With the pitched trade battle between the United States and China sending tariff rates into uncharted territory, the notion of the world’s two largest economies decoupling completely can no longer be relegated to the realm of academic theory.
But rather than this split causing one large, measurable fissure, it is splintering global supply chains in messier, riskier ways.
As the sweeping tariff regime of US President Donald Trump squeezes margins and muddles forecasts, whispers of off-the-books workarounds are now quietly circulating among manufacturers grasping for survival; with tax rates on some items reaching into triple digits, the motivation to smuggle or otherwise take risks has grown considerably.
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From grey routes to proxy factories, a new era of evasive logistics is unfolding. This raises the question: is this what decoupling looks like?
Global trade is set to sail into stormier seas in the coming months, as Trump has imposed new cumulative tariffs of 145 per cent on all Chinese goods over several escalatory rounds. This has sent the effective tariff rate, factoring in those already in place, close to an eye-watering 156 per cent.
“China now faces up to a 245 per cent tariff on imports to the United States as a result of its retaliatory actions,” the White House said in a fact sheet published on Tuesday, without providing specifics.
The rapid pace of tariff increases has only been matched by the speed at which they have been partially or fully reversed.
Last week, Trump granted a 90-day reprieve to many of the “reciprocal tariffs” he had levelled at most US trading partners, rolling back punitive duties to a baseline 10 per cent during the pause. He also said certain goods from China would be exempted from the triple-digit rates, though the rest would continue to be taxed at those prohibitively high levels.
Businesses have become paralysed in response to the back-and-forth. Orders have stalled, factories have gone quiet and re-routing has become an inescapable aspect of doing business – though the where and how of these routes is in constant flux as rules change at a moment’s notice.
Rather than a clean break, the world is witnessing an explosive and chaotic unravelling of decades-old supply chains – and what could be the most decisive shift yet in the US-China economic relationship.
Alfred Ng, whose electronics company Suga International Holdings runs factories in both China and Vietnam, has found himself at a crossroads.
“The situation keeps changing,” said Ng, as around 40 per cent of his business relies on the US market. “If there are no changes to the current tariff arrangement, it’s a decoupling between the US and China.”
While manufacturers like Ng brace for an indefinite period of uncertainty – as the lower rates during the 90-day pause could become permanent, revert to Trump’s initial parameters or go even higher – they are taking a wait-and-see approach, and not rushing to divert supply chains or build new plants.
“It takes six months to a year to set up a new investment,” Ng said. “Most manufacturers will be cautious when the situation is hazy.”
While the prospect of a full separation has never been closer to reality, it remains elusive in the short-term, leaving businesses to improvise.
“It’s not a clean break – more like a messy rebalancing,” said Catherine Chien, vice-president of digital marketing at Dimerco.
Companies have started diversifying supply chains out of China, especially for consumer electronics, apparel and industrial components, Chien said, but this process is partial and selective. The US cannot completely eliminate Chinese goods or production from its supply chains, she added, as deep interdependencies still exist in areas like hi-tech manufacturing, rare earths and certain raw materials.
“We’re seeing a shift from China-only to ‘China plus one’ or ‘China plus many’ strategies, especially among US importers. The impact on China will be supply chain restructuring, with production shifts to Malaysia, India or Brazil, not Vietnam.”
Since Trump launched the trade war during his first term in 2018, Chinese exports to the US have steadily declined in certain sectors, while countries like Vietnam, Mexico and India have seen a surge in outbound shipments to America – some serving as alternative production hubs, others as nodes for transshipments.
China’s share of US imports fell considerably over those years, from a peak of 21.6 per cent in 2017 to below 13.3 per cent in 2024. Meanwhile, US imports from Southeast Asia have surged; the value of shipments from Vietnam rose from US$46.5 billion in 2017 to US$136.6 billion in 2024 for an increase of around 194 per cent.
Before last week’s tariff bonanza, Vietnam had become a major hub for Chinese manufacturers as they sought ways to get around US duties. Under the aforementioned “China plus one” strategy, firms keep their core operations in China while expanding into another country to diversify their shipment channels and guard against risk.
Official data shows that China is now Vietnam’s largest trading partner and among its top foreign investors. In 2024, Chinese companies directly invested over US$2.5 billion in Vietnam, and bilateral trade between China and Vietnam has exceeded US$200 billion for four consecutive years.
Even with these shifts, in the eyes of many global traders, a total US-China decoupling is impossible.
“These two economies are conjoined twins – they can swap their stuff into left and right pockets and scream at each other to keep their hands off, but they share vital organs. It will be very hard to walk away,” said Terry Newman, owner of Ecquality Timber based in China’s eastern province of Zhejiang.
“Chinese businesspeople are used to the government interfering in catastrophic ways ... The Americans doing stupid stuff is just another obstacle, but [Chinese manufacturers] will use their networks to go around them.”
The businessman said he is examining the benefits of entering new markets like Japan and India, as well as Southeast Asia.
Higher tariffs would affect all sorts of goods and services, not just shipments of finished goods, according to a report published Monday by Gavekal Dragonomics.
“The impact of tariffs is much broader than hiking the prices of finished consumer goods as they cross the border,” said author Andrew Batson. As tariffs take effect, he added, higher prices and shortages will ripple through sectors where consumers never see “made in China” or “made in the USA” labels.
According to a Goldman Sachs report published on Sunday, for 36 per cent of US imports from China – a portion worth around US$158 billion – Beijing provides over 70 per cent of its supply. This, the authors said, indicates “limited short-term flexibility for American importers to find alternative sources, even under substantial tariff pressures.”
Some sectors are even more reliant on supplies from China than the rest of the economy, including telecommunications, construction, manufacturing, machinery and electrical equipment.
China supplied over 70 per cent of the US’ imported PC monitors and smartphones in 2024, and 66 per cent of its laptops, according to figures from the US International Trade Commission.
Politically, the push for decoupling may also prove hard to sustain in the long run.
US reliance on Chinese inputs is highest in sectors that are major employers of the blue-collar workers who supported Trump in the 2024 election, the Gavekal Dragonomics report said, naming construction, car manufacturing and textiles.
“Tariffs bringing economic disruption to those sectors could sap the political will to pursue this kind of decoupling from China.”
Over time, domestic opposition to higher costs and supply chain disruptions may also pressure the Trump administration to reconsider or adjust its policy, said Fan Di, an associate professor in fashion and textiles at Hong Kong Polytechnic University.
“Industries where alternative sourcing is more accessible – such as textiles – may adjust more rapidly, while sectors reliant on specialised Chinese inputs like rare earth minerals could experience a slower process of decoupling,” Fan said.
With procurement costs rising sharply, US buyers are being forced to either renegotiate with Chinese suppliers or shift their sourcing elsewhere, he added.
While a partial separation is possible, a full decoupling between the two countries would be catastrophic, said Xu Tianchen, senior China economist at the Economist Intelligence Unit.
The US can drum out Chinese investment and technology with relative ease, he said – although not without cost – but in trade and finance the US and China are too intertwined for a total rift to be feasible.
“A forced decoupling would be brutal and costly – perhaps more than the US government and its people can afford.”
Rather, Xu said the baseline will be a further “elongation” of supply chains as seen in the first-generation trade war, with more countries in the Middle East and Eastern Europe serving as relay points along with traditional “connectors” such as Southeast Asia and Mexico.
“Another trade war will spur Chinese firms to assume leadership roles overseas, not just to avoid tariffs, but also to shape the global economy and capital flows,” he said. “Operating ‘out of China, not for China’, similar to what Japanese companies did during the 1980s and 1990s.”
Thanks in part to a front-loading of goods by suppliers in advance of anticipated tariff increases, China’s exports rose by 12.4 per cent in March from a year earlier to US$313.9 billion, a major spike compared to the 2.3 per cent growth recorded for January and February.
China’s exports to the United States also increased by 9.09 per cent year on year in the same month, compared to the 2.3 per cent observed in the first two months of 2025.
Shipments to countries in the Association of Southeast Asian Nations – where Chinese exporters had been re-routing their goods to bypass US trade barriers – also saw a rise of 11.55 per cent in March, while exports to Thailand and Vietnam jumped by 27.78 per cent and 18.91 per cent year on year, respectively.
China is no stranger to underground trade. Before market reforms began in the late 1970s, black markets thrived under the country’s centrally planned economy; smugglers along the southern coast, especially in Guangdong and Fujian provinces, quietly ferried in foreign-made goods, bypassing strict quotas and state monopolies.
Today, as Trump’s tariffs roil global logistics, echoes of that spirit could return. Smaller companies, deciding they have nothing to lose, could alter the declared country of origin on shipping documents, reducing their tariff exposure when entering the US market.
But the larger players that ship hundreds of containers per quarter are unlikely to employ such an underhanded approach.
“If caught, companies could face heavy fines, reputational damage and even the loss of their import licences – making such strategies unsustainable,” said Kwong Boey, a supply chain consultant with clients in the US market.
Despite his frequent criticisms of China, “Trump doesn’t seem to be as ideologically married to complete decoupling as some in his current and previous administrations,” said Mark Witzke, a non-resident scholar at the University of California San Diego.
“Hopefully Trump and [Chinese President] Xi Jinping can come to some sort of grand bargain,” he said. “If China promised to purchase more goods from the US and increase investment, then some kind of arrangement could perhaps be reached. Unfortunately, it’s not clear exactly what he wants China to do.”
China, as the world’s manufacturing powerhouse, is also the anchor for global factory prices. According to calculations by Chinese think tank CF40, the country’s manufacturing value added has gone up nearly seven times over the past two decades, and now approaches the combined total of all G7 nations.
“Tariffs will fuel US inflation through both rising costs and heightened price volatility in manufactured goods,” CF40 researchers warned in a report published Sunday.
Ng of Suga International said in terms of his electronics company’s existing business with clients in the US, it all depends on whether American partners continue buying.
His firm is being cautious, and ensuring buyers have ample cash flow – the previous 30-day payment window after delivery might no longer be possible as the trade landscape loses its predictability.
In its report, Goldman Sachs said the unprecedented tariff increases would create long-term incentives for import substitution if they persist, and the relationship between price hikes and import declines may become increasingly non-linear.
“Moreover, exceptionally high tariffs on China but not on countries where Chinese manufacturers have operations could accelerate trade diversion through third-country re-routing, further complicating the adjustment process,” the investment bank said.
As companies rethink their global footprint, many are decoupling internally to adopt an “in China for China” strategy – bifurcating their production voluntarily and reworking the local supply chain to exclusively serve the country’s vast and growing consumer market.
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