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China’s Garment Manufacturing Hub Grapples with US Tariffs, Factory Closures
Numerous clothing factories in Guangzhou, a prominent manufacturing center in southern China dubbed “Shein Village,” have recently ceased operations. This industrial slowdown is attributed to the former Trump administration’s imposition of import duties and the termination of the “de minimis” provision, which previously facilitated duty-free entry of inexpensive goods sold by e-commerce businesses to American consumers. This policy shift is significantly impacting the fast fashion supply chain and broader US-China trade relations.
Impact on Guangzhou’s Panyu District
In Panyu district of Guangzhou, once a vibrant nucleus of workshops supplying the fast-fashion behemoth Shein, a sense of stillness has descended. Employees report that workshops are now silent, with stockpiles of unsold apparel accumulating within factory premises.
End of “De Minimis” Exemption
Until the recent policy change, merchandise from these factories was routinely shipped directly to US purchasers. The “de minimis” rule exempted international shipments valued at $800 or less from taxes, enabling these goods to be sold at significantly lower prices compared to clothing from US-based retailers.
Order Reduction and Sales Decline
“Orders from Shein have diminished this year, leading to a substantial drop in our sales,” disclosed a worker at a workshop employing approximately 20 individuals, in an interview with Nikkei, a Japanese news outlet.
Tariff Implementation
The elimination of the de minimis policy, enacted on May 2nd, subjects all shipments, irrespective of value, to import taxation.
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Disruption to E-commerce Business Models
This regulation has undermined the business model of online retailers like Shein and Temu, which relied on the de minimis threshold to maintain competitive pricing within the US market.
Economic Strain on China
This alteration in trade policy intensifies the economic challenges confronting China, which is already contending with significant economic headwinds, particularly within its weakened property sector.
Stagnant Economic Growth
China’s economic expansion remained unchanged at 5.4% in the initial quarter of this year, mirroring the growth rate of the preceding quarter, indicating persistent economic deceleration.
Widespread Workshop Closures
“Workshops have been shuttered extensively in the past two months,” stated Li Lianghua, a business proprietor originally from Hunan province, in conversation with Nikkei, highlighting the rapid escalation of factory closures.
Shein’s Relocation Strategy
Amidst escalating trade tensions, Shein has reportedly urged its suppliers to transfer their manufacturing operations to Vietnam. This strategic move is designed to lessen the adverse effects of the tariffs implemented under the Trump administration.
Challenges for Smaller Suppliers
However, smaller-scale suppliers, lacking the necessary financial resources for relocation, have been forced to cease operations altogether, unable to absorb the increased costs.
Shift in Sales Strategy
Li himself has stopped accepting orders from Shein and is now redirecting his business focus towards direct-to-consumer sales through social media platforms, adapting to the altered market conditions.
Troubles in Dongguan Manufacturing Hub
A similar predicament is unfolding in Dongguan, another manufacturing metropolis east of Guangzhou. Factories in Dongguan that supply leather goods and bags to American companies had already witnessed a downturn in business activity prior to the recent tariff measures.
Contract Losses in Dongguan
By the close of 2024, one factory in Dongguan had experienced the termination of contracts valued at $150,000 annually from four major US clients, illustrating the pre-existing decline in US-related business.
Diminished Prospects in US Market
“We foresee no opportunity to secure new contracts with US entities, compelling us to withdraw from that market,” commented Liu Xiaodong, the new factory owner, signaling a definitive shift away from American partnerships.
Increased Risks in US Trade
“Engaging in commerce with the US now entails only hazards,” Liu asserted, underscoring the perceived risks associated with trading with the United States under the current trade policies.
Viability Through Asian Markets
Despite these setbacks, Liu’s enterprise remains financially sound, generating approximately $3.4 million in annual revenue, predominantly from markets within Asia, showcasing the resilience of businesses focused on regional trade.
Focus on Intra-Asian Trade
Liu indicated intentions to further expand business operations within Asia, emphasizing the benefits of quicker and more economical shipping options to nearby markets such as Japan and Singapore, suggesting a strategic pivot towards regional markets.
Anticipated Export Downturn
Although Chinese exports to the US experienced a surge of over 9% in March—as businesses expedited shipments before the tariffs took full effect—industry experts anticipate a considerable decline starting this month, coinciding with the full implementation of 145% tariffs on Chinese imports.
Deflationary Pressures and Global Price Competition
Deflationary trends within China may propagate to other global markets as Chinese manufacturers seek alternative customers outside the US, potentially heightening competition and initiating widespread price reductions in various sectors.
Intensified Export Competition in Asia
“Price competition in exports to Asia will intensify,” cautioned a Chinese manufacturing executive, portending challenging times for global trade dynamics and increased competitive pressures in Asian export markets.