When President Trump announced his big round of tariffs in April of last year, the intent was to move production back to the U.S. and force big sourcers to relocate their importing activity. The biggest target was China, and it didn’t take too long for astronomical tariff rates—as much as 145 percent—to be imposed. But a funny thing happened on the way to the post-Liberation days: None of those wacky duty rates actually went into effect. Now, 18 months later, China remains the go-to choice for American importers. And most of the companies that considered moving out of the country to other places in Southeast Asia, in fact, never did. Or if they tried, they are increasingly turning back to China with their business.
To be politically incorrect in resurrecting an anecdotal cuisine cliché: With Chinese tariffs, 20 minutes later and you’re back for more.
Why are American companies returning to China? And the answer is: It turns out the tariffs are more competitive with other countries for manufacturing.
The Sourcing Trail
Chasing the cheapest and most efficient point of manufacturing is as old as the Industrial Revolution. When New England-based producers needed less expensive labor, land for factories, and raw materials, they headed south to the Carolinas, Georgia, and elsewhere in the Southeast.
When that still wasn’t enough to keep costs low, they turned to Asia with its cheap labor pool. First, they moved to Japan and Korea, then to Taiwan, and finally to China. China became the king of cheap production for international manufacturers, and the factories there learned incredibly quickly how to make (and copy) goods at very competitive prices with quality levels that were acceptable to their American customers.
The Trump tariffs of his first administration, combined with China’s advances in high-tech manufacturing in sectors like automobiles and electronics, drove U.S. importers to look elsewhere in Asia, moving some of their sourcing to India, Vietnam, Pakistan, Indonesia and other smaller countries in the region. But they did so begrudgingly, because China was really good at what they did with a vast network of sub-suppliers and an infrastructure that knew how to move finished products quickly through the supply chain pipeline.
145 Percent?
Under an ever-shifting and expanding array of regulations and mystifying political justifications, Trump changed the tariff rules again. When his duties on goods from China moved into triple-digit territory, it’s safe to say that virtually every company that did business in the country was terrified of the consequences and spent an enormous amount of time and resources finding alternative places to produce what they needed. Few, if any, brought production back into the United States. While some sectors like motor vehicles and construction materials started the process of securing American manufacturing, it still amounted to a relatively small percentage of the overall pie.
So, where did it go?
Return to Sender
Once all the bluster and political posturing was cleared away, American importers suddenly found that China was, in fact, pretty competitive with their other manufacturing options. “If tariffs on China settle near those on alternative locations, we expect to see some companies returning to their Chinese suppliers,” Mary E. Lovely, an economist at the Peterson Institute for International Economics, told The New York Times. China has a large cost advantage and the ultimate tariff differential with other countries is small, so that shift of business out of China could reverse, she said.
Even as Chinese exports to America have declined—maybe as much as a third according to some estimates—its effective tariff rate is nowhere near the outrageous levels first suggested. According to an analysis by Guojin Securities, a Chinese financial firm, the overall U.S. weighted tariff rate on Chinese goods is slightly above 23 percent. It also found the rates were similar or even identical to the duties being levied on other nations permitted to supply products. And most of the alternatives were not nearly as efficient or dependable as the Chinese suppliers. “China keeps doing really well because they just have the scale to produce things that much cheaper,” Deborah Elms, head of trade policy at the Hinrich Foundation in Singapore, told The Times. “Economic logic is going to drive you to have a very large share of manufacturing in China.”
Asian Options
Still, many American importers remain concerned about having too much production in one country, even if it’s China. They also know that tomorrow’s Trump tariffs could be very different than today’s. He remains committed to his tariff strategy as a (unrealistic) way to bring manufacturing back to this country and increasingly as a way to punish his enemies, real and perceived. Just ask Canada about that.
Still, geopolitical factors like the war in Iran that is causing energy shortages in some Asian nations are the wild cards in all of this. It’s generally agreed that China has done the best job of any oil-importing country in managing its energy supplies, making it a more reliable place to do manufacturing. “As soon as you have a little stress, you find that because all those factories have no more fuel to power their factories, companies rush back to China,” Sebastien Breteau, the founder of Qima, which audits supply chains for thousands of companies, told The Times.
In the meantime, the Trump administration has charged more than 40 U.S. importers of operating a “shadow transshipment network” that allows them to produce in China but claim the products were made elsewhere. Transshipping is nothing new; it’s been going on for decades as an illegal workaround to politically imposed mandates. It’s popular because it’s also relatively difficult to prove.
America Last?
What all this tariff-related confusion has not done is move any sizeable portion of manufacturing back to this country. “The story that it is bringing back manufacturing is really not the story,” Lovely told Fortune in a recent interview. “Manufacturing is not coming back.”
She believes that transshipping is much more common than some think because China is still producing the components used by other countries, creating a false impression about manufacturing origin and migration. “It’s kind of hard to believe, and in fact, it is stupid to believe because what was happening … is that a lot of these inputs just went through third countries,” she told Fortune. “There has been a lot less decoupling than the top-line numbers indicate.”
More than 18 months since Trump launched his tariff assault, and nearly eight years since he declared the initial round of tariffs in his first administration, we are right back where we started. This past June, the balance of trade between China and the U.S. hit $125.6 billion, a near historic level.
And it’s likely to get even higher 20 minutes from now.
