US tariff hike adds pain for Hong Kong manufacturers banking on American market

The new tariff imposed by the US on mainland Chinese and Hong Kong products could be the final straw for manufacturers who had hoped to weather the trade war and force an exodus of plants to Southeast Asia, industry veterans and other experts have warned. While the city government has downplayed the impact of the additional tariff, it announced on Friday it would file a complaint with the World Trade Organization (WTO) over the move. The extra 10 per cent levy, which pushes the total tariff and import duty burden to about 40 per cent when combined with existing ones, appeared to particularly affect electronic manufacturers among industries. The new policy threatens to eliminate already thin profit margins for Hong Kong’s small and medium-sized enterprises (SMEs) that have struggled to diversify away from their reliance on the crucial American market. In response to the new tariff, the government has moved ahead with plans to file a complaint with the WTO, calling the penalty “grossly inconsistent” with the trade body’s rules. Industry veterans paint a stark picture of the challenges ahead. “Businesses that did not move their plants elsewhere after the previous introduction of 25 per cent tariffs in 2018 can hardly survive the extra 10 per cent tariff,” said Pamela Mak Mei-yee, honorary president of the Hong Kong Small and Medium Enterprises Association. “Which companies can earn 30 per cent net profit? It’s impossible.” Electronic manufacturers, who face additional hurdles in relocating production, are likely to be more badly hit. “Electronics supply chains have not matured elsewhere, so many are still being produced in China,” said Tiffany Chong, senior director at law firm Sandler, Travis & Rosenberg. While apparel makers have largely shifted to countries such as Bangladesh and Vietnam, electronics firms are still catching up. “Chinese enterprises are studying how to go overseas, which is their hottest buzzword, and which country in Southeast Asia to turn to,” she said. According to a report from the US International Trade Commission last year, the US market share of imports from China fell from 2013 to 2023, while the market shares of other top suppliers such as Vietnam, Bangladesh, Cambodia and Pakistan increased. While the 2018 tariffs affected about 60 per cent of products, according to the estimate of Danny Lau Tat-pong, honorary chairman of the association, the new 10 per cent levy applies across all categories, intensifying pressure on businesses already operating on slim margins. The predicament facing Hong Kong’s SMEs is exemplified by Lau, whose aluminium business derives one-third of its volume from the US market. Despite originally pricing his products at about half of American alternatives, the accumulated tariffs severely undermine his competitiveness against producers from other countries. Market diversification also presents its own challenges. Lau noted that exploring new markets took him four years of groundwork just to establish basic business relationships, with no guaranteed returns. He said businesses that tried to explore the mainland market were reeling from significant losses. Some retailers have reported losses of up to HK$50 million (US$6.4 million), with unsold inventory, despite online sales efforts. One apparel retailer was forced to close 30 stores with losses reaching HK$30 million, Lau added. Language barriers and communication issues further complicated expansion efforts, while emerging Asean markets might lack the purchasing power for premium products traditionally sold to US customers, Mak said. Some manufacturers are exploring workarounds, such as routing shipments through third countries such as the Philippines before reaching the US. However, this method requires a coordinator in the US, who bears the risk on the shipment’s content, Lau added. Others, such as Francis Fong Po-kiu, honorary president of the Hong Kong Information Technology Federation, highlighted how even small shipments now faced heightened scrutiny and costly customs procedures. Lawmaker Jeffrey Lam Kin-fung, also a member of the key decision-making Executive Council, has called for a wait-and-see approach given the US government’s fickleness. This stands in stark contrast to the urgency expressed by industry players on the ground. The pessimism came after the United States Postal Service left many in a state of confusion on Wednesday after suddenly announcing the suspension of incoming parcels from Hong Kong and the mainland, only to state later at night that services would resume. The stakes are high for Hong Kong, with the US being its second-largest export market after the mainland. The main export items include telecoms equipment, computers and precious stones. Official data shows exports to the US already declined by 6.9 per cent in 2023 to US$34.9 billion, suggesting the new tariffs could accelerate this downward trend. For many SMEs, the choice now appears to be between accepting razor-thin margins to maintain US market share or embarking on the challenging journey of market diversification. Neither option offered easy solutions, especially for smaller firms with limited resources to navigate new business environments or absorb additional costs, Lau added. The situation underscores a broader transformation in global supply chains, with Hong Kong manufacturers caught between American trade policy and the practical challenges of relocating production. “Now it is not about which industry is hit the most,” Lau said. “Now the impact is across the board.”

US tariff hike adds pain for Hong Kong manufacturers banking on American market

New levy threatens to eliminate thin profit margins for small and medium-sized enterprises struggling to diversify away from crucial market