Some Companies Are Relocating From China Over Trade Tensions, Survey Says
The American Chamber of Commerce in the People's Republic of China surveyed more than 430 member companies between Aug. 29 and Sept. 5 and found that about 30 percent of those businesses were seeking to relocate their China-based supply chains. That will mean more work for trade lawyers and the companies' general counsel.
October 31, 2018 at 06:09 PM
4 minute read
“Made in China” tags might be getting a little less ubiquitous as trade tensions drive some companies to move their supply chains or manufacturing facilities outside China. And as that happens—a new study suggests that a small movement is already afoot—many of those same businesses will be turning to international trade lawyers for guidance.
“Our lawyers are working like they've never worked before,” said Dan Harris, a partner at Harris Bricken in Seattle and an expert in Chinese business laws. Harris said he and other trade gurus at his firm have been busy helping clients leave China and set up shop elsewhere, usually in Southeast Asia.
Many of those companies were ready to pack their bags before the U.S.-China trade war, but the tariffs provided them with the “last straw,” according to Harris.
What Harris has been seeing might be indicative of a nascent trend: AmCham China and AmCham Shanghai, the American Chamber of Commerce in the People's Republic of China, surveyed more than 430 member companies between Aug. 29 and Sept. 5 and found that about 30 percent of those businesses were seeking to relocate their China-based supply chains. About half of those companies are in the automotive, machinery and equipment industries.
While some companies are looking to move supply chains, more than 18 percent said they were considering the more drastic option of relocating a portion or all of their manufacturing out of China. But about 64 percent planned to stay.
“They're not looking because they don't really have many options,” Harris suggested, based on his talks with clients.
But just because a company plans to relocate part of its supply chain or manufacturing from China doesn't mean that it will abandon the country completely. Pulling off a clean break is tough because “no country comes close to China in terms of contract manufacturing,” Harris said.
So when a company decides to relocate part of its operation, it typically has one big question for its trade lawyer: How can the business structure its supply and manufacturing chain to keep some of the operation in China while avoiding the “Made in China” tag and the tariffs that go along with it?
The answer hinges on whether the product can pass the “substantial transformation” test, which often involves a complex analysis of the supply chain—the kind of analysis that keeps certain trade lawyers busy these days.
“Is the product substantially transformed in China or another country? It's kind of subjective depending on the facts,” said Lars-Erik Hjelm, a partner at Akin Gump Strauss Hauer & Feld in Washington, D.C., who specializes in customs law and policy.
“You might source auto parts and export them to Taiwan and perform some manufacturing operation of assembly. Is it now a new article of commerce that is different than the parts imported into Taiwan?” he said. “For auto parts, generally a simple assembly, such as putting screws into Chinese parts and repackaging and shipping, that's not going to be a substantial transformation.”
Many of the companies that are not thinking about leaving China are in the pharmaceutical industry or make high-end electronics and medical devices and have high margins, according to Harris. He said those who have left China make clothing, furniture, toys and housewares. And the companies that are wanting to leave are in what Harris calls the “middle ground” and make more complicated products, including auto parts and charging devices.
For those who planned to relocate, the most popular destinations were in Southeast Asia including Vietnam, where more than 18 percent of the companies said they were headed. Six percent said they'd go to the U.S. And about 4 percent had their sights on Europe.
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