Take Heed: Chinese Factories Relocate to Avoid Tariffs, But Face Increased Costs and Govt Scrutiny

A warning to businesses, investors and really everyone about what is coming down the road for the global economy, mass migration and government policy. Companies that prepared (knowingly or not) for trade frictions by diversifying their supply lines have mitigated some of the cost from tariffs, while those who waited until the end have to pay higher costs to relocate in foreign markets, if they can get past their own government clamping down on offshoring.

SCMP: Chinese companies moving to Vietnam keep quiet on trade war to avoid wrath of authorities and staff

Interviews reveal that many factory owners and operators feel that they are caught in the middle of forceful rhetoric from both sides in the trade war. And rather than face direct retaliation from officials, workers and suppliers in their home market, they are deciding to keep their counsel.

Those companies that plan to move production out of China to avoid US tariffs and preserve their US business face a particularly delicate balancing act.

“Manufacturing exporters that are thinking of relocating face more difficulties and higher costs than those that already moved out over the past two years, so many of them are not willing to speak out,” said Liu Kaiming, head of the Shenzhen-based Institute of Contemporary Observation, which monitors working conditions for hundreds of Chinese contract manufacturers.

Every business located overseas and every foreigner living abroad needs to assess the potential risks as nationalism increases. The U.S. tariffs are not surprising, they were highly likely based on history, the growing imbalances in global trade and the shifting political winds. Mass expulsions of non-natives are also likely down the road as nations shift from diveristy to unity, from multiculturalism to forced assimilation. This is not a blip in history, this is the start of a massive wave that will last at least a generation, if not two. Nations such as France exist because non-French people were either defeated or assimilated, including during wartime. Diversity is not a normal condition of human history. Hope, as they say, is not a strategy.

“To relocate, they have to handle very carefully the plans for lay-offs and compensation for workers, the reaction of suppliers, the problem of stock price fluctuations in large enterprises, and so on. They have to keep all this low profile,” he said.

“Once the news of a relocation is released, various rumours may crop up that are not favourable to the company,” Liu added. “Now that the trade war has escalated, the risks are even greater. Even though more and more manufacturing industries are affected, most of them are afraid to express their views in public.”

Driving home the point that you want to have exit strategies in place ahead of time. This also goes for your finances. If you're an investor with a public profile, will you be able to dump U.S. Treasuries in the midst of a dollar collapse with mobs in the street and the President calling short-sellers traitors, or will selling USTs already be outlawed?

“Now we face a rapid escalation of trade war uncertainty. It is a sensitive period for the trade talks, so we need to remain silent and low-key. Our customers are internationally renowned brands, and they definitely do not want to be caught up in the US-China dispute, or stand up for either side,” the senior executive said.

“In particular, since last week, there has been growing criticism of the US government among Chinese internet users, both on online forums and social media. They believe the US is pressing too hard and bullying the Chinese people. Enterprises like ours have all experienced anti-Chinese sentiment in Vietnam and anti-American brand protests in mainland China, and so our risk awareness is very high. Keeping silent is the best and safest protection for our operations in both China and Vietnam,” she added.

Local governments are turning from supportive to hostile too:

“I invested 3 million yuan (US$436,140) with a partner in 2017 to rent a 2,400-square-metre factory in Thu Dau Mot City, in the Binh Duong province of Vietnam, transferring four production queues and recruiting 80 workers there. The rent was already 22 yuan (US$3.20) per square metre and has now gone up to 28 yuan,” Zhou said.

“At that time, the economic atmosphere in China was still very good, and everyone was eager to expand investment. The local government in Dongguan was relatively relaxed and supportive of us relocating production to Vietnam. Now, several friends of mine are planning to move. Their costs will be definitely much higher than they were in 2017. Moreover, the local [Dongguan] government is not as nice as it used to be.”

“Procedures are now strictly enforced by the local government in Dongguan,” Zhou added. “If you do not pay a large compensation package to make up for workers’ social security fees and other taxes, they will not let you move the machinery and equipment.”

Wonder why capital control evading cryptocurrencies keep finding a bid? People are looking for exits and prices soar when the doors start closing.

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