Industry News

U.S. Companies in China are Feeling Pessimistic and are Acting on the Feeling

Sep 27, 2023
By: David G. Forgue

If you’ve paid any attention to international trade (and if you haven’t why are you here?), you know that U.S. companies that import from China have an increasingly difficult task. Whether it’s UFLPA, 232 duties, 301 duties, AD/CVD cases, or an ever-changing country of origin landscape, it’s a lot. Now a survey of its members by the U.S. China Business Council indicates that the melancholy felt by U.S. importers is shared by U.S. businesses in China as well. The linked report covers a range of issues, but we’ll highlight only a few here.

Not surprisingly, the greatest challenge identified by companies in 2023 was the U.S.-China relationship and related geopolitical issues. Even at the height of China’s zero COVID policies in 2022 the U.S.-China relationship was the number 2 challenge, so this is not a new concern. For a variety of reasons, some of which are fleshed out in the links above, the U.S.-China relationship is unlikely to be substantially improved in the next several years. Tensions in the South China Sea, with Taiwan, regarding the Russian invasion of Ukraine, and the global manufacturing transition that decarbonization are all stresses beyond the trade-specific issues discussed above. All of these will surely stress the relationship, adding to the myriad issues the companies already face.

Other significant poll results include a whopping 83% of respondents say they are less optimistic about business in China that they were three years ago. Perhaps more astounding, while 83% are less optimistic, 15% feel the same level of optimism (whatever that was) as three years ago. Thus, only 2% of respondents are more optimistic. This is after the lessening of COVID restrictions and with the reform efforts by the Chinese government ongoing. Of course, 71% of respondents say that government reform has made “no difference” in their industry, so that does not seem to have helped companies be more optimistic.

The practical impact of this pessimism is that more companies than ever (in the life of this survey) are planning to reduce or cancel investments in China. 34% of respondents said they had such plans, far higher even than the survey answers at the height of the pandemic. Similarly, 23% of respondents said they planned to move operations out of China, either to the United States, or elsewhere. Significantly, of the companies not planning to move operations, 85% plan to remain in China to access or serve the local market. The focus on access the Chinese market may always have been an element of why companies initially invested in China, but sourcing decisions over the last two decades have made clear that supplying the U.S. market from Chinese facilities has often been part of the business plan of U.S. companies in China. This refocusing on the Chinese market may reflect the greater difficulty of economically shipping to the U.S.

This pessimism and the plans regarding investment and resource allocation are all anecdotally supported by observations in the United States. Companies are diversifying their supply chains to focus more on Mexico, Southeast Asian countries, India, and even the United States. But those moves all come with their own risks. Operations in Mexico need to be structured to ensure they avoid additional duties for Chinese goods. As a number of companies have discovered, the worst possible outcome is spend time and resources to move processes to Mexico to avoid Section 301 duties only to have the goods exported from Mexico be assessed Section 301 duties by U.S. Customs.

Companies switching suppliers, especially to southeast Asia must be diligent to ensure they are not actually buying transshipped Chinese goods. Investigations of antidumping and countervailing duty evasion by Customs have become more common, and their impact on the U.S. importer can be devastating. Particularly smaller companies with fewer global resources have been driven crushed under duties in excess of 100% when Customs finds that the goods imported from southeast Asia ostensibly as locally-produced goods are actually transshipped Chinese goods subject to very high duties.

Similarly, moving operations to countries like India or the United States carries specific legal and regulatory risks that can undermine the intended benefits. These depend on the industry and the underlying supply chain needed to support the operations.

However companies choose to address the current reality with respect to the United States and China every opportunity carries risk and every risk (probably) carries opportunity. Ensuring that you mitigate these risks and pursue these opportunities with a knowledgeable and trusted partner is crucial to your long term success. Do not hesitate to contact any attorney at Barnes, Richardson & Colburn LLP to address any of these issues.