High tariff walls will incentivise companies to move from a “China plus one” manufacturing model to a US plus one. — Bloomberg
PRESIDENT Donald Trump’s tariffs look to bring investment and production back to the United States. Some manufacturers will do so, as they vie to sell to America’s voracious consumers.
But high tariff walls will delink US suppliers from the rest of the world, incentivising companies to move from a “China plus one” manufacturing model to a US plus one. The end result will be the marginalising of US exports in the global economy.
China’s economy took off during the first decade of the 21st century through commercial integration with Asia and its evolution into the go-to source for consumers worldwide.
A combination of membership in the World Trade Organisation, cheap labour, tax breaks for international businesses and the attraction of its billion-plus consumer market catapulted it to become the biggest global goods producer and second largest economy.
Yet just a few years later, the first international companies began shifting at least part of their production and their parts providers out of the manufacturing behemoth, piloting what would become known as a “China plus one” strategy.
As wages rose and tax breaks expired, companies began to look for lower-cost markets, especially for low-margin goods.
Growing commercial oversight by the Chinese Communist Party, government interference in markets and favouritism for domestic businesses and state-owned enterprises encouraged the move. So did sharpening geopolitics, as many Western markets imposed tariffs, export controls, and other hurdles for Chinese-made goods.
A 2024 survey by the American Chamber of Commerce in China found that some 30% of American companies were moving part of their operations out of China or seriously considering doing so.
A similar survey of European firms suggested that 40% were making or considering the shift. In the last few years, inbound foreign direct investment to China has plummeted, with monthly outflows occasionally surpassing inflows.
International companies didn’t all leave China. Many even doubled down on domestic production for Chinese consumers.
But for their customers in the rest of the world, many established bifurcated supply chains, moving some operations to South-East Asia, Mexico, Poland, Hungary and other nations.
The wave of US tariffs against dozens of countries, including many important trading partners, threatens this strategy; price shifts and political pressures will again restructure the global movement of goods.
Supply chain playbook
Corporations may swap the nations in their supply chain playbook, making the United States now the global plus one.
As tariffs raise import costs, local production for the US market may grow. But they also raise the price of exports through higher production costs and tariffed components from abroad.
Foreign-made inputs into exports average some 12% of US exports, and for energy, vehicles and even agriculture (think tractors and other machines), it is often higher. Add in tit-for-tat retaliatory tariffs, already announced by China and promised by Europe, and US goods will become less affordable abroad.
Take cars, which President Donald Trump has singled out for special protections.
The across-the-board 25% tariff on imported cars may bring more assemblers to the United States.
These will be for more expensive models: Long gone are the days when US consumers could find US$20,000 cars; they also don’t have many options for US$30,000. The higher price point means fewer purchases and slower sales.
And while the US imports millions of cars a year, it exports millions, too. BMW alone sends some US$10bil a year in sport utility vehicles and coupes from its Spartanburg, South Carolina, plant abroad.
Less affordable
Toyota uses the United States as an export base, shipping more than a third of its US-made vehicles overseas.
With higher tariffs worldwide, those US-made autos will become less affordable and desired.
Other industries and companies must reckon with similar calculations. In the face of “China plus one” business strategies, China shifted tactics: Its companies pulled back from trade with the United States and focused on the rest of the world. This worked: In 2024 Chinese-based businesses ran up a record trillion-dollar global trade surplus.
Yet the surge in manufactured goods also led to pushback from emerging and advanced industrial economies.
Nations began to parallel if not fully coordinate their responses.
The United States, European Union, Canada, Brazil and India have all placed tariffs on imported electric vehicles. But now, by hitting allies and adversaries alike with tariffs, the United States has let China off the hook for exporting its overcapacity.
Instead, companies may refocus their higher input cost and geopolitics playbook on the United States.
Only bright spot
The only bright spot is the survival of the United States-Mexico-Canada Agreement (USMCA).
Trump spared USMCA-compliant goods save for steel, aluminium, and cars from levies. This means the supply chains and manufacturing bases built up over the last 30 years may stay intact.
While most important for Mexico and Canada’s trade-driven and US-dependent economies, USMCA’s continuation opens an advantageous path for US exporters to sell inputs and products to its two largest export markets relatively unchanged and, through Mexico’s and Canada’s much greater global commercial trade access, potentially as a back door to the rest of the world.
But is this just a temporary reprieve for the trade agreement?
Up for renegotiation
USMCA is up for renegotiation, and Trump has signalled he’s willing to walk away from the deal he used to call “the fairest, most balanced, and beneficial trade agreement we have ever signed into law.”
Mexico and likely Canada are amenable to broad-based concessions, though it is unclear what would appease the White House.
While Trump doesn’t seem to believe in the benefit of international ties, companies do. If USMCA winds down, they will move, leaving the United States even further on the outside looking into a US plus-one world. —Bloomberg
Shannon O’Neil is senior vice-president and director of studies at the Council on Foreign Relations and author of “The globalisation myth: Why regions matter.” The views expressed here are the writer’s own.
