Local Firms Say if China Loses, They Do Too : Tariffs: Manufacturers warn of ‘mad dash’ out of Asian nation and heavy toll on businesses if the U.S. revokes China’s most-favored-nation trade status.
Robert Solomon, fresh back from a trip to China, where he was checking on orders of Flintstone plush toys, has one word to describe what effect China’s loss of the most-favored-nation trade status would have on his company: horrific .
Solomon is chairman of Dakin Inc., a Woodland Hills marketer of plush toys. At least half of Dakin’s stuffed animals and other toys are manufactured in China. So if that country’s MFN status were annulled, as the Clinton Administration has threatened because of China’s human rights record, Solomon would have big cost increases because tariffs on the Chinese-made toys would go up by at least 10%.
Currently, China’s MFN trading status allows it to export products to the United States under normal, low tariffs. But China’s MFN status must be renewed annually, and President Clinton has told the Chinese that MFN, which expires in June, will not be continued unless Beijing makes substantial progress in human rights.
Without favored-nation trading status, duties on Chinese-made goods would increase from an average of 8% to about 40%.
“If MFN were revoked, I would not be out of business,” Solomon said. But he said he would have to pull out of China, where he contracts with a dozen factories that were built by Hong Kong investors, and shift production to other Asian countries such as Thailand, Indonesia and the Philippines.
“That would be chaotic because we wouldn’t be the only ones doing it,” said Solomon, whose private company grossed about $75 million in sales last year. “There would be a mad dash out of China” by everyone in the toy industry looking for other low-cost manufacturing sites in Asia.
Dakin is one of many toy, shoe and apparel companies based in the region and across the country that expect to be hit hard if China’s MFN status is withdrawn.
U. S.-China trade last year totaled $39 billion, with China buying $9 billion in U. S. products, mostly aircraft and telecommunications equipment, and the United States taking in almost $30 billion in Chinese exports, much of them toys, shoes and apparel.
While considered unlikely, the possibility that favored-nation status could be withdrawn this summer has fueled plenty of concern and anger.
“I have a very, very strong personal opinion on it,” said Steven Nichols, the soft-spoken chairman of K-Swiss Inc., a Chatsworth marketer of sneakers. “If you really want to attack communism, you do it with free enterprise, and that means free trade,” he said, his voice rising. “I don’t want to defend China, but we’re out of our mind not to do business with them every day.”
K-Swiss gets about 1 million pairs of shoes, or about 15% of its annual total, from a 75,000-square-foot factory in the countryside along China’s southeast coast. U. S. tariffs on those shoes average about 10%, but Nichols said they would jump to 20% or more if China lost its MFN status. Workers in Chinese shoe factories generally make about $60 a month.
Without MFN, “we could not operate there and send shoes to the U. S.,” Nichols said. “It’s difficult enough to compete with Reebok,” he said, adding that giant U. S. shoe companies such as Reebok and Nike have a greater share of their products made in China than K-Swiss, and are very likely to lead an exodus out of China if its MFN is not renewed.
K-Swiss, which does about $150 million in annual sales, also buys shoes in Indonesia, Malaysia and the Philippines. “There is more capacity there,” Nichols said. “But if China closed down, they would know they could get a premium. . . . In the short term, there might be less shoes available and the price would go up” for retailers and consumers.
Like many other U. S. footwear companies, K-Swiss has relied more on China in recent years because of wage increases in countries such as Korea. Besides lower wages, China’s shoe factories, which are owned largely by Taiwanese businessmen, have a reputation for high productivity and quality, said Peter Mangione, president of the Footwear Distributors and Retailers of America, a trade group in Washington.
“We’re anxious about it,” Mangione said of U. S.-China trade relations, adding that “there are some wild cards in the deck,” most notably how China reacts to the precarious situation in the Korean peninsula. “Politics is an inexact science; we don’t know what will happen.”
One of Mangione’s 70 members concerned is Cherokee Shoe of Thousand Oaks, which makes one-third of its athletic and casual footwear in China. Cherokee Shoe, a unit of the Sunland-based apparel firm Cherokee Inc., does about $30 million in annual sales.
“I don’t know what human rights has to do with controlling one’s economy,” said John Lovely, executive vice president of Cherokee Shoe, which has been struggling enough with the recession. “We’re assuming this is not going to happen,” he said of China’s possible change in status. But if it does, “it will be costly to us.”
William Mow, founder and chairman of the apparel firm Bugle Boy, in Simi Valley, said he has not taken steps to prepare for China’s loss of MFN status. Mow considers it unlikely to happen because of the importance of the rapidly growing Chinese market to the United States.
Currently, Mow relies on China for 22% of his company’s production, which translates into 10 million shirts and pants made in China. Mow, whose family fled communist China when he was 13, contracts with factories in 26 Chinese cities, including Shanghai. Mow says he has to have production spread throughout China because there are U. S. quota limits for goods made in China, which in turn allocates that quota on a city-by-city basis.
If China loses its MFN, some of the duties will be 100%, Mow said in an interview. “We would definitely have to terminate our business there,” said Mow, who owns 90% of Bugle Boy, which last year had sales of about $440 million.
Mow says Bugle Boy produces clothes in a dozen other countries. But those countries also have U. S. quota limits, and some of them are running at capacity. “It would take us two years to allocate the Chinese production.”
Mow worries that revoking China’s favored-nation trading status could cost the United States its share of the potentially biggest market in the world. “I hope we all come to our sanity,” he said. “We should be courting them rather than dictating to them. We Americans cannot afford to dictate.”