If There is No Trump-Xi Deal, This is How Trade Tariffs Impact China Compared with India, Indonesia, Singapore, Thailand, and Vietnam

Posted by Reading Time: 6 minutes

Op/Ed by Chris Devonshire-Ellis 

With the US and Chinese presidents Donald Trump and Xi Jinping scheduled to meet and discuss their on-going trade tariff disputes at the G20 summit in Buenos Aries tomorrow, there is plenty at stake for manufacturers based in China. Both foreign-invested and Chinese manufacturers have long been stakeholders in a relatively inexpensive, yet well developed and globally established China supply chain, and the recently imposed tariffs of 25 percent upon a wide ranging variety of Chinese exports has the potential to dramatically shift that if no deal is reached.

The danger for China is short-term damage to its economy; the danger for the US is that China calls it a bluff and uses a trade war to deleverage exposure to the US. It is also unlikely the threat of tariffs or even sanctions will go away under Washington DC’s current thinking. An additional round of tariffs are scheduled to come into force from January 1, 2019 – this time impacting another US $200 billion worth of Chinese imports, including inverters and non-lithium batteries. That is just a month away. There has also been talk of sanctions.

It is entirely possible China will take a longer view against Trumps’ short-term perspective and not back down. If this happens, it will have an almost immediate impact on the global supply chain as China based manufacturers exporting to the US will look to shift all, or part of their manufacturing base elsewhere. They will not “reshore” to the US either, as production costs are too high. Instead, they will decamp elsewhere in Asia, and to countries with a strong manufacturing base not facing increasing American pressure over trade imbalances and tariffs.

This is how the tariff picture looks should there be no deal, as we compare the existing tariffs on the top ten exports of these countries to the US compared with China.

US-Tariffs-on-Asian-Exports-(002)

All subheadings under the specified chapters have not been tariffed by the US. This list is comparison of HS2 level codes. For a comprehensive list of tariffed products, please click here.

The results speak for themselves. The issue for China is that agreeing a deal with the United States does not in fact make the threat of future tariffs or sanctions go away. This means that now is a vital time for foreign-based manufacturers in China possessing a large exposure to the domestic market in the US to consider relocating part, or all, of their production base to alternative facilities in Asia.

The ASEAN alternatives  

Of these, Vietnam is the closest and most similar to China’s own supply chain and the easiest to integrate with well-established Chinese infrastructure. It also possesses most-favored nation status with the US, as an ASEAN member can access the ASEAN free trade agreements with China and India, and for the more adventurous, also possesses a Free Trade Agreement with the Eurasian Economic Union, providing access to markets in Central Asia and Russia. Our complimentary report on having a China plus One strategy using Vietnam as an alternative can be accessed here.

Other complimentary reports concerning foreign investment in Vietnam can be found as follows:

Singapore is also a member of ASEAN and the regional financial services center. It is typically a service center for manufacturing based elsewhere in ASEAN, but is also an excellent head office (HO) base to monitor and manage manufacturing centers across the Asian region. Basing a regional HO as an Asian service center in Singapore to manage operations spread between China and Asia makes a lot of sense, such as the consolidation of finances and business administration, and the Singapore government provides tax incentives for foreign-invested SMEs to do just this. Singapore has also just signed off a free trade agreement with the European Union. Our complimentary report on using Singapore as an ASEAN-and Asia-base can be downloaded here and our report concerning using Singapore as an Asia payroll and compliance base accessed here.

Indonesia and Thailand are also viable destinations, yet still lack in some regards the consistent infrastructure that China provides. On the plus side, this is offset by lower production costs. Analysis should be taken in these markets to fully understand the cost benefit versus productivity gap. Our complimentary reports on setting up in Indonesia is here and in Thailand here.

The Philippines isn’t analyzed in this article due to time constraints. However, it too is a member of ASEAN and as such has near identical export tariffs to the other ASEAN nations, as well as most favored nation status with the US. The Philippines is developing as a light manufacturing base as an alternative to China and also has a relatively well educated, English language speaking working class. It is a huge recipient of outsourcing investment in the services industry and competes with India for global operations such as call centers. Our complimentary report on setting up in the Philippines is here.

Malaysia is also not featured due to time constraints; however, it has a number of joint venture industrial parks with Chinese investment and remains a center for light manufacturing. We have discussed the tax benefits available in Labuan here, best practice in import and export here ,and Malaysian labor contracts here.

Emerging ASEAN 

Cambodia is another destination that is often mentioned, although I do not feature it in this analysis. However, infrastructure remains in process, and although it receives a fair amount of foreign investment, this is mainly Chinese. Cambodia currently remains a play for experienced Asian investors used to, familiar with, and willing and able to deal with the hassles of conducting manufacturing in still emerging markets. Our comments on importing and exporting in Cambodia are here.

Laos is in a similar position, yet is landlocked, and has no seaport access, restricting export opportunities. However, it does possess light industry and garments manufacturing, and could be a useful sourcing venue. Our comments on import and export with Laos are here.

Myanmar is another emerging ASEAN nation, yet it is very early days, and issues with human resources are a major drawback. It is gaining some traction in the garments industry, however, and our comments on this are here.

We have produced a number of complimentary reports that collectively explain the benefits of locating a business in the ASEAN countries. These are as follows:

The India Option – Export Manufacturing and a Healthy Consumer Market  

India has free trade agreements with both China and ASEAN, and has an added advantage over the ASEAN bloc in that it also possesses a large (400 million) middle class consumer base in addition to an educated, English speaking talent pool. This would be an ideal choice for manufacturers wishing to break into new consumer markets as well as export. India possesses free trade zones, and although it can be administratively awkward, this can be offset by taking professional experienced advice and hiring qualified Indian senior management. Our complimentary report on manufacturing and trading in India can be found here.

Other complimentary reports concerning foreign investment in India can be obtained as follows:

Relocating a manufacturing business from one area to another requires a lot of planning, and assessments concerning costs (labor, taxes, utilities etc.), available financial incentives (tax breaks, using export and free trade zones, encouraged industries), in addition to supply chain issues (power, transport, logistics, warehousing, labor, reliability factors). Let alone issues involving the termination or relocation of existing staff, optimal alternative locations, hiring new management and even the import duty concerns of bringing in used equipment to countries who essentially want to upgrade rather than inherit old technologies. Fortunately, our firm has been handling this for clients for many years. I recall assisting a European diamond drill manufacturer relocate three plants in China to one new one in Xiamen as a result of a corporate merger some 20 years ago, while our offices in China are used to assisting manufacturers settle their accounts and taxes and relocate either in China or overseas. Meanwhile, our offices in India, Indonesia, Thailand, and Vietnam have been used to dealing with foreign investors for many years now – including many previously based in China. Given the uncertainty the US administration is currently placing upon China based manufacturers, now is the time to assess the alternatives to China manufacturing.


China Briefing is written by Dezan Shira & Associates. The practice has a 26-year history of assisting foreign investors into Asia, and has 28 offices throughout China, ASEAN, and India. For pan-Asia business intelligence, legal and tax advisory and related services please contact us at asia@dezshira.com or visit us at www.dezshira.com  To obtain a complimentary subscription to our Asia Briefing materials, please click here.

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