround,” they wrote.
President Trump knows exactly what’s at stake when the two sides meet again in October.
“While I am sure they would love to be dealing with a new administration so they could continue their practice of “ripoff USA” ($600 B/year), 16 months PLUS is a long time to be hemorrhaging jobs and companies on a long-shot,” Trump tweeted Tuesday following a report that China may be willing to wait until after the election to reach a trade deal.
“And then, think what happens to China when I win. Deal would get MUCH TOUGHER! In the meantime, China’s Supply Chain will crumble and businesses, jobs and money will be gone!