Any product bearing the “Made in China” tag may soon see a price hike. This is due to a few developments. First, President-elect Donald J. Trump indicated during his election campaign that he would impose higher tariffs on Chinese imports to the U.S. market. Second, China’s own workforce demands better work conditions and pay. Both of these are impacted by a Chinese tendency to sell at low-profit in order to undercut competitors. Considering this, the U.S. might decrease the degree to which it relies on products imported from China.
President-elect Trump is poised to shake up global trade if the United States leaves the World Trade Organization (WTO), which he, as President would have the authority to carry out. If that happens, we might rarely see “Made in China” on our products. In a November 14th, 2016 Forbes article, writer Sarah Hsu states that President Trump has labeled China as a “currency manipulator” and that he would work to impose a 45% tariff rate increase on China’s imports.
This exact rhetoric has not been used since former President George W. Bush in 2002, when he increased tariffs from 8-30% and was held in violation of the WTO. Since then, President Barack Obama has also butted heads with China’s use of exports. Consequently, Trump’s “get tough on China” stance is not new. Yet, his promise to bring manufacturers back to the US by imposing tough tariffs drew many voters to his campaign.
Cutting “Made in China” out of the U.S. Market
On the surface, cutting Chinese imports and leaving the WTO appears to be a great deal for the U.S. workforce. Theoretically, by removing U.S. reliance on Chinese manufacturing, U.S. production would rise. However, increased tariffs and a U.S. exit from the WTO could hurt foreign relations. To spur these changes, Trump has accused China of “material injury to the U.S.’s domestic industry.”
China has Been Selling at Cost for too Long
Trump bases his accusations on Chinese companies like Xiaomi, who has admitted to setting prices so low that they are purposely taking a loss to undercut the market. According to a November 25, 2016 Tech Crunch article by Darrell Etherington, Xiaomi’s Global VP and former Android VP Hugo Barra stated to Reuters that, “Xiaomi could sell 10 billion smartphones and wouldn’t make a single dime in profits.” This strategy forces competitors out of the market and over time potentially becomes a benefit for Xiaomi, as they would hold a monopoly over the industry. In this case, consumers could eventually see prices rise significantly.
Beijing Considers Raising Prices to Offset Profit Loss
Since 2014, Chinese wages have risen and many business owners have cut jobs to offset rising costs. Compounded by sacrificed profit margins to control the market, China seeks to raise prices to offset a heavy debt burden as they have done in the past.
Many Chinese companies have seen a near 30 percent decrease in sales since 2012. Sandy Chang, owner of Dongguan City XinChen Gift Co. told The Economic Times of India, “It’s impossible to cut prices further. The only way out is to increase efficiency, reduce waste and to get ahead by selling more.” Chang mentioned she has had to significantly cut her staff since 2012.
What Lies Ahead
Companies like Xiaomi look to cash in on years of low profit margins as Trump aims to bolster U.S. industry with an import tariff increase. This political and financial chess match might prove to be a volatile mix while workers in both countries hope to see benefits in their pocketbooks and quality of life. Ultimately, the Chinese want “Made in China” to appear on more foreign countries’ imports, and the U.S. wants to see less.
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