There is little point in trying to plot the trajectory of Donald Trump’s tariff strategy (there is little point in calling it a strategy, but we’ll come back to that). There have been many reversals and flip-flops since April 2 when the president first levied a raft of confusing, ridiculously designed tariffs on nearly every country in the world (and some places that aren’t even countries) and then began to immediately walk parts of them back.
China’s pain will become everyone’s pain, particularly if U.S. Customs starts to ferret out every possible Chinese input along the global supply chain, unpacking every automobile produced in Mexico or T-shirt in Vietnam to determine the extent to which it is, or isn’t, “substantially transformed.” If the U.S. persists in tariffing all of China’s productivity, all costs in every market will go up.
Connected and Complex Economic Policies
Higher manufacturing prices to U.S. suppliers will force them to raise their cost of sales to non-American markets that aren’t tariffed. A Hong Kong-based toymaker told me that it is highly likely that she’ll have to raise prices to Canada, Europe as well as other markets to recover some of her anticipated lost revenue in their U.S. sales. It will be impossible to recoup it all, however, as the U.S. is 80 percent of her global market.
The latest (as of this writing) reversal is a case in point. Trump’s current exclusion of Chinese-produced smartphones, computers and other digital products from the list of goods to be tariffed runs counter to the U.S. government’s core claims that its nearly decade-long technology trade war is being waged to limit access to foreign technology markets for reasons of national cyber-security. It also does not align with a long-stated objective of the administration to motivate American manufacturing businesses, particularly those that produce high-value products, to relocate their production to the U.S., creating jobs and reducing its reliance on foreign imports.
The China Trump Card
Much analysis over the last two weeks has been given to distinguishing between the U.S. trade position on China versus the rest of the world, with the underlying assumption that exporters from every other country are now “safe” — despite the fact that not a single retaliatory tariff has been withdrawn, only “paused.” But this is a pointless distinction for three reasons, which all brand owners and retailers must understand and appreciate in their forward planning:
- China is deeply embedded in the rest of the world’s economies, as both a primary trading partner and a supplier of manufactured components. It is impractical to assume that tariffs alone will extract China from global supply chains.
- Beyond this, China has many other means to resist U.S. tariff pressure, meaning that China is probably willing and able to weather a very long trade war, and do so relatively unscathed.
- To assume that there is an end game in the China tariffs is to assume that there can be a strategy to work around them. This is not the case—maintaining continuous uncertainty and chaos are the only “Liberation Day” goals.
China’s Pain Is All Our Pain
The Trump administration believes that the American economy is too important for China to not back down. It’s true that China exports more to the U.S. than to any other country—over half a trillion U.S. dollars in 2023, and nearly $525 billion last year. But this is not even nine percent of the $6.1 trillion China exports globally. Two important economic blocs, the EU and ASEAN, each account for as much trade with China as the U.S. Some 120 other countries—which collectively generate over half of global GDP—count China as their top trading partner. China is the lynchpin of nearly everything in the world’s supply chain. It produces half of the world’s digital devices, 60 percent of its extruded aluminum and more than a third of its textiles and consumer appliances. Importantly, more and more of China’s exports are sent to factories in other countries, from Southeast Asia and East Africa to Mexico, where they are key inputs to finished goods which are then shipped to the U.S.
The American market is important for China, but not critical. It’s true that China exports more than three times the value of products to the U.S. than America sends to them and, in the words of a Vietnam-based investor, “No one can replace the global dominance of the American consumer.” China still has many other places to sell its wares, and Chinese semiconductors, steel and rayon are all essential ingredients in everybody else’s exports to the U.S. It is impossible to split China off from the rest of the world.
China’s pain will become everyone’s pain, particularly if U.S. Customs starts to ferret out every possible Chinese input along the global supply chain, unpacking every automobile produced in Mexico or T-shirt in Vietnam to determine the extent to which it is, or isn’t, “substantially transformed.” If the U.S. persists in tariffing all of China’s productivity, costs to every market will go up. “Where does extracted aluminum come from? Where does the coal come from to power the smelting plants?” asks a manufacturer of vehicle components in Asia. Complex manufacturing reshoring is a years-long process (one that would likely only be completed by the time another administration enters the White House) and U.S. facilities will still be dependent on core raw materials imports.
Punitive Tariffs
Higher prices to the U.S. will even force suppliers to raise their cost of sales to non-American markets that aren’t tariffed. A supply chain manager of an American manufacturer of digital games and educational devices reckons she will have to raise prices in Canada, Europe and other markets to recover some of her anticipated lost revenue in their U.S. sales. “Essentially the cost of my products has more than doubled–as has most other producers who have some degree of electronics in their products.”
The Robin Report has spoken to several Asian-based manufacturers of components and finished goods who indicate that while “Country of Origin” (COO) forensics are not extensively used, as they are costly and lengthen customs clearance times, they could be ramped up if the U.S. becomes determined to tariff Chinese goods entering the U.S. through other channels, or as parts of goods assembled in third-party countries. But this will involve a significant increase in customs inspectors and inspection processes, and in the words of the head of cargo business for an Asian-based airline, “We don’t see how that capacity will be added quickly. Even if it is, it will result in a tremendous slowdown in American trade with the rest of the world.”
China’s Upper Hand
“We believe this trade war will go on for a long time,” says the air cargo head. One of the reasons he believes this is because while China’s trade imbalance with the U.S. will indeed leave it very exposed, it has a lot of ammunition on hand. China has already begun to loosen its monetary policy to weaken its currency and help exports. China is likely to restrict the release of movies from the U.S.—meaning that Zootopia 2 is unlikely to be as profitable as its predecessor–something that has accelerated Hollywood’s concern.
Many believe that U.S. companies that have active service businesses in China will also suffer. “If the government tells you to stop buying coffee at Starbucks in Beijing or hamburgers at McDonald’s in Shanghai, you’ll stop,” says one Hong Kong-based owner of a components manufacturer that exports to the U.S. and Europe.
China’s entire consumption economy is also driven by local a few super-apps (primarily Alipay) and it would be very easy for compliant Chinese tech firms to make it more difficult for consumers to tap-and-go a Starbucks macchiato if Beijing so chooses. Even if there are no formal boycotts, patriotic Chinese consumers could easily switch to any of their many fast-growing and comparable homegrown Chinese megabrands. Local giant Luckin Coffee saw its 2024 revenues grow 38 percent to over $47 billion last year, surpassing Starbucks in China.
Finally, China’s global trade connectivity means that Chinese firms, and those that rely on Chinese parts and products, will likely be able to work around tariffs. This is already happening around de minimus trade as a litmus test for how global supply chains will rework themselves. While China’s ecommerce champions can no longer ship fast fashion and consumer goods directly from China to the U.S. (until there is evidence that COO inspections are on the increase), they will simply ship from everywhere else China manufactures products. “We have already put on additional capacity in Southeast Asian hubs, and there is a real possibility that air cargo companies will increase their freight and fulfilment hub capacity in Europe” in the short term, says the air cargo head.
Chaos Is not an Economic Strategy
The whole point of the Trump administration’s tariff action is to cause chaos and keep all trading partners off balance in an effort to create a perpetual state of control and extract ‘deals.’ This means that nowhere is safe. “China plus one” sourcing strategies have been a mainstay of producers with exposure to U.S. markets for years before even Trump’s first term to diversify productivity and have safer locations to ship goods to the U.S. However, the fact that outside of China most tariffs have been ‘paused’ is no great comfort. In the words of a vehicle manufacturer, “No one is now moving production anywhere else, as every place can potentially be at risk. Neither, however, is anyone seriously considering moving to the U.S.”
The 90-day reprieve puts a particular ticking clock under these one-to-one negotiations. As a supply chain manager noted, June is the shipping date to the U.S. for Christmas, and not knowing whether or not a particular country will be ‘safe’ by that time is making forecasting impossible.
Moreover, given that many toy and gift categories have semiconductors or electronics in them, it will be hard to categorize them as anything other than a pile of Chinese components if the U.S. ramps up its COO strategies. The toy manufacturer already shipped a fair amount of supply to the U.S. months ago like Apple did from India, which may see her company through Q4, but new releases and models are coming onstream soon. “I can last a few months, but I can’t last out the year with the inventory I’ve shipped–and I won’t be able to sell my latest models at Christmas time for less than 200 percent of last year’s cost.” The vehicle parts manufacturer notes that smelted aluminium comes largely from China, and while the firm set up shop in Thailand several years ago to diversify away from China to lessen import duties, he has already heard of contract manufacturers who have stopped receiving components from China, waiting to negotiate ‘pain sharing’ from their suppliers up and down the value chain.
Let’s Make a Deal
Chinese value chains extend widely and deeply across most other global manufacturing clusters for most industry sectors. Any country that manufactures products with Chinese inputs (which means practically everything) exposes itself to increased scrutiny—and increased tariffs—if the U.S. does choose to invoke stricter COO inspections. If U.S. customs do not, then things go back to the way they were—a global trade ecosystem where China passes its exports through third-party countries, and every country (except the U.S.) benefits from their increasingly efficient and high-quality inputs.
Contrary to the optics, China is not ‘singled out’ in this trade war. Most of the rest of the world, including U.S. producers themselves, are subject to crippling tariffs. Further, American brands are unable to plan until the tariff chaos is resolved. Reshoring is impractical; the natural resources, electronics and machinery needed to make the U.S. manufacturing independent will not materialize on American shores any time soon. And, as China has many more tools at its disposal to fight back against import tariffs, it will be able to endure this global pain longer. If the tariffs are ultimately about capitulation to make a deal with the U.S. administration, China may have the upper hand.
