By Casey Hall and Ellen Zhang
SHANGHAI/BEIJING (Reuters) -Jacky Ren, who owns a kitchen appliance factory in China, says exporters in his industry are now selling at a loss to keep their U.S. clients, with little power to say “no” to requests for lower prices on products facing higher tariffs.
If an exporter does not take such orders, Ren said, “you will die immediately. So, people think it’s better to die slowly.”
U.S. and Chinese officials agreed on Tuesday on ways to restore a trade truce and roll back duelling export restrictions, including on rare earths, where China has a near-monopoly in production and major leverage in the negotiations.
But in the meantime, the pain from U.S. tariffs is deepening in China, especially among smaller exporters such as Ren’s Gstar Electronics Appliance Co., which did not move part of their production abroad after U.S. President Donald Trump imposed tariffs in his first term in office.
The growing pressure on companies to sell at a loss or to cut wages and jobs to stay afloat gives Washington a pain point to press Beijing in coming weeks and months as talks continue between the two sides to rebalance their trade relationship.
“If it lasts more than three or four months, I think many of these small and medium-sized enterprises will not be able to bear it,” said Zhiwu Chen, chair professor of finance at the University of Hong Kong.
“This is definitely a bargaining chip for the United States.”
This week’s talks in London are expected to bring the two sides back to where they were after an initial discussion in Geneva last month, when they agreed to cut back tariffs from triple-digits to levels that are still damaging for both sides, but at least allow trade flows to resume.
U.S. levies on Chinese goods remain 30 percentage points higher than last year.
In April, when tariffs were at their highest, the number of loss-making Chinese industrial firms rose 3.6% year-on-year to 164,467 – a whopping 32% of the total, official statistics show.
Industrial capacity utilisation dropped to 74.1% in the first quarter of this year – when Washington began raising tariffs – from 76.2% in the last quarter of 2024, according to Chinese government data. It remains near record lows.
And while China’s overall export growth rate of 4.8% in May might be interpreted as a sign of resilience – even as U.S. exports shrank by more than 30% – the intense competition among Chinese manufacturers looking for a slice of the subdued external demand is evident in falling prices.
“People forget, but the current tariff level is already quite painful,” says Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis.
“This is a weakness” for Beijing, she said, but cautioned “it’s not a big card” for Washington, which has its own worries over high inflation and product scarcity.
Beijing was also confident it can bear more pain than its rival, she said.
DELAYED WAGES
Before the meeting in Switzerland, Beijing had grown increasingly alarmed about internal signals that Chinese firms were struggling to avoid bankruptcies, including in labour-intensive industries such as furniture and toys, Reuters reported last month.
The subsequent rollback in tariffs may have saved China from a nightmare scenario of mass layoffs, but analysts say millions of jobs remain at risk.
Candice Li, a marketing manager for a medical devices maker in southern China, says her employer has not paid wages for the past two months due to cashflow issues caused by new demands from U.S. clients who want to protect themselves from the tariff uncertainty.
Li says U.S. buyers no longer offer an advance deposit for their orders and demand to only make payments 120-180 days after delivery. And because other Chinese firms accept such terms, her employer is not in a position to fight back.
“They have us under their thumb,” Li said. “It looks calm on the surface, but it’s really hard to do business now.”
“The company can’t even manage to pay wages,” she said, adding a quarter of the staff left as a result. “It’s really hard to keep the company running.”
To be sure, not all Chinese firms are under such strain. In the short term, neither the United States nor other countries can significantly reduce their reliance on supply chains from an economy that produces about a third of the world’s goods.
The pain is being felt mostly among small firms in sectors that don’t make essential products, such as Christmas decorations or where China can easily be replaced by other producers – for instance, in household appliances and other low-to-mid-range electronics.
Across the economy, industrial profits in China still rose 1.4% year-on-year in January-April, according to official statistics that capture data from firms with annual revenue of at least 20 million yuan ($2.78 million).
China’s headline resilience has been helped by U.S. importers frontloading orders ahead of higher tariffs, while Beijing ramped up fiscal spending and cut interest rates, said Shuang Ding, Standard Chartered’s chief Greater China and North Asia economist.
But as these mitigating factors wane in coming months, Beijing might grow increasingly uncomfortable, analysts warn.
“They still rely on low-end manufacturing sectors, in particular exporting sectors, to support their general macroeconomy,” said He-Ling Shi, economics professor at Monash University in Melbourne.
“The American government has to react to pressure from industries. China’s central government … doesn’t need to react immediately, but in the long term, it’s still a big concern.”
($1 = 7.1859 Chinese yuan renminbi)
(Additional reporting by Claire Fu in Singapore and Liangping Gao in Beijing; Writing by Marius Zaharia; Editing by Kim Coghill)
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