(Bloomberg) -- “I’m lost and perplexed,” said Chinese furniture maker Ben Yang as he reeled Friday from news that U.S. tariffs on his products were hiked to 25% from 10%. “We probably have to switch to making something else or shut down altogether.”
Furniture makers like Yang’s Sunrise Furniture Co., based in the industrial heartland of Dongguan in southern China, already had wafer-thin profit margins after years battling rising labor and other costs. A Bloomberg Economics analysis of almost 1,000 companies in major export sectors found "not many" can survive tariffs of 25%.
That raises the specter of substantial disruption to China’s dominant role in the global supply chain with painful adjustments rippling across the world after President Donald Trump escalated the trade war last week. China’s best hope is that it can soften the blow by selling more to the rest of the world and in its rapidly expanding home market.
“The U.S. tariff hike threatens to dislodge China from the global supply chain,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore. “The current China-centered supply chain will likely break up and shift towards Southeast Asia and disperse more widely across the globe.”
For cable maker Jiangyin Haocheng Electrical Appliance Wire and Cable Co. based in the east coast province of Jiangsu, Trump’s tariffs “have thrown everything into uncertainty” said marketing manager Ellen Lee.
“We only have a profit margin of 10% -- it’s so thin that we can’t reduce prices any more," she said in a telephone interview. Her only comfort was that most of her competitors are also based in China and so everyone will be hit.
Taizhou Jinba Health Technology Co. in Zhejiang province on the east coast sells half of its brightly-colored hair dryers and curling irons to the U.S. The 25% tariff hike will slash that share to about 30%, according to sales representative Ryan Tao. With a profit margin of 20% to 30%, the company will reduce prices by 5% to 10% to keep customers, he said.
That puts them at the top of the companies Bloomberg Economics examined. Fewer than 60 companies out of 1,000 listed exporters in the study had profit margins higher than 25%. Three hundred had profit margins of more than 10%, and the rest were below that.
Increasing tariffs to 25% on about $200 billion of goods will reduce China’s exports by 2.7%, drag on growth by 50 basis points over the next two to three years, and cause 2.1 million jobs to be lost, said Liu Ligang, chief China economist at Citigroup Inc. in Hong Kong in a May 10 note.
Still, exports to the U.S account for around a fifth of China’s total and Deutsche Bank AG estimates that China’s industrial output overall has only a five percent exposure to the U.S. market.
Chinese production serving the rest of the world is five times more important than the supply chain serving the U.S., Deutsche Bank China economist Zhang Zhiwei in Hong Kong said last year. The key issue is whether U.S. tariffs drive out supply chains from China that serve other countries and history suggests they will not, he said.
But companies will still have to adapt.
“Global supply chains will be reshaped, with the likely relocation of clusters and producers to avoid tariffs,” said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard. “Trade frictions would deter business investment in China or incentivize companies to reallocate capacity to other regional economies or back to the U.S.”
The long-term threat for China is how its role as the core of the world’s supply chain holds up. Tariffs of 25% are set to give that probably its biggest ever test, with the Trump administration today poised to announce details of its plans to impose more tariffs on the remaining $300 billion in trade. Beijing hasn’t yet announced any details of its own plan to retaliate.
Some Chinese firms will dodge Trump’s latest blow as they have already shifted production overseas. Wenzhou Changjiang Automobile Electronic System Co. in Zhejiang province will not be hurt because it set up a factory in Brazil years ago and its China production serves only the domestic market, says sales manager Vincent Ren.
“Our China factory is running day and night to catch up with the local orders,” said Ren, whose company makes car electronics. “We are increasingly focusing on the domestic market.