The 2018 China – USA trade war is the talk of the world. Two international economic juggernauts are going head to head with mind-boggling tariffs on more than $200 billion of goods. The USA insists Chinese exporters and suppliers – including the government – are gaming the system for higher profits at the expense of American businesses.
The Chinese government strongly stands against these accusations and says that it is not cheating the system and is following international trade laws. With both sides accusing the other, each side has placed tariffs on a considerable amount of goods. The increased tariffs vary depending on the product, but US President Donald Trump has vowed these will increase year on year.
What does this mean for importers in the US who rely on shipments of goods from China in order to run their businesses successfully? Where is this trade war headed? What kind of ramifications has it had on the value of the Chinese Yuan?
Decline of the Yuan
Since the trade war began, and by its peak, the Chinese Yuan has taken a nosedive. It is currently at its year lowest, with 1 CNY worth 0.14 US cents. Clearly, this shows that the trade war has not been beneficial for the value of the CNY nor China’s economic growth. In addition, the Chinese GDP-to-debt ratio is increasing and is forecasted to increase to 274.5% by the end of the year. This is all a result of American tariffs on Chinese exports.
The decline of the Chinese Yuan is something positive for American importers and businesses, as Chinese products can be had for cheaper than before – making it a good opportunity to source and stock your products from China now. It also allows room for further negotiation as Chinese suppliers work to sell wholesale product while keeping their businesses afloat in wake of the trade war. While China is hit strongly by American tariffs, its new focus will be on reducing its debt through a sustainable growth model and by allowing Chinese banks to make it easier to borrow money.
How Chinese Exporters Avoid Tariffs
Are Chinese exporters worried about this trade war? On the surface, Chinese companies should be concerned, as this makes their products more expensive, and therefore, making American buyers inaccessible. However, Chinese businesses have a trick up their sleeve – one that is not necessarily legal.
In an article titled, “The U.S.-China Trade Battle Spawns a New Era of Tariff Dodges” by The Wall Street Journal, it finds that some Chinese exporters are avoiding American tariffs by falsely labeling their products and changing the HTS (Harmonized Tariff Schedule) code. U.S. customs agencies rely HTS codes to understand what is contained within shipping containers.
By doing this, the product is no longer classified as the original, but can become an entirely different product with little or no tariffs. For example, American tariffs on Chinese hardwood-faced plywood has had a 183.4% tariff imposed on it since November 2017. The following year, the exports of softwood-faced plywood, that has tariffs of between 0% and 8%, increased to almost $200 million.
The product contained within the boxes and shipping containers did not change, but the HTS code did. A similar change can be seen with diamond saw blades, which Chinese exporters began labelling as grindstones. With 18,927 HTS codes available to Chinese exporters, they have a near limitless ability to avoid tariffs and can export goods without a loss in business.
Where the Trade War is Headed
Most economists agree this trade war benefits no one, instead, it hurts American consumers the most. Products that American consumers readily buy are seeing staggering increases in prices they cannot afford. Businesses that rely on cheap wholesale products from China are forced to change suppliers from Vietnam or Indonesia, or buckle under the increased cost of product.
Ronald Temple, head of US equity at Lazard Asset Management believes this trade war with China, in addition to souring relations with Canada and Europe may result in a recession by 2020. Unlike 20 years ago, China has many more options for exports, trade deals, and other economic relationships around the world. It does not solely rely on the U.S. anymore.
This recession is still a big IF, but on the macroeconomic level, these tariffs will knock 0.1% to 0.2% off the growth rate of both China and the U.S. This could be worth a loss of $30 to $60 billion.
As Chinese exporters come up with inventive ways to avoid extensive tariffs, ultimately, this trade war hurts American businesses and consumers. This is the complete opposite of what President Donald Trump vowed: to force China to play on an equal level with the U.S., and to help boost American businesses and make American products more competitive.
What the Trade War Means for You
If you’re an American business owner, the tariffs will most definitely hurt your profit margins. While the decline of the Chinese Yuan means that you can purchase goods for a lower cost than before, the tariffs cancel this advantage if you are planning to sell in the United States. If you’re in touch with the right suppliers and have the right contacts, you can continue to import goods from China and avoid tariffs altogether. The Chinese people are very clever at saving money, and making money.