- The US president promised tariffs on Chinese goods as part of the trade war would help bring jobs back to the United States
- But while firms are leaving China, it is the likes of Vietnam, Indonesia, Cambodia, Mexico, and Bangladesh that are benefiting the most
This story is part of an ongoing series on US-China relations produced jointly by the South China Morning Post and POLITICO, with reporting from Asia and the United States.
When Nikki Haley, then-governor of South Carolina, went to an opening ceremony for Kent International in 2014, the bicycle company had grand plans for expansion at its assembly plant to enable it to make its products in the United States.
This was two years before US President Donald Trump promised that his steep tariffs on Chinese goods would help bring jobs back to the US as firms downsize or in some cases close their manufacturing bases in China.
But five years after Haley's visit, it is the very tariffs that Trump has imposed that have kept that plant in Manning, South Carolina, from expanding.
Firms are indeed moving out of China, but are not flocking to the US, undermining the central promise of Trump's trade war. Cheaper labour markets in Southeast Asia are the ones benefiting the most amid the trade war that has ratcheted up duties on Chinese goods.
In fact, Trump's actions have prompted Kent International to still rely on its Chinese joint venture partner, Shanghai General Sports, to supply more of its bicycles. For its part, Shanghai General is planning to build a factory on a plot of land in Cambodia, and by the end of year, 40,000 sq ft of production capacity will be complete.
Kent International chairman and CEO Arnold Kamler estimates that 30 per cent of the company's annual production of 3 million bicycles will come from Cambodia, at the expense of China, once the factory is open.
The tariffs are also taking a toll on Kent International's ambitions to bring jobs to the US. The company needs steel tubes as components in the welding assembly line, which currently can only be bought at a reasonable price from foreign suppliers. Trump's tariffs on steel and aluminium imports " as well as the threat of new tariffs on most the components used in bicycle production " has meant that additional phases of bringing jobs back to the US have yet to happen.
The majority of jobs are going to other countriesJeff Ferry
The latest trends are not helping efforts, with the US economy having already slowed to 2.1 per cent this year, and the 3 per cent growth Trump promised in 2018 revised down to 2.5 per cent. Manufacturing job trends are also cooling, with the latest US jobs report showing employment has risen by an average of 8,000 per month so far in 2019, compared with an increase of 22,000 jobs per month in the sector in 2018.
Across-the-board tariffs on all Chinese imports could create more than 1 million US jobs in five years, according to the Coalition for a Prosperous America, a major backer of Trump's tariffs. The reality, however, is that other nations with lower wages are the ones benefiting.
"The majority of jobs are going to other countries," said Jeff Ferry, chief economist for the coalition, which has advocated a complete decoupling from the Chinese economy to benefit the US.
Ferry acknowledged the coalition's study advocating a blanket tariff would only lead to 1 per cent of jobs leaving China switching to the US in the first year, with the figure eventually increasing to 17 per cent after five years, he said.
For his part, Trump pledged that his strategy to escalate the trade war against China would create jobs in the US in the long term, and there have also been some prominent announcements from companies trumpeting that they have "reshored".
….companies to come to the USA and to get companies that have left us for other lands to COME BACK HOME. We stupidly lost 30% of our auto business to Mexico. If the Tariffs went on at the higher level, they would all come back, and fast. But very happy with the deal I made,…
" Donald J. Trump (@realDonaldTrump) July 12, 2019
"Tariffs are a great negotiating tool, a great revenue producer and, most importantly, a powerful way to get companies to come to the USA and to get companies that have left us for other lands to COME BACK HOME," Trump tweeted last month.
Stanley Black & Decker said this year it would move production of its Craftsman line of tools, which it acquired from Sears, from China to Texas where it would add 500 jobs. High-end furniture company Restoration Hardware, meanwhile, said in a recent earnings report that tariffs were spurring it to bring some manufacturing to the US.
The US Department of Commerce this year published a case study on reinvesting in the US, highlighting the experiences of six companies moving production to America. The report makes the case "that anecdotal evidence of hundreds of reshoring cases is very real", but it also admitted that tariffs are a "challenge" for companies wanting to move production to the US, with half of the companies highlighting the harm of tariffs on investment decisions.
Quality Electrodynamics, an Ohio-based company that designs and produces parts for medical devices, "recommended that the US government could promote reshoring and expansion in the US by revising US tariffs on Chinese components in a way that does not disadvantage US companies".
Those working to find ways to increase reshoring say the tariffs are making it harder for companies to make decisions on where, or even whether, to add capacity.
Clearly Trump caused work to come here more by the things he did on taxes than by pounding on the table with tariffs. The uncertainty caused by the tariffs are hurting reshoring and foreign direct investmentHarry Moser
Harry Moser, president of the Reshoring Initiative, said he agrees with the goals of Trump's tariffs, but said they have had a "modest net negative" effect on jobs coming back to the US as companies look elsewhere to relocate production.
Based on the Reshoring Initiative's own study, 2018 was a successful year, but that progress has already dropped off in 2019.
"Clearly Trump caused work to come here more by the things he did on taxes than by pounding on the table with tariffs," Moser said. "The uncertainty caused by the tariffs are hurting reshoring and foreign direct investment."
Trump's trade chief, US trade representative Robert Lighthizer, acknowledged recently that tariffs were diverting some production to the US but also to other countries.
"The imposition of tariffs can have many effects, including modifications to supply chains," he wrote in a response to a written questions from the US Congress on whether tariffs are benefiting producers in other countries. "I have closely followed reports of manufacturing coming back to the United States from China or going to third countries in some instances."
Sebastien Breteau, the CEO of Hong Kong-based supply chain inspection company Qima, said the data his firm collects supports the theory that neither China nor the US is winning the trade war. The company, which has 6,000 clients worldwide, has seen a 13 per cent drop for China-based inspections from US companies.
Meanwhile, inspections for US clients increased 21 per cent in Vietnam, 25 per cent in Indonesia, 15 per cent in Cambodia, and by a staggering 119 per cent in Mexico, in the first six months of 2019.
"There is a clear sign that in the trade war between the US and China, the winner is not going to be the US and it's not going to be China," Breteau said. The winners are "going to be Vietnam, Indonesia, Cambodia and very likely Mexico and Bangladesh".
The Qima data is supported by a recent report from consulting firm AT Kearney, which found that imports from low-cost Asian countries in 2019 outpaced US manufacturing output.
A report by investment firm China International Capital Corporation released in July estimated that across eight manufacturing sub-sectors in China, the first two batches of tariffs from the US would likely result in 1.5 million job losses in China. The authors said that looking across the whole manufacturing sector, "this estimate may be low".
However, there is little evidence to suggest that many of these jobs are flocking to the US.
George Whittier, CEO of Morey, a Chicago-based custom electronics manufacturer, said his company still relies on imported parts to make GPS tracking devices and controllers for vehicles. Most of those components imported from China are subject to tariffs, but the finished products are not, resulting in more time being spent haggling over costs with existing customers rather than expanding production and jobs.
Whittier also questioned whether the US labour pool could absorb a major increase in manufacturing as he is unable to fill 15 positions despite raising the salaries twice.
"If there was this big boom of manufacturing coming back from China into the US, I gotta be honest, I have no idea where the workers are going to come from," he said.
Kamler, of Kent International, said previous discussions with the Trump administration had been frustrating because of a perspective that only goods made from "start-to-finish in the US" count as "real" domestic manufacturing. But he added that recent talks with the US Department of Commerce had been more fruitful.
Kamler has formed a coalition of 12 American companies in an attempt to bring an entire supply chain cluster back to the US. If the alliance can prove that it is assembling entire bicycles, it would "be able to import all the component parts for five years, duty free," Kamler said.
But the tariffs will only be removed if the alliance can prove that it could increase US bicycle assembly from 600,000 annually to 4 or 5 million. Kamler said the industry would ultimately have to seek permanent relief from tariffs through legislation, which he said is in the early stages of being developed.
"These things don't happen so fast, but this is a long-term play and this is actually my hope and part of my legacy that I'm hoping to leave, that I can help bring back the American bike industry," he said.
For other companies, the threat of intellectual property (IP) theft, and not tariffs, has driven decisions to relocate production to the US.
MGA Entertainment, the world's largest privately owned toy company, reshored production of fashion accessories for its line of LOL Surprise! Dolls under its Little Tikes brand to an existing plant in Hudson, Ohio, in a bid to avoid fake versions of its products from being sold to consumers.
"The biggest problem we face in China is the theft of IP. There are over 200 factories in China that make LOL Surprise! counterfeit products and very little can be done about it," CEO Isaac Larian said. "These counterfeit products are unsafe for children."
He said MGA had tested moving the production of one item to the US and found it was successful, and now, it plans to move more, with toys made in China among the items subject to a 10 per cent tariff as of December 15.
"It will definitely affect business due to lower sales, and we are looking at options" to move more manufacturing out of China, he said, adding that "it is too late for this year".
I still have hope that the 10 per cent won't hit, but we are prepared for it and have already spoken to customers. They've increased the quantities of their orders, so that helpsTimothy Stuart
Another toy seller, Unit Bricks, examined moving production to the US by pricing out the plastic elements of its production as well as packaging. But the company decided it was unaffordable at this stage because profit margins on toy sales are too thin to justify the costs of relocating production to the US.
"Everything is about margins," said Timothy Stuart, the owner of the educational toymaker. "The issue with the US is that labour intensive items become too expensive.
"All production is in China for us: plastic, wood, packaging. Industry follows labour, and America can't afford cheap labour."
With the threat of a new tariffs looming in September and December, Stuart said that his business could absorb a 10 per cent levy, but should it rise to 25 per cent, "we would have zero choice at that point" but to leave China.
"Frankly, I still have hope that the 10 per cent won't hit, but we are prepared for it and have already spoken to customers. They've increased the quantities of their orders, so that helps," added Stuart.
But should things escalate, the US and Poland are both active options, but due to the higher cost, "the US is the last resort".
Adam Behsudi reports for POLITICO from Washington. Finbarr Bermingham reports for the South China Morning Post from Hong Kong
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