The Challenges of Export-Dependent Chinese Factories

By Liangping Gao, Ellen Zhang, and Casey Hall

BEIJING/SHANGHAI (Reuters) – Eno Qian, who operates a clothing factory in eastern China, reports a profit of 20 yuan ($2.74) on each item sold internationally, compared to just 2 yuan on domestic sales, rendering a shift to the local market impractical for her tariff-affected business.

With the U.S. market now stagnated due to a 145% increase in tariffs on Chinese goods, Beijing has urged exporters to pursue local buyers. However, businesses express concern about the complexities involved in this transition.

Many factories reliant on exports lament weak domestic demand, aggressive price competition, low profit margins, delayed payments, and high return rates in the Chinese market. Qian indicates she has opted against pursuing domestic sales due to these issues, stating, “Foreign partners are more stable.”

These challenges reveal the critical over-reliance of China’s economy on exports and underscore the urgent need for policies aimed at boosting consumer incomes, according to analysts. Without fiscal measures to enhance domestic demand, increasing product supply could adversely affect businesses and exacerbate deflationary pressures.

He-Ling Shi, an economics professor at Monash University, warns, “In China, due to fierce competition, profit margins are very thin—sometimes nearly zero—which could lead some exporters to insolvency if they pivot domestically. This would further weaken consumption power, as those businesses unable to survive won’t contribute to the domestic market.”

In response to challenges posed by U.S. tariffs, China’s commerce ministry acknowledged its strategy to help exporters enhance domestic sales. It has organized matchmaking events across major cities in China, linking manufacturers with e-commerce platforms and retailers to facilitate business deals. Local governments are also establishing task forces to tackle exporters’ concerns, such as unfamiliarity with the domestic market and low brand awareness.

E-commerce giant JD.com has announced a 200 billion yuan ($27.35 billion) fund to support exporters in domestic sales over the upcoming year, attracting interest from nearly 3,000 firms, about 0.4% of the companies engaged in foreign trade. Delivery service Meituan has offered assistance in marketing and related areas for exporters.

However, Qian emphasizes the need for better support mechanisms, particularly in the form of tax breaks and subsidies. Following a 30% loss in sales due to U.S. tariffs, Qian faces potential factory closure.

David Lian, who runs an underwear factory in southern China, describes the domestic market as highly price-sensitive, resulting in considerable promotional costs and frequent product returns. He aims to find new clients in regions such as the Middle East, Russia, and Africa.

Regarding domestic sales, a factory owner named Liu indicates her small firm lacks the resources to establish a separate sales team.

The Communist Party’s Politburo is set to meet this month, with efforts to support the domestic sales pivot likely on the agenda, though observers note that media coverage could primarily serve to project strength domestically while largely ignoring actionable economic policies.

Economists stress that concrete demand-side stimulus measures are crucial, as last year’s 43.2 trillion yuan ($5.92 trillion) retail sales dwarfed the 3.7 trillion yuan exports to the U.S. A potential 2 trillion yuan loss over the next two years in U.S. sales might be mitigated by a 4% increase in domestic consumption, according to estimates.

However, lack of consumer confidence and government commitment to improve social benefits could deter spending. Wages must rise quickly, which seems unlikely given the burdens on employers from tariffs. Minxiong Liao, a senior economist at GlobalData.TS Lombard APAC, argues that measures related to the social safety net, particularly pension and fiscal reforms, are essential.