CHECK OUT THE ASSOCIATION’S COMMENTARY AT THE END OF THIS ARTICLE
U.S. President Donald Trump’s “order” for American firms to leave China amid rising trade war tensions will do little to help to resolve the long-running dispute and nothing for the companies’ balance sheets, analysts and business leaders say.
Jake Parker, senior vice-president of the US-China Business Council, said companies that did choose to exit the world’s second-largest economy would be depriving themselves and the US of a huge commercial opportunity.
“China will contribute a significant proportion of global growth in the decades ahead. Missing out on that would weaken the competitiveness of US industry and harm the United States’ interests at home,” he said.
“The jobs in the United States that support that growth would also be negatively affected.”
Trump seemed unaware of such potential problems when he tweeted recently of how “Our County has lost, stupidly, Trillions of Dollars with China over many years”.
The US “would be better off without them”, he said, before “ordering” American companies to “immediately start looking for an alternative to China”.
Parker, however, said that as well as benefiting from the financial opportunities China provided, US firms had been “consistent catalysts for progress” in the country and had made a significant contribution to its economic development.
“It is important to keep in mind that US business has been a positive example for progress in China and that China is a much more open society than it was 30 years ago,” he said.
Trump’s latest Twitter tirade – which he later clarified made reference to an obscure federal law known as the International Emergency Economic Powers Act – came after Beijing announced plans to reinstate a 25 per cent tariff on cars and car parts imported from the US, and impose retaliatory tariffs of between 5 and 10 per cent on US$75 billion worth of other American products.
China’s move was in turn a response to the White House’s announcement that it would increase the tariff rate on US$300 billion worth of Chinese imports to 15 from 10 per cent in two batches – the first on Sunday and the second on December 15.
The tit-for-tat actions came after the latest round of negotiations in Shanghai in late July failed to break the stalemate in the trade war.
While studies have suggested that the dispute has pushed some foreign companies to consider moving out of China, the prevailing attitude is that the world’s most populous nation is still an important place to be.
Lu Xiang, a research fellow specialising in US issues at the Chinese Academy of Social Sciences, said that while Trump might have the arcane authority to order American firms to pull out of China, doing so would be damaging not only for the companies concerned but also for the global supply chain.
General Motors, which last year sold more cars in China than it did in the United States, was a prime example, he said.
“If General Motors exits China, can it find another market big enough to replace its nearly 4 million unit sales? Is President Trump able to create a huge market for GM?”
Even if the giant carmaker left China, it would soon be replaced, Lu said.
“It won’t hurt China’s economy. The situation is very simple: the car market in China is fully competitive, so the market share of an exiting producer would be quickly picked up by another, but its [GM’s] losses would never be recovered,” he said.
Despite the disruption caused by the trade war, Joerg Wuttke, president of the EU Chamber of Commerce in China, said that only a handful of foreign firms had chosen to leave China, and several of those had done so for reasons unrelated to the dispute between the world’s two largest economies.
“I don’t really pay attention to the companies moving out,” he said.
As for Trump’s order to exit China, Wuttke said: “The problem is that you have to know where to move to. Where is it? Does it have enough ports, enough electricity and enough trained workers?”
Also, the industrial structures that had been created in China would make relocation impossible for many firms, he said.
“Very few businesses can easily move out. Maybe toys or shirts, but if you look at China’s strength – it’s clusters: it’s a chemical cluster in Jiangsu, it’s an electronic cluster in Guangdong. You cannot move out a cluster, ever. A cluster does not move, it just fades away,” he said.
Wang Yiwei, a professor of international relations at Renmin University in Beijing, agreed that it would be hard for American companies to turn their backs on the economic benefits China had to offer.
“China is not only the world’s factory but also the world’s market,” he said. “No one can stay away from it. It is just wishful thinking to order US companies to leave China. It goes against market rules and against logic.”
China’s sheer size meant nowhere else in the world could compete, Wang said.
“China has 400 million middle-class consumers – more than the entire US population – 170 million workers with a higher education and 856 million internet users,” he said. “These numbers can’t be matched by countries like India or Vietnam.”
Parker said that the only way for the US and China to resolve their trade differences was to return to the negotiating table.
Beijing and Washington should work together to “find a compromise that removes tariffs and sets the relationship on a more stable, predictable and constructive trajectory”, he said. (Source: SCMP)
This has become a snowball of an issue for U.S. companies doing business in China. For those that have never done business (import/export) with China, only a portion of the story is on the stage, so added content is necessary.
As the association has both U.S. and China members, it can speak with some authority on the issues at hand when it comes to the dietary supplement industry and the ongoing trade problems.
The status quo prior to the escalating trade war was and continues to be one sided in favor of China. The association is only speaking about the dietary supplement industry. However, the association assumes that other industries have similar experiences.
To illustrate this “one-sidedness”, let’s take a look at the creation of a dietary supplement in the U.S.
First the U.S. company needs ingredients that will make up the supplement. Can a U.S. company go down the street or to the next state over to get these ingredients? With a few exceptions, No. Some companies like to claim they source all their ingredients in the U.S., which may be true to the extent they are buying from U.S. companies (distributors), but where do those distributors get their ingredients? For the most part, China.
China is such an important part of the supplement and food industry as a manufacturer of nutritional ingredients, raw botanical ingredients and food additives that the supplement industry would falter without China. It has been estimated that 70 percent of the global supplement industry’s ingredients are coming from China. This is also true for pharmaceuticals. It’s clear that China is benefiting the most from the current situation, let’s take a look at those benefits:
First benefit to China:
Prior to the trade war most of these Chinese ingredients flowed into the U.S. with little to no taxation. This is obviously also a benefit to the U.S. companies as it helps them keep prices down. Although listed as a benefit to China, it has been beneficial to both sides. This is a clear example of open trade, which is good for industry, consumers, job creation etc…
Second benefit to China:
Now let’s say that U.S. supplement manufacturer wants to export that supplement to China because it sees a potential opportunity. Some decisions have to be made on market entry strategy.
The company has to determine if it will sell its products through cross border e-commerce or directly enter the market through traditional commerce.
Let’s say they choose the direct traditional commerce route, which entails finding a China partner to run the business or setting up a Wholly Foreign Owned Enterprise (WOFE). Next step how to get the supplements legally into the market.
Traditional commerce requires the U.S. company to first get the products approved by the State Administration for Market Regulation (SAMR). Prior to 2018, the approval process was managed by China’s Food and Drug Administration. China’s FDA is now known as China Drug Administration (CDA). All food regulatory responsibilities were transferred to the newly created SAMR.
The approval process is normally quoted as taking 2-3 years. However, the most recent batch of newly approved supplements, which were from domestic Chinese companies, all began the approval process back in 2013. That’s right a six year waiting period until the products were approved and ready to hit the market.
The time factor is only half of the problem. In order to successfully make it through the process both domestic and international companies alike utilize registration agents, which together with the government fees charge around US$150,000 per product (SKU). The costs involved depend on the ingredients used and the claims being made, so the fees can be less or more than stated.
Once the products are approved and ready to hit the market, U.S. companies would have to pay a 20 percent food import tax and a 17 percent VAT as well as a bunch of other smaller fees related to import processing. In total, the U.S. company is looking at over 40 percent in import taxes.
Now that is an arduous, timely and costly endeavor. Thankfully China has cross border e-commerce options available to international companies. This process doesn’t require product registration or any kind of SAMR approval, so that cuts out the 2-6 year waiting period and the potentially US$150,000 plus investment for the registration. However, the products will be taxed through the cross border system at 11 – 15 percent depending on if they are shipped directly from the U.S. to the consumer or first sent to a free trade zone then to the consumer. Doesn’t sound “Free” to me.
So let’s recap, China ingredient exports to U.S. zero to very little in taxes paid. U.S. companies shipping to China, potentially years waiting for approvals and hundreds of thousands in registration fees as well as up to 40 percent in import duties at minimum 11-15 percent if utilizing the cross border e-commerce channel.
Does that sound fair to you? Didn’t think so.
The China supplement story hasn’t yet ended as there’s another piece to discuss and that is one of a self inflicted wound. Due to the incredibly restrictive regulatory process in place, the development of China’s supplement industry is not being realized.
For years associations, industry groups and the like have been asking China to amend the registration process in order to allow both domestic and international companies greater access to the market. The demand for quality supplements is sizable in China, but the regulatory situation has caused the industry to innovate at a snail’s pace. Although the China market is second to the U.S. in terms of supplement market size, it is only realizing a fraction of its true potential.
Now that SAMR has taken control of regulating supplements, the industry is hopeful the Administration will move forward with regulatory changes that will allow both domestic and international companies transparent, timely and cost effective access to the market. This move will create more jobs in China, attract investment and give China’s consumers access to nutritional supplements that their international counterparts enjoy on a daily basis.
The fact remains that many of China’s consumers are buying foreign made supplements through cross border e-commerce. Wouldn’t it make more sense for China to have those purchases be made in China with Chinese currency, China labor and China regulatory oversight?
So back to the article and its title. Should U.S. companies leave China? Absolutely not. U.S. companies should not abandon the market as the sizeable consumer base is like none in history and the potential is there. Unfortunately, that “potential” is being used like a stick and carrot. It’s up to domestic and international industry to continue to engage with China’s leaders and share information in order to better the situation for all involved. The association’s members within China and out, both want free access to each other’s markets to the benefit of industry and consumers alike. There is no winner when politicians take the reigns of trade. Supply, Demand and Opportunities all go out the window. When this is all over, only the governments will have benefitted from these higher taxes, which were forcibly removed from the pockets of industry and consumers (Source: HPA-China)