How to Use the Trump China Tariffs To REDUCE Your China Product Costs
Yesterday, in Trump’s New Tariffs and Their Impact on U.S. Trade with China, Mexico, and Canada, I analyzed the new tariffs President-Elect Trump has talked about enacting against China, Mexico, and Canada. In that post, I explored the potential impacts of the proposed tariffs, including the broader implications for companies that import products from China for sale in the United States. Additionally, I predicted that the tariffs against China are very likely to be implemented, whereas those against Mexico and Canada are much less likely to take effect.
In this post, I will delve into the specifics of leveraging the threat of tariffs on China to negotiate reduced costs with your Chinese manufacturer. Additionally, I will discuss the risks associated with this approach and provide strategies to mitigate them.
Chinese Manufacturers Are VERY Worried
China’s producer prices have been falling for 24 straight months. I repeat. China’s factory prices have been declining for 24 straight months. Two years.
Needless to say, this trend has caused considerable consternation among Chinese factories, a reality I witness daily in my work. Pre-Covid, approximately 75 percent of the manufacturing agreements we drafted—including China NNN Agreements, China Manufacturing Agreements, China Product Development Agreements, and China Mold Ownership and Protection Agreements—were signed without any revisions from the Chinese side. Today, that percentage has increased to about 95 percent, and any revisions typically come from large Chinese companies producing hard-to-source products.
In other words, Chinese factories realize they have lost leverage.
Desperate Chinese factories are lowering their prices, and most Chinese factories are desperate right now. My firm’s international manufacturing lawyers have observed a trend consistent with these findings: a significant number of Chinese factories are reducing their prices in a bid to remain competitive. This reflects a broader state of urgency within China’s manufacturing sector and, indeed, in China’s economy at large. See today’s CNBC story, China’s industrial profits fall by 10% in October as deflation worries linger.
It’s bad out there. Really bad.
Not every Chinese factory is in a dire situation, but a substantial number are compelled to negotiate lower prices due to economic pressures. Many of our clients sourcing products from these factories have successfully negotiated meaningful reductions in costs. This high success rate underscores a widespread willingness among Chinese manufacturers to adjust prices, reflecting their response to an increasingly tough economic environment and their own levels of desperation.
China Product Prices Have Been Falling for 24 Straight Months
China’s plunging producer prices and profit margins are putting industrial output and jobs at risk. This downturn is exacerbating other economic challenges, including a property and debt crisis. There is no denying the depth of China’s economic troubles or its high and rising unemployment rate. In response, the Chinese Communist Party (CCP) has reverted to a familiar strategy in times of economic weakness: increasing subsidies to manufacturers to help them stay in business and prevent layoffs.
With it becoming increasingly easy for foreign product buyers to shift their purchasing outside China, and with Chinese factories also relocating their production overseas, the Chinese government’s subsidies have reached unprecedented levels. These subsidies are enabling significant price reductions. We have clients who have successfully negotiated discounts of 25-50% (yes 50%) with their Chinese suppliers by proposing increased purchase volumes or by extending contract terms. We have other clients that have secured substantial price reductions unconditionally, with Chinese manufacturers readily agreeing to cuts of 15% to 25% without demanding further commitments.
Now Add in Trump’s China Tariff
President Trump’s plan to impose an additional 10% tariff on goods imported from China has intensified the climate of uncertainty and fear among Chinese manufacturers. These manufacturers are well aware that tariff increases will lead to a reduction in orders from U.S. companies seeking cheaper manufacturing alternatives elsewhere.
This situation gives you unprecedented leverage in product pricing negotiations. The threat of losing business to competitors in more cost-effective regions compels Chinese manufacturers to accommodate their existing U.S. product buyers.
I know from the tariffs President Trump enacted during his first administration exactly how companies can and must leverage this fear to their advantage.
You currently have a strategic advantage, and you should approach your Chinese manufacturers with a proposal to “share” in dealing with the tariff challenges. Framing the conversation around the need to share in the costs of the tariffs is a non-confrontational/face-saving/win-win way to get Chinese manufacturers to reduce their prices in both parties’ best interests. It’s far better to present this as a “partnership” strategy than as demand or an ultimatum.
Again, I know this from what I saw during the last round of China tariffs.
It also benefits you to frame these negotiations as an opportunity for your Chinese manufacturer to secure a long-term relationship with your company, ensuring stability for them in an unpredictable market. Consistently emphasize “long-term” in your discussions, but do NOT commit to any legally binding long-term agreements. This is surprisingly easy to achieve.
China Desperation Pricing
In China’s tumbling prices push some exporters to the brink, a Reuters article describes how this can go down (pun intended). Per Reuters, and per exactly what our China manufacturing lawyers have been seeing in China:
“Companies cut product prices, then staff salaries. Then consumers won’t buy – this could be a vicious cycle,” he said. Profits at China’s industrial firms fell 2.3% last year, adding to the 4% drop in COVID-hit 2022. An official survey showed manufacturing activity contracting for a fourth straight month in January, while export orders shrank for a 10th month.
For Lin [a Chinese factory owner], that has meant the $1.5 million order his client placed was 25% below a similar one last year. It was 10% below production cost.”
Think about the above for a moment. A foreign product buyer was able to get product for $1.5 million that cost its Chinese manufacturer $1.65 million to produce. In other words, the buyer got product from its Chinese manufacturer for less than the production costs. For decades low prices from China have been dubbed The China Price. I propose we start calling it the China Desperation Price. In other words, the buyer acquired products for less than the production costs.
Now is The Time to Lower Your China Product Costs
This should be obvious by now.
But Negotiating Lower Prices from Chinese Factories is Risky
Negotiating lower prices with Chinese manufacturers requires strategic planning. Chinese factory owners are highly sensitive to any indications that foreign companies might relocate their production, and any hint that you might move your business abroad could jeopardize your operations.
If you confront your Chinese factory with an ultimatum—such as demanding a 40% price cut or threatening to take your business elsewhere—you risk a severe backlash.
In How to Move Your Manufacturing Out of China Safely I detailed the risks foreign companies face when it becomes known that they will be leaving China.
My law firm has helped about a dozen foreign companies navigate their way out of situations where violence was threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time and they should — if at all possible — not go to China or remain in China so long as that dispute might be pending.
In a similar vein, we have also written extensively on why you must plan for terminating your China supplier. And by plan, we mean ensuring that you have secured your molds and all your paid-for product before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.
It is common for Chinese manufacturers to retaliate against foreign product buyers that cease buying product from them. For this reason, we instruct our clients to line up new suppliers and have them ready to go before they even hint about ceasing production with their existing China suppliers.
Just today, China released three Americans who had been wrongfully detained for many years. While it’s unlikely that poor negotiations with your Chinese factory would lead to such extreme consequences, it’s important to recognize that the Chinese government does not arbitrarily choose its targets and there is a lot they can do to you if you are in China.
The above examples regarding debt collection and hostage situations show that even a mere whisper of a foreign company considering reducing or eliminating its purchases can have dire consequences.
Our China manufacturing lawyers repeatedly see the following and similar:
1. Company A informs its China manufacturer that it will cease production with them. The manufacturer then retains all of Company A’s tooling and molds, claiming ownership. To prevent this, secure an agreement from your Chinese manufacturer clearly stating your ownership of the tooling and molds before they suspect any plans to relocate. See On the Importance of China Mold Ownership and Protection Agreements.
2. Company B requests a price reduction, warning its China manufacturer that it might relocate manufacturing to Mexico and Thailand if the reduction is not granted. Company B eventually learns that someone in China registered its brand names and logos as trademarks in Mexico and Thailand and it no longer is able to have its product with its own brand name and logo manufactured in Mexico or Thailand. To prevent this, register your brand names and logos in the country to which you will be moving your manufacturing before anyone knows you might be manufacturing in those countries. You should even consider doing these registrations under a company name that will not tip anyone off to your plans to leave China.
3. Company C comes to us after having told its China manufacturer that it would need to add an additional manufacturer because it needed greater production capabilities. The China manufacturer responded by saying that “we own the China trademarks to your products and the China patent to your product designs and if anyone else in China tries to make your products, we will get an injunction to stop them from doing so and another injunction to stop any of your products from leaving China.” SIX lawsuits later the warring companies reached a settlement. To prevent this, follow the advice in China Trademarks: Register Yours BEFORE You Do ANYTHING Else.
4. Company D tells its China manufacturer it is looking to move its manufacturing out of China for tariff reasons. China manufacturer then says it will not be shipping any more product because Company D is late on payment and owes it hundreds of thousands of dollars — none of which is true. China manufacturer reports foreign manufacturer to Sinosure (China’s government owned export insurance company) and Sinosure then puts this company on Sinosure’s notorious “blacklist,” which means the foreign company can no longer buy product from anyone in China or from any Chinese company anywhere in the world! This issue is incredibly common, with the number of Sinosure cases we’ve handled this year doubling compared to any previous year. To prevent this, get written and signed and sealed clarity regarding what you owe or might owe before you start negotiating for lowering your product prices
Suddenly, you may find yourself confronted with unexpected claims: tax authorities present you with surprise levies, factories assert you owe them more than anticipated, you discover that your IP has been stolen and your products cannot leave China, and/or you receive invoices for materials or services such as molds, tooling, or design work that you were led to believe had already been paid. My personal favorite is when the Chinese factory seeks the $800,000 it claims you owe it for bad product that it had agreed to write off three years ago, largely because this one has become the dagger of choice in the last few years.
Specific Strategies for Negotiating Lower Product Prices
When discussing pricing with your Chinese factory, it is essential that you strategize carefully, communicate diplomatically, and prepare for any potential financial or other claims or actions that may arise.
In at least ten percent of cases, when one of our clients approaches their Chinese supplier to negotiate lower prices, the response is abrupt: “We are done manufacturing for you. We don’t need you anymore. We are now selling our own products [which very well might be YOUR products] directly.
To plan for such scenarios, we recommend you do the following:
1. Protect Your People
Do not have any company representatives in China when initiating discussions on pricing. This prevents your Chinese factory from potentially holding anyone hostage.
2. Protect Your Assets
Before discussing price reductions, safeguard your intellectual property and physical assets. Secure your molds, tooling, and any pre-paid products to protect against preemptive actions by the supplier upon suspecting a shift in your production strategy. Additionally, leverage your existing good relationships to confirm all outstanding balances.
3. Establish Alternatives
Proactively identify and establish relationships with alternative suppliers in different regions who can commence production quickly if necessary. This ensures that you maintain a steady product supply, should negotiations with your current supplier break down.”
Conclusion
The “China Desperation Price” is YOUR opportunity to secure lower prices, but it comes with risks. Negotiating lower prices from your Chinese manufacturers involves more than just demanding better terms. It is crucial you first ensure the safety of your employees and the protection of your intellectual property and other assets.
