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Wednesday June 7th, 2023

Tariffs push some US firms to exit China for Sri Lanka, Bangladesh

Chicago, United States | AFP | Wednesday – As fresh US tariffs on Chinese imports kick in, Illinois-based phone accessories manufacturer Ben Buttolph has been urgently moving production to other Asian countries despite the cost, inconvenience and deep uncertainty.

Buttolph, chief finance officer at Xentris Wireless, expects that his company will never return to China after completing a move that he describes as “a kind of business ‘head trauma’.”

“It’s a huge inconvenience, it’s a huge expense,” he told AFP after Xentris set up in the Philippines, Taiwan and Vietnam since the trade war between the US and China erupted 18 months ago.

But manufacturing in other developing nations comes with risks, he admitted.

“Building up these supply chains took 30 years in China. China has a lot of infrastructure that some other countries don’t yet have.

“We are trying to have multiple locations certified for all of our products, so that if all of a sudden there’s an issue with one of the locations, we just flip the switch.”

Reflecting on the impact of tariffs on China, he said: “We’re never going to be in that position again — diversification was one of the intentions we had.”

US President Donald Trump’s plan to enact 15 percent tariffs on $300 billion in consumer goods imported from China has forced some manufacturers such as Xentris to shift production from the country, while others have absorbed the tariff or raised prices.

The latest round of levies began on Sunday on about $112 billion worth of Chinese goods, according to an analysis by the Peterson Institute for International Economics. The remaining portion of the tariffs are set to take effect on December 15.

– Never going back? –

“We are leaving China and we have no immediate or long-term plans to ever go back,” Buttolph said, recalling how his company, which has 68 US employees, sought legal advice on the strategic outlook when the trade war began.

“(Some companies) anticipated that this whole thing was going to blow over and that Xi Jinping and Donald Trump would cut a deal. Our assumption early on was based on advice that this is going to be an ongoing, long-term problem.

“Chances are that it will never be the same in China. There were a lot of folks in the consumer electronic space who may have dragged their feet in terms of setting up relationships and getting the supply chain moved.”

Richard Roberts, import logistics manager at California-based PacSun, a lifestyle clothing company, echoed the sentiment that production must move out of China — even in the face of weaknesses in nations that offer a cheaper alternative.

“The latest round of tariffs is making it almost impossible to import from China,” said Roberts.

“This calendar year we are planning to move up to 30 percent of what we produce in China to Sri Lanka, Bangladesh and Pakistan.”

PacSun, which has 10,000 employees, imports about 900 20-foot containers a year, most of it from China.

– The cost of change –

“You’re going to have delays with factories not knowing how to make the correct timing. Roadways are not built, so containers are taking longer to get to the port,” Roberts said.

“You also have to take into consideration the longer transit time. You go from Shanghai, where it’s 10 or 12 days by vessel, to something coming out of India that’s 30 days, so that’s a disruption to your supply chain.

“We have Trump (as president) and it’s his agenda, so… what do you do? Your company has to do what it needs to do.”

For international law firm Harris Bricken, which helps companies navigate working abroad, partner Dan Harris said the US tariffs on China have caused his business to “go crazy” as companies seek help to avoid tariffs — often by moving their production from China.

US and Chinese talks are due to resume this month after a sharp deterioration in the trade war in August.

The chances of a breakthrough look slim after Trump tweeted that China was “hemorrhaging jobs and companies” and that Chinese negotiators may be holding out for a better deal in the hope he would lose next year’s elections.

Tom Case, a customs broker for 50 years and president of The Camelot Company, a customs brokerage company near Chicago’s O’Hare Airport, said that the costs would ultimately be passed onto the US consumer.

“The guy that’s losing is the guy that goes to the store to buy a new screwdriver,” he said.

“The screwdriver is going to cost him 25 percent more than it did before the Trump tariffs. The guy who’s buying the screwdriver is the one paying.”

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.

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No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.

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Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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