What Is The Way Out For Chinese Export Enterprises Under The Trade War?

The tariff war launched by Trump shocked the world, and the real tension lies with enterprises in various countries that export to the United States.

Such high tariffs will inevitably lead to one result: the total amount of goods exported to the United States must decrease, regardless of which country the enterprises come from.

 

We will not discuss the impact on American consumers and the subsequent effects on American politics. Instead, we will focus on how enterprises exporting to the United States can respond.

 

Let me first explain a phenomenon.

In China, the most outstanding enterprises are often not those whose main business is exporting to Europe and the United States, even though these companies have seen the most stable profits over the past forty years. Why are they not outstanding? Because they have not experienced the more intense and competitive business battles within the Chinese domestic market.

In the past, the more profitable business was exporting to Europe and the United States due to the exchange rate differences. The Renminbi was undervalued, which made exporting to Europe and the United States more profitable than domestic sales.

This is similar to an average Hong Kong resident earning a monthly salary of HK$20,000 to HK$30,000. While living frugally in Hong Kong, they can spend freely in Shenzhen because they earn a currency linked to the US dollar – the Hong Kong dollar.

Americans on Xiaohongshu see prices in China and, as long as they can afford airfare, are eager to travel to China. After all, saving $1,000 a month in the U.S. allows them to spend lavishly in China.

Exporting to Europe and the United States earns U.S. dollars, and this money is enough to pay domestic wages and cover consumption in China. Therefore, a large number of Chinese companies rely on foreign trade with Europe and the United States for their livelihoods.

Because Americans pay higher prices for goods than Chinese consumers do, more production resources are directed toward foreign trade. But why? The reason lies in the international currency status of Europe and the United States and the over-issuance of their currencies.

Just like someone holding counterfeit money who doesn't care about paying a higher price, Europeans and Americans use over-issued U.S. dollars and euros to buy Chinese products, so they naturally offer higher prices.

When Chinese people buy domestic goods, it's essentially a barter system. To buy better products, you have to produce more in return, so prices are lower.

Europe and the United States, through their currency status and over-issuance, have changed the allocation of production resources in China and East Asia-more resources have been used for exports and fewer for domestic sales; more resources have served Europe and the United States, and fewer have served developing countries.

 

China has a trade surplus of hundreds of billions of dollars with the United States each year, which is not necessarily a good thing. This surplus simply means that Americans are not exchanging real goods for the goods of Chinese companies.

China's coastal areas are more developed, and more people have become wealthy, partly because many businesspeople there focus on foreign trade.

I've met many bosses of foreign trade companies, and they often look down on domestic trade.

One boss told me: Domestic sales are very competitive. In foreign trade, you can get large orders from just a few clients, often long-term ones. I just need to manage production, and the profits are substantial.

However, with domestic sales, you have to compete fiercely with countless peers-not only on production costs but also on marketing, branding, and distribution. Exporting is much simpler and places lower demands on business owners.

But with the start of the trade war, all of this is changing.

Trump's main goal is to achieve "internal circulation" in the United States-encouraging more companies to manufacture within the U.S. rather than abroad. Whether tariffs will accomplish this is another matter, which I discuss in the next article.

This change will force many foreign trade-oriented companies in East Asia to adjust their direction.

The previous customers who were insensitive to price due to access to over-issued U.S. dollars are disappearing. Foreign trade companies that once benefited from exchange rate differences must now face real markets, meaning markets outside of the U.S.

These non-U.S. markets can be divided into two major areas: first, the domestic Chinese market, and second, developing countries outside of China.

To enter these two markets, companies must offer lower prices.

If they cannot, then bankruptcy is inevitable because they won't be competitive in domestic or third-world markets.

They must also adjust their product lines. They may no longer be able to produce what Americans want-or at least cannot rely on that as their main product category. They must pivot to products needed by domestic consumers or by those in developing countries.

At this point, a company whose core business was exporting to Europe and the U.S. must change its business model.

They must learn more advanced management models like their domestic counterparts, including hiring marketing talent, learning to understand customer needs, and improving production line management techniques.

Previously, the products that companies exported to Europe and the United States were often dictated by European and American importers. These importers were the true entrepreneurs-they predicted consumer demand. Most domestic factories were OEMs: "You tell me what to make, give me the drawings and standards, and I will manufacture it."

 

But now, OEM factory bosses must learn to predict market demand themselves. This raises the bar for business owners.

Many now believe that without the American market, their goods won't sell. This is a misconception. The U.S. trade deficit is the result of excessive money issuance. Selling goods to the U.S. was the result of Americans manipulating global resource allocation through currency over-issuance.

Production itself is a form of wealth creation. But whether a company is producing the right things depends on its business model-whether it can pivot to meet real market demand.

Some argue there will be an oversupply of goods. This is entirely wrong. There is only misaligned production, not overproduction.

Goods are never sufficient to meet all human needs. So how can there be an oversupply?

But if you spend 100 yuan producing a product for an American that should never have existed were it not for currency over-issuance, that is misaligned production.

There are billions of people in developing countries who are in urgent need of various low-end industrial products. Can you adjust your production to meet their needs?

Since these countries don't have the global currency status of the U.S. dollar, they must trade real goods. In this case, you'll receive real goods in return, but you're unlikely to profit from exchange rate differences as you did in the past.

There are three paths for manufacturing companies:

1. Invest abroad to produce goods needed by Chinese consumers at lower costs

In the past, many companies moved to Vietnam but still primarily exported to Europe and the U.S. Production costs in Vietnam are nearly 20% higher than in China. Factories and offices there are now more expensive than in China.

This path is no longer viable because Vietnam is also facing high tariffs. Although they are still lower than China's, a sharp drop in overall sales is inevitable.

Companies must further reduce costs and manufacture in areas with lower wages and cheaper land-such as Africa or India.

Otherwise, it will be impossible to gain a price advantage in China's fiercely competitive domestic market.

2. Enter the domestic sales competition

Many people believe that domestic consumption is declining, so there's no market. But unmet demand always exists. The reason many companies avoided domestic sales was due to resource misallocation under the exchange rate system.

Now, companies must accept the market test. They must look inward, improve management, enhance efficiency, reduce costs, and boost productivity. If they can cut costs, they can survive in the domestic market.

3. Treat developing countries as future markets

Companies should research the markets of ASEAN, East Asia, Africa, and South America. They must let go of their fixation on serving European and American markets and move on from the days of profiting off currency exchange differences. Entrepreneurs must understand consumer needs and then innovate, cut costs, and meet the demand in these regions.

Some export-oriented companies have already realized this issue and diversified their markets across different countries, avoiding the risk of relying solely on Europe and the United States.

The world is vast. The United States has only 300 million people. Americans' real consumption capacity is limited. Most of them can produce only a few tangible goods to exchange with you. That is the reality.

If the U.S. dollar collapses, that day will come even sooner. The tariff war has simply accelerated the process.

This is the correct form of production. In the past, many companies produced for Americans, which was incorrect-it resulted in insufficient trade with developing countries and excessive trade with the West.

The adjustment will be painful. Companies that fail to adapt will go bankrupt. But from a macroeconomic perspective, this trade war will become the catalyst for many East Asian export enterprises to return to the real market.

There is only one way forward for companies: to meet real global consumer demand rather than serving the false demand created by over-issued currencies.

Go global. Explore markets beyond Europe and the United States. Say goodbye to the days of easily winning orders from Americans. That is the only way out