The Trade War Is Evoking Feelings of Economic Darwinism

(Bloomberg) --

With big American companies uprooting production from China to dodge tariffs in President Donald Trump's trade wars, what are smaller businesses doing to survive?

For Dara Venekeo, owner of a six-employee beauty company in Los Angeles, it's been an uphill struggle. A lot of her customized cosmetics orders come from Chinese manufacturers that took her years — and many visits — to build a relationship with. There's no way she could quickly abandon them and recreate those connections in tariff-free Southeast Asia nations.

That's been the playbook of multi-nationals including Hasbro, which is accelerating plans to shift production from China to new plants in Vietnam and India. American consumer electronic companies Fitbit and Tile along with Intel are among those considering similar plans.

But Venekeo doesn't have the global footprint or the bankroll behind her, and that's left her in a bind. She can't absorb the entire cost of 10%-25% tariffs on imported orders from China or she'd be losing money with her thin margins, but as a businesswoman it's difficult to ask her clients to pay more.

For now, she's trying to split the difference, and crossing her fingers for a solution which hopefully rolls back the tariffs for good.

Venekeo's story, featured in this week's Stephanomics podcast, illustrates just how painful the impact of the tariffs is for parts of the U.S. economy that don't get much press. The latest national economic data on Wednesday illustrated  again how businesses are taking the hit and consumers are weathering it so far.

As the trade war drags on, its worth a reminder that smaller companies account for about 45% of U.S. economic output and employ almost half of American workers, according to JPMorgan. They play a key role in global commerce — producing about a third of all exports that leave America's shores worth a hefty half a trillion dollars a year. 

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Charting the Trade War

Thailand is the latest target of U.S. trade warfare, but may not be the last in Southeast Asia. In Bloomberg Economics' view, the U.S. suspension of Thai trade preferences goes well beyond concerns about the working conditions of Thai fishermen. Rather, it's a second warning shot to firms thinking about diverting production from China to Asean as a means to avoid punitive U.S. duties. More measures may be in the pipeline, and Malaysia, with a $39.4 billion bilateral trade surplus last year, could be next. 

Today's Must Reads

• Phase One and done? | Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to a “phase one” agreement.
• Summit scouting | U.S. officials are looking for a new venue for Trump to ink the first installment of a trade accord with Xi Jinping after Chile canceled a summit where they had planned to meet.
• Growing pains | Hong Kong's economy contracted sharply in the third quarter as it entered a recession. Meanwhile, euro-area growth unexpectedly maintained momentum and Taiwain expanded at the fastest pace in more than a year.
• Shipping news | The trade war and China's economic shift made 2018 a tough year for global shipping and will continue to reverberate through the industry, according to the UN.
• Farm fallout | U.S. farm bankruptcies in September surged 24% to the highest since 2011 amid strains from Trump's trade war with China and a year of wild weather.

Economic Analysis

• Euro-area surprise | Growth came in slightly above expectations, but remains a long way below trend for the euro area. 
• Honk Kong recession | The ongoing social unrest and uncertainties surrounding the U.S.-China trade war will continue to bruise Hong Kong's key industries.

Coming Up

• Nov. 1: South Korea trade balance

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

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