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2018-09-13 | All chapters

European Chamber survey and analysis on US-China tariff effects

Background

The European Union Chamber of Commerce in China surveyed its member companies to better understand how the recently escalated tariffs on a variety of products traded between the US and China affected European firms doing business in China. Responses were collected from 193 respondents across a wide variety of industries. This survey ended on 3rd September, and thus does not reflect any potential changes that may occur after that date. At the time of publishing, the Trump Administration had not yet decided to move forward with the addition of another USD 200 billion worth of products imported from China to the current levies.

Stance

The US-China trade war is causing significant disruptions to global supply chains and is seriously impacting companies that are neither Chinese nor American. Respectively, 53.9 and 42.9 per cent of respondents viewed the American and Chinese tariffs negatively, which is more than ten times the number that viewed them positively.

A total of 17 per cent of respondents reported that they were delaying further investment and/or expansion. As a result, the direct impact of tariffs on costs and margins is paired with the indirect impacts, such as even slower economic growth, fewer jobs, less trade and more delays to production upgrades than may have been originally anticipated.

While only a small percentage of European firms in China have taken drastic measures, like relocating or changing suppliers, these represent worrisome trends to what is currently only a portion of the possible additional tariffs being considered by the US and the subsequent potential responses from the Chinese.

The planned escalation of the Trump Administration of tariffs on another USD 200 billion worth of Chinese imports to the US, as well as the expected Chinese response, would certainly magnify the responses of this survey.

“The effects of the US-China trade war on European firms in China are significant and overwhelmingly negative,” said Mats Harborn, president of the European Union Chamber of Commerce in China. “We share the concerns of the US regarding China’s trade and investment practices, but continuing along the path of tariff escalation is extremely dangerous. It threatens to dismantle the entire global, rules-based system at a time when we should be working together to modernise it.”

Survey results and analysis

'View of European companies' graph

Negative views of both country’s tariffs are common among European businesses in China. However, 53.9 per cent of members viewed the US tariffs on Chinese goods negatively, roughly 12 per centage points higher than the number that reported negative views of the Chinese tariffs levied on American imports. As there are far more goods produced in China for export to the US than there are ones produced in the US for export to China, a higher proportion is expected. However, the high rate of negative views on either side of the trade war is emblematic of the degree of interconnectivity in the global economy.

Neutral views are common. This reflects the reality that many European firms in China produce for the Chinese market, and that many of those firms rely on local suppliers or suppliers in countries other than the US.

Positive effects from tariffs imposed by either the US or China were rare, and diffuse across sectors. There were no clear patterns for which industries were more likely to see the tariffs positively.

'Responses to the conflict' graph

*multiple responses allowed

When asked what measures companies were taking to respond to the tariffs, roughly the same number of members reported that they are relocating out of the US or China respectively, indicating that neither side is ‘winning’, as both are equally prone to losing companies as a result.

The most common response was inaction and continued monitoring of the situation. However, the second and third most common responses were to hold up on investment/capital expenditure and/or to hold up on business expansion efforts. Due to some overlap in these two responses, a total of 17 per cent of respondents that might have otherwise contributed further towards growth are opting not to do so due to the looming uncertainty caused by the trade war. 

Additional feedback from members

Consultants have a field day – one respondent that provides research and analysis on EU-China relations noted that demand has gone up for their services.

Regionalism as a response – another member said that they have shifted sources for the Chinese market and are trying to service the US market from facilities outside of China, meaning that the efficiency of a global system has been forcibly abandoned for regional ones to avoid tariffs.

Dodging the effects – one member invested in the US to create a new company so that they could change the trading method by selling from China to their own new company at a transfer price rate. Doing so lowered the effective rate considerably, but they now pay for a new company with no real and tangible value. The European Chamber has heard similar examples from other members that are transitioning wares produced in China to the EU first before re-exporting from the EU to the US. Although this adds costs, it is still a cheaper alternative to facing tariffs head on.

Shifting trade flows hit home – another respondent noted that while they do not export to the US market, they have local competitors who do. If competitors export to the US and they find that they lose market share as a result of the tariffs, those production lines will suddenly create local overcapacity and there is a real risk of ‘dumping’ in the local market to recoup as much as possible, thus driving local prices down and hurting other producers.

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June Yu

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