Some Chinese businesses are investing in the US to dodge tariffs

Krystal Hu
Reporter

The tit-for-tat tariff war has hurt many companies both in China and the U.S. With additional tariffs on $250 billion worth of Chinese goods in place and tariffs on more than $300 billion on the table, some Chinese companies are looking to avoid tariffs by moving their manufacturing hubs to the U.S.

“I have never had so many projects in the pipeline like in the past year,” said John Ling, managing director at LinVest and president of the Council of American States in China, who has helped Chinese companies expand to the U.S. for over 15 years. “For many Chinese companies, the U.S. is their single biggest market, which is almost impossible to replace.”

An executive at a Chinese chemical company, who asked to be anonymous because of the “sensitive times”, said his company decided to move forward with its investment plan in the U.S. in the wake of the tariffs. “Wish we started the project even earlier, then we can be immune to the tariffs now,” he said.

Foreign direct investment from China to the U.S. plunged by 84% in 2018, according to Rhodium Group. While M&A activity was hammered by tightening screening by the Committee on Foreign Investment in the United States (CFIUS), greenfield foreign direct investment has experienced a pickup since the second half of 2018. Analysts at Rhodium noted “a noticeable increase in newly announced projects in response to trade barriers, especially in basic materials, automotive and consumer sectors.”

Cho Tak Wong, center, chairman of Fuyao Glass, tours the plant at Fuyao Glass in Moraine, Ohio on September 29, 2016. Fuyao has become one of the most successful Chinese investments in the U.S.(Andrew Spear for The Washington Post via Getty Images)

Some Chinese companies believe investing in the U.S. is a gesture of goodwill, and could help them make a stronger case when they ask Washington for exemptions for imported materials that are already subject to tariffs.

Last week, over 90 representatives from China attended SelectUSA, a conference hosted by the U.S. Department of Commerce to attract foreign direct investment. China remains the top four destination of delegations, despite a slight decline from last year.

Other companies are wait and see

White House economic adviser Larry Kudlow delivers remarks at SelectUSA Investment Summit in Washington D.C., U.S. June 11, 2019. REUTERS/Carlos Barria

To some companies, whether the economics make sense to build a factory in the U.S. depends on the level of tariffs that will be imposed on their Chinese-made products. Trade associations and companies plan to testify against the tariffs on $300 billion Chinese goods at public hearings hosted by the U.S. Trade Representative’s Office in Washington set to begin Monday.

“I think companies are wait and see right now and many investors don't like uncertainty,” said Brian Connors, executive director at Michigan-China Innovation Center. “We have one company tell us actually, if the tariffs stay where they are, we will put a small sales office in America. If the tariffs go up to 25%, we will actually put manufacturing in America, because we need to jump over the tariff to localize.”

Chinese companies that see the tariff war as a catalyst for investing in the U.S. have pretty much played into the hands of Washington, which has made it a priority to revitalize manufacturing and create job opportunities in the U.S. The administration even touts the trade freud as a selling point for “Made in the U.S.”

“If you Invest in the USA, you don't need to worry about issues like tariffs or trade deals with the like,” Larry Kudlow, White House chief economic adviser, told prospective foreign investors at the SelectUSA conference last week.

But a full-blown trade war still remains a top concern for Chinese companies, which worry about the economic impact on its home business and that their decision to move money from China to the U.S. at a time when the two countries are increasingly seeing each other as an adversary, could anger Beijing.

“We've seen a number of projects go on hold. People are very cautious and tentative about proceeding with their greenfield investments in the state,” said Justin Kocher, senior manager of international business development at JobsOhio. “They want to see how the trade war plays out,”

Krystal Hu covers technology and China for Yahoo Finance. Follow her on Twitter.

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