Trade war no toy story for factories
Trump tariff plan delivers pre-Christmas gloom to China’s manufacturers
Chinese factories are normally at their busiest during the third quarter, cranking out production of everything from Barbie dolls to miniature trucks in time to ship them over the ocean to the US ahead of the all-important holiday shopping season. This year is different.
Even with President Donald Trump delaying tariffs on US$160 billion ($251b) of items from toys to smartphones, to spare the Christmas boom for US retailers, the damage has already been done. That’s because big toy purveyors like Walmart have already piled up inventory given the uncertainty over how the trade war will pan out, according to industry officials.
“We will be among those bearing the brunt,” says Justin Yu, a foreign trade manager at Pinghu Mijia Child Product, a maker of toy cars and kids’ scooters in Zhejiang, China.
“The influence is definitively huge.”
Yu now plans to find new customers
in Europe, the Middle East and Africa to make up for the shortfall in sales to the US.
The company is considering reducing North America’s significance to its revenue to avoid future tariff hits.
Yu says he now sends US$25 million of goods a year to US retailers including Target and Walmart.
Retailers started a buying frenzy a year ago as trade tensions between the US and China began to heat up — shipping cargo volume to North America from Asia rose 7.9 per cent in the second half of last year, according to data compiled by Bloomberg. That growth has slowed significantly this year — to just 0.2 per cent in the first half — as US warehouses filled up.
And pointing to a continued slowdown in goods volume, China’s exports to the US dropped 6.5 per cent last month from a year earlier in dollar terms.
That means US shoppers are likely to see fewer new items in stores during the holiday season as retailers limit purchasing to reduce stock towards normal levels, says Rahul Kapoor, head of research and analytics at IHS Maritime & Trade in Singapore.
“There won’t be any empty shelves,” Kapoor says. “Inventory level is very high.”
In the middle of this month Trump postponed planned tariff hikes on Chinese products such as smartphones, laptops, and children’s toys from September 1 to December 15, saying the delay had been made “so it won’t be relevant to the Christmas shopping season”.
Yet just 10 days later, he hit the retail sector and US shoppers with a new blow: the new levies will be higher than initially planned as retaliation after China threatened to impose additional tariffs on American goods.
Yu, the trade manager in Zhejiang, says the delay in tariff hikes was positive news, but since the increase is taking effect eventually, he expects to lose business. He also expects customers to request that the higher tariff costs be split between the buyer, the manufacturer and the middlemen — which could hurt producers’ prices.
Another industry getting hit, shipping, is cutting capacity as volumes shrink.
The world’s third-biggest container-shipping company, CMA CGM, will pull two vessels from its Asia-Europe services as early as this month. Orient Overseas Container Line, owned by China’s biggest shipping company, also halted some services to the US and Europe from last month.
Adding to their woes, the slowing volume has pushed shipping fees down at a hefty pace. Rates to move cargo on major trade lanes have fallen 7.4 per cent this year, with those for the US slumping 26 per cent, according to the Drewry World Container Index.
“This peak season is going to be challenging,” says Um Kyung-a, a shipping-industry analyst at Shinyoung Securities in Seoul. “Some shipping companies probably are not able to cover their costs.”
Another fear is that the trade war will spill over to next year, hurting consumers’ eagerness to go shopping.
The International Monetary Fund last month cited trade tensions as one of the biggest risks to the global economy as it downgraded its growth forecast for this year and next, while Goldman Sachs has said there’s growing concern that the trade war will trigger a US recession.
“Next year is much more concerning on the demand side,” Kapoor says. “This doesn’t go away easily.”