Chinese exporters have bigger worries than tariffs as the summit approaches

Chinese exporters have spent the past year trying to move away from the US, moving chains overseas and targeting new markets, including the Middle East, as punitive tariffs have upended their business models.

Now the Iran war has put new pressure on those businesses, straining critical shipping lanes, causing a historic energy shock, and threatening to reduce global demand for Chinese goods.

As US President Donald Trump and his Chinese counterpart Xi Jinping prepare to talk business and politics later this week, traders appear less concerned about tariffs and tensions in the Middle East.

“They all want the war to end,” said Wang Dan, China director at Eurasia Group, who was speaking to exporters across the country. Many of them did not mention prices when asked about their expectations from the conference, he added.

“There has been a lot of focus on the time of the Iran war, as they are worried about orders from overseas markets,” Wang said. Some businesses have already made emergency plans to cut back the second half of the year if the dispute continues, Wang said.

Going into the summit, Beijing and Washington are likely to confirm their joint goal of reopening the Strait of Hormuz and restoring stability to the region, said Yue Su, chief China economist at the Economist Intelligence Unit. But maritime disputes and stop-and-go negotiations will struggle, Su said.

The supply chain disruption caused by the Iran war is causing more pain than the volatile US prices that exporters have been dealing with for much of the past year.

Take the case of Bryan Zheng, founder and CEO of Shenzhen-based cycling helmet maker, Livall Tech. He was forced to rely on expensive air freight to ship products to Europe after sea delays through the Strait of Hormuz stretched shipments to nearly 50 days – which would have taken 30 to 40 days.

Port congestion across Asia has also sent cargo prices soaring. Shanghai and Ningbo are among the ports facing major backlogs, with labor shortages and capacity constraints limiting the movement of containers on the Asia-Europe and Mediterranean trade routes.

Rail equipment, a faster and cheaper alternative, has been blocked after Zheng’s helmets were described as sensitive dual-use goods, given the conflicting areas that work on the track.

A peace deal that would reopen the conflict would be a “big net for everyone,” Zheng said, although he warned any possible suspension of a meeting between Trump and Xi would be temporary. Higher taxes, in contrast, can be managed by passing the cost on to consumers, Zheng said.

The increase in the cost of goods used has started to weaken in the industrial sectors as well. An index measuring input costs for raw materials, fuel, and energy in China fell 3.5% in April from a year earlier, compared with 0.8% in March following a multi-year decline.

“Companies are very concerned about this [war] because it disrupts everything – all supply chains, raw materials, oil derivatives, and fertilizers from the Middle East,” said Cameron Johnson, Shanghai-based senior partner at supply chain consulting firm Tidalwave Solutions. “This is a global thing, a much bigger problem than a tariff.”

The US-China trade war last year, with tariffs rising slowly to triple digits, forced a supply chain reckoning, prompting many exporters to build production in Southeast Asia, the Middle East, and beyond. The trade agreement reached between the two countries last year did little to end that volatility.

Last year, China’s sales to the US fell by 20%, but increased significantly elsewhere – up 25.8% to Africa, 13.4% to Southeast Asia, 8.4% to the European Union and 7.4% to Latin America, according to data provider Wind Information.

China’s exports to the five Gulf countries, including Iran, Saudi Arabia, the United Arab Emirates, Qatar and Kuwait, grew 9% last year to $144.9 billion, nearly doubling from 2019’s level.

For consumers who have grown less dependent on the US market and have passed on higher labor costs to consumers, expectations ahead of the conference on tariffs are muted.

“Regardless of the final tax rates, many companies have integrated operating systems to adapt to the changing business environment,” said Su. The summit, however, would give Beijing a chance to get a lower rate of tariffs by granting concessions, such as the purchase of American goods, he added.

A US court ruling that challenged Trump’s authority to impose tariffs forced him to use powers under Section 301, which covers unfair trade practices, to stop the threat of jobs. Chinese exporters, therefore, do not seem to be counting on a return to the pre-tariff era.

“I don’t see traders building new factories or significantly expanding US-focused capacity based on hope alone,” said Ash Monga, founder and CEO of IMEX’s logistics services in Guangdong. “We have learned the hard way not to depend on one market. Now we think conflict is normal.”