By Nina Trentmann
A hefty U.S. import tax on goods produced in China could
accelerate a trend already well under way: Chinese companies
setting up factories and expanding in the U.S.
Manufacturers in China face a host of pressures. Wages have
risen substantially, while land and electricity prices are up. This
challenges China's decadeslong orthodoxy of producing mass-market
goods at extremely low cost.
At the same time, Chinese companies that have saturated their
home market are looking elsewhere for growth.
"Many Chinese firms have become so dominant in their domestic
market that they are now forced to look beyond the Chinese
borders," said John Ling, Georgia's managing director for
investment in China and president of the Council of American States
in China. Mr. Ling helps attract and facilitate expansion by
Chinese companies in the state.
President Donald Trump has called for a rejuvenation of U.S.
manufacturing, in an effort to boost employment. He campaigned on a
promise to tax Chinese imports at roughly 45%, and House
Republicans are proposing a border-adjusted system that would
effectively tax all imports. Since his inauguration, the president
has talked of taxing imports from Mexico. A White House spokeswoman
said the administration had no comment on taxing Chinese
imports.
Some firms are already well-placed should there be a rise in
tariffs for Chinese goods.
Keer America Corp., a subsidiary of Keer Group Co., a textile
producer from Zhejiang province in China, plans to invest $68.5
million in the first phase of a $218 million, five-year project to
double the capacity of its yarn-spinning facility in Indian Land,
S.C., said chairman Zhu Shanqing.
The facility has been in operation since mid-2015. Keer now
employs 208 full-time, mostly line workers in the U.S. and plans to
hire another 300.
"There are obvious cost advantages," Mr. Zhu said. Electricity
prices, for example, are up to 40% lower in Lancaster County than
in Hangzhou, he said.
Chinese companies' direct investment in new production
facilities in the U.S., also known as "greenfield" investments, has
increased rapidly over the last five years, with companies turning
to capital-intensive operations such as manufacturing, said Thilo
Hanemann, an economist at Rhodium Group LLC, a company that tracks
Chinese spending abroad.
From 2000 to 2016, Chinese firms plowed $8.6 billion into 778
greenfield or new investments in the U.S., according to Rhodium
Group. Last year, companies spent $1.4 billion on 34 greenfield
projects, Rhodium said. That is down from the $1.8 billion spent in
2015, although Rhodium said the 2016 figure might climb once there
is more clarity over the progress of large projects.
Lower costs, the ability to circumvent some trade barriers and
the proximity to U.S. consumers all contributed to the rise in
Chinese manufacturing investment, Mr. Hanemann said. "Higher
tariffs and other market-access barriers would certainly increase
the rationale for Chinese manufacturers to invest in a U.S.
production base," he said.
Beijing in November tightened currency controls on Chinese
companies seeking to invest overseas, but Georgia's Mr. Ling said
that isn't likely to have a significant impact on Chinese
manufacturing investment in the U.S. The measures are particularly
aimed at large acquisitions and investments in overseas entities
unrelated to the investor's core business.
In terms of manufacturing investment, "I see big momentum coming
from China," he said, especially given the potential threat of
higher tariffs. Companies are paying "a lot of attention to" Mr.
Trump's statements, Mr. Ling added.
"We are currently looking at whether it makes sense for us to
produce in the U.S.," said Carolyn Wang, vice general manager at
Shenghuabo Group Co. in Shanghai, an auto-parts supplier that
operates four plants in China and exports to other markets,
including the U.S.
"If [Mr. Trump] tries to raise the bar on imported products, he
might also incentivize Chinese entrepreneurs to produce locally,"
Ms. Wang said. She said if Shenghuabo were to open a plant in the
U.S., it would be a highly automated facility with minimal laborers
to keep costs down.
For others, moving production to the U.S. isn't an option.
Michael Crotty, president of MKT & Associates Ltd., a
home-textile trading company based in Shanghai, said he would start
sourcing curtains and other products from Vietnam, Pakistan or
India should the U.S. introduce a 45% import tax on goods from
China.
Because about 90% of curtains sold in the U.S. come from China,
moving production to the U.S. isn't feasible, Mr. Crotty said. It
would likely take decades to build a supply chain with the
economies of scale needed to produce curtains at prices competitive
with China's, he said.
However, one of the 10 China-based suppliers MKT works with is
considering opening a plant in a southern U.S. state, he said.
"That plant will be highly automatized," Mr. Crotty said.
Coline Cabinetry NY Inc. set up shop in the U.S. to be closer to
its customers, said Andy Hu, director of the Smithtown manufacturer
of kitchen cabinets that originated in Shanghai.
Mr. Hu currently employs about 30 people in the U.S. and sells
to retailers as well as consumers.
U.S. workers, he said, "are not cheap," but the company saves on
freight costs and other logistics expenses. He buys marble and
granite from India and Spain and plywood from the U.S. However,
other raw materials come from China.
"If there is an increase in [sourcing] costs, the sale price
will rise, too," Mr. Hu said.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
February 26, 2017 12:07 ET (17:07 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.