Hong Kong business owner Itay Sharon breathed a sigh of relief when he heard the news this week that the United States and China had moved to de-escalate their trade war and temporarily reduce the punishing tariffs between them.
Under the agreement, the U.S. will temporarily reduce its tariffs on Chinese goods from 145 per cent to 30 per cent, while China will lower its levies on American imports from 125 per cent to 10 per cent, effective from Wednesday.
The 43-year-old Canadian Israeli runs the consumer brand Eco Wave, which produces items such as bamboo baby wipes and compostable diaper bags. The products were manufactured in factories in mainland China and sold on Amazon in the U.S. and U.K.
A shipment of 200,000 compostable diaper bags from a factory in Henan province in China was set to arrive in Los Angeles port on May 13, and Sharon had been preparing to pay a 125 per cent tariff on the shipment. He now hopes to pay the reduced 30 per cent tariff on Chinese imports, but wasn’t sure which rate he will pay.
While he was “elated” the tariff rate had come down, Sharon said he would still have to pass the additional cost onto American consumers.
“I don’t have the margins to absorb it,” he told CBC News.
The cycle of tit-for-tat tariffs between the world’s two biggest economies has roiled financial markets. It has also brought uncertainty to businesses reliant on the American market, which don’t know what level tariffs will be at in three months’ time.
Some Hong Kong companies have pivoted to manufacturing products in another location. Others who rely on the large American market continued to tread water as they waited to see where the tariff levels would eventually land, amid fears of possible staffing cuts the longer the higher tariffs remain in effect.
‘You have to adapt or get swept under’
Following Donald Trump’s first term in office, many Hong Kong companies opened up factories outside of mainland China to circumvent U.S. tariffs and hedge against the impact of geopolitical tensions. Known as the “China Plus One” strategy, companies diversified their production lines to places such as Vietnam and Cambodia, which helped those countries emerge as manufacturing powerhouses.
Exports to the U.S. contributed around 30 per cent of Vietnam’s GDP and 29 per cent of Cambodia’s GDP last year.
In his second term in office, President Donald Trump announced a 10 per cent tariff on U.S. trading partners and so-called reciprocal levies as high as 46 per cent on Vietnam and 49 per cent on Cambodia — before announcing a 90-day pause on April 9.
Trump said his aim was to correct unfair trade practices, arguing that many countries impose higher tariffs on American goods than the U.S. does on theirs, thus creating an imbalance.
Following Trump’s announcement of 145 per cent import taxes on Chinese products last month, Sharon immediately booked a flight to Ho Chi Minh City. Having travelled to Vietnam regularly when he worked for his father’s exporting business for 15 years, he was familiar with the country.
Sharon had been in touch with a factory there since last year, as he had been looking into diversifying his supply chain, and decided to manufacture his bamboo baby wipes from there to get around the triple-digit tariffs.
His first shipment of 20,000 packs of bamboo baby wipes was set to ship next week.
Now that tariffs have been reduced to 30 per cent on Chinese imports, Sharon said he would return to manufacturing those products in a factory in Zhejiang province, China, which he had used for three years.
While that tariff rate was still higher than Vietnam’s 10 per cent, Sharon said manufacturing the baby wipes in China remained cheaper, as the factory provided him more favourable payment terms.
He said not knowing what trade policies would happen next, and shifting production lines, was challenging.
“It is very difficult. You have to adapt, and if you don’t adapt, you’re gonna get swept under,” said Sharon.
Companies count the cost
Hong Kong entrepreneur Danny Lau, who runs Kam Pin Industrial, watches the news two or three times a day looking for any signs of movement in the trade war between the world’s two biggest economies.
Asked about his thoughts on Trump, Lau replied: “Hard to predict. This man is unexpected. He can do anything.”
Lau’s business, which his parents founded in 1960, has a factory in Dongguan, in mainland China, manufacturing aluminum-coated panels for buildings in Hong Kong and mainland China.
The United States accounts for a third of Kam Pin Industrial’s business — with its products going on buildings for customers including tech giants Amazon and Google.
President Trump increased tariffs on imported aluminum and steel to 25 per cent. Along with existing levies from Trump’s first term, that had put tariffs on his U.S. products at around 75 per cent, Lau said.
Trump said the 90-day pause on tariffs on China does not include sectoral tariffs on cars, steel, aluminum and potentially pharmaceuticals.
Lau said he was checking to see what the import tax rate would be for his products, and would contact clients in the U.S. to see whether he “may have a chance” to get projects in the U.S. in the third and fourth quarters.
He had expected $5 million US in orders from the U.S. for the second half of the year, but American orders have been reduced or put on hold “until the two big giants [the U.S. and China] … can settle down and reduce the duty.”
“If we don’t have sufficient orders, we have to make the headcount cut, and contract our whole business, including using less space in our office and also the production facilities,” he warned. “It’s a bad feeling. It’s unexpected.”
Lau is looking to new markets, such as in the Middle East, but said it was hard to replace the large American market, which took him four years to break into.
The temporary trade truce this week had given him some hope. But he said all he can do is wait until there was a deal between the U.S. and China.
“[The outlook is] a little bit bright, but not completely sunny yet,” said Lau. “Looking forward to the sunny day.”
Uncertainty remains
As the clock ticks down to whether the U.S. and China can strike a final deal, economist Simon Lee warned issues that triggered the trade war remain unresolved — such as U.S. demands that Beijing crack down on the trafficking of chemicals used to make fentanyl.
“The [tariff] removal is just temporary,” said Lee, who teaches at the Chinese University of Hong Kong. “A clearer picture can be seen after the U.S. finished deals with other countries. The tariffs to China are still higher than before.”
As tariffs sky-rocketed, trade between the world’s two biggest economies plummeted, with Chinese exports to the United States in April dropping 21 per cent year on year, according to data released by China’s customs authority on May 9.
Some Canadian manufacturers are facing catastrophic cost increases due to Canada’s own retaliatory counter-tariffs against the U.S., and some owners say federal assistance may not be enough to keep them afloat.
Alan Murphy, chief executive of supply chain research firm Sea-Intelligence, said according to anecdotal evidence from shipping lines and freight forwarders, China-to-U.S. volumes have fallen between 30 to 50 per cent, as bookings were cancelled.
“The massive implosion of exports out of China that we were expecting as a consequence of the 145 per cent tariffs has, at least, been postponed,” he said.
Murphy added some goods would start to move now, but he did not expect a large rebound in demand, as even 30 per cent tariffs remained “rather punitive.”
Murphy said for U.S. importers, the question was whether tariffs would come down from 30 per cent in 90 days — or go up. Nobody knows.
“It’s the uncertainty here that’s killing everybody,” he said.
