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China-U.S. Tensions Hurt Confidence And Re-Route APAC Supply Shains

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China-U.S. Tensions Hurt Confidence And Re-Route APAC Supply Shains

Sentiment of the U.S. business community in China is turning gloomy because of ongoing political tensions between Beijing and Washington, according to the "2019 China Business Climate Survey Report."  Tariffs are up and they're hurting business confidence. They're also re-routing supply chains, the survey reveals. Each year the American Chamber of Commerce in the People's Republic of China (AmCham China) surveys its members to discover the business sentiment of the U.S. business community in China.

First, the good news. Most of the respondents – 69 percent – reported that their companies were profitable in 2018, although this was down from 73 percent in 2017. Another 21 percent only broke even. Still, 80 percent of respondents expect positive industry growth in 2019, yet over half expect the industry to grow at less than five percent. And 32 percent of respondents expect their investments to slow in 2019.

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Pessimistic about Chinese-U.S. relations

Recent tensions have also led 89 percent of AmCham's members to develop a pessimistic view of the bilateral trade relationship. Yet 96 percent of members see a positive bilateral relationship as "key to business growth." About 37 percent of members believe that bilateral relations between the U.S. and China will deteriorate in 2019. Meanwhile, an equal 37 percent thought relations would stay the same. The remaining 27 percent thought relations will improve in 2019 – that's down by nine percentage points from the 36 percent who, last year, thought relations would improve in 2018.

Recent developments in tariffs are viewed as a challenge. "The freedom to import and export goods benefits both American and Chinese citizens in terms of more choices, value, jobs and economic wealth… Imposing overarching tariffs runs the risk of overshooting and causing a negative impact for everyone involved," one respondent said.

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Troubled about tariffs

Uncertainties in the U.S.-China relationship and bilateral tariffs were the top factors influencing the U.S. business community in China to reduce its investments.

About 33 percent of respondents thought the implementation of bilateral tariffs increased the cost of manufacturing their products; 30 percent said they increased the sale price; 29 percent said they decreased demand for their products and 26 percent said they reduced profit slightly.

"Any trade-related disputes hurt the image of our U.S.-based company and make business harder," wrote one respondent.

Another respondent wrote "tariffs harm tourist arrivals, make government organizations less supportive and could cause a consumer backlash."

A third respondent added: ""[Tariffs] caused us to seek non-U.S. sources of imported products."

About 42 percent of respondents thought that limiting the use of industrial policies that create barriers would have a significant impact; 24 percent thought it would be "very significant" and the other 18 percent thought it would be "extremely significant."

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Business investment and supply chains affected

About 28 percent of respondents are delaying or canceling their investment decisions because of tariffs and U.S.-China trade tensions. A further 23 percent are adjusting their supply chain by seeking to source components and/or assembly outside the U.S.

And 19 percent are adjusting their supply chain by seeking to source components and/or assembly outside of China. About eight percent are considering relocation of some or all manufacturing away from China and five percent are considering the same in respect to the U.S.

About 19 percent of respondents either have, or are considering, moving capacity outside of China in the next three years. The top factor cited by respondents is U.S. tariffs on products exported from China. The "Developing Asia" region was the top region to which capacity might be relocated; it accounted for 40 percent of responses. A long way behind in second place was the U.S. itself, with 17 percent of nominations. It should be noted that a further 10 percent nominated Mexico/Canada as the favored region for relocation purposes.

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More non-tariff barriers

Meanwhile, nearly half of all member companies are experiencing an increase in non-tariff barriers including more inspections, slower customs clearance and more scrutiny.  About 20 percent faced increased inspections and 17 percent faced slower customs clearance.

AmCham China is a non-profit, non-governmental organization with over 3,300 individual members working in 900 companies in China. The survey was carried out between mid-November and December 2018. There were 331 responses from a population of 771 AmCham China member company representatives to which the survey was sent. About 62 percent of respondents were senior-level country managers (CEO, VP, General Manager, etc.). The survey was carried out in association with Deloitte.

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