RPT-BREAKINGVIEWS-Trump will splinter world’s 'China plus one' plans

By Una Galani

MUMBAI, March 6 (Reuters Breakingviews) - Donald Trump, once more, is moving to slash imports from China. Just like in his first term, the returning U.S. president wants to decouple from the world’s second-largest economy and establish self-sufficiency in key strategic sectors. The difference this time is that he’s cracking down on his adversary’s practice of re-routing products through third countries. The new administration’s vision is far-reaching and heralds greater upheaval for global supply chains.

The real estate tycoon is only in the seventh week of his second term but he has already ratcheted up import tariffs on the People’s Republic twice, adding a cumulative 20 percentage points of duties on top of existing charges. That hits the baseline level most economists built into their global forecasts as they grappled with a wide range of potential trade war scenarios, and those tariffs are now expected to continue rising.

Trump is also attacking Beijing by targeting backdoor beneficiaries of the so-called “China plus one” trade, under which companies accelerated moving operations out of the People’s Republic after he unleashed tariffs in 2018. A decade-old strategy to address the country’s rising labour costs morphed into a way to reduce geopolitical risks from the deteriorating Sino-American relationship.

This initial rerouting of supply chains only dealt with the risk of direct bilateral trade between the two powers. Production overall is still highly connected to the world’s factory. China’s share of U.S. imports fell 8 percentage points to 13.4% between 2017 and 2024, according to the U.S. Census Bureau. But its share of global merchandise exports rose from 12.7% to 14.2% over a similar period, data from the UN Trade & Development shows.

Some Chinese-made goods simply go through third countries to the U.S., often with minimum value added on the way. U.S. imports from Vietnam tripled from 2017 to 2024, reaching $137 billion according to the Census Bureau, while Mexico’s rose by almost two-thirds to $506 billion. The United States’ neighbour specialises in cars and car parts, while the Southeast Asian country’s share of U.S. imports surged in areas ranging from telecommunication and sound recording kit, furniture and footwear, according to an analysis by investment bank Natixis.

The America First Trade Policy memorandum, published on Trump’s first day in office, calls for tariff modifications to industrial supply chains to address circumvention. Vietnam looks especially vulnerable to this type of sanction. Its domestic value added, which measures the share of gross export value that is generated inside a country, fell 5 percentage points to 50% in the decade to 2020. That compares with 64% on average for India, Malaysia and Mexico – countries whose figures increased or remained flat over the same period, research by Nomura shows.

The U.S. is leaning on its allies too. Take Mexico. It is now weighing imposing tariffs on Chinese goods and has launched a dumping investigation into Chinese steel, reinforcing its bid to appease Washington, whose 25% tariff against its southern neighbour went into effect on Tuesday. President Claudia Sheinbaum readily admits that her country, home to firms like German carmaker BMW BMWG.DE, has little option but to prioritise the U.S. relationship. Trump’s Treasury Secretary Scott Bessent says Canada too ought to apply tariffs on China to protect North America from a flood of goods from the People’s Republic.

“In the past a lot of the restrictions were focusing on Made in China, and increasingly it is focused on Made by China”, says Gary Ng, senior economist at Natixis.

Trump’s ultimate policy intent remains unclear but there are various ways the China plus one trade might now evolve. The United States is seeking to bring back some manufacturing. This effort could focus on strategic sectors including steel, aluminium, pharmaceuticals, automotives and high-tech goods such as semiconductors. For low-end manufacturing, where it doesn’t make sense for the U.S. to compete, Trump may favour importing goods from its allies with less exposure to China, says Sonal Varma, Nomura’s chief economist for Asia ex-Japan.

In this scenario, Vietnam would lose because it is a big recipient of both Chinese trade and investment, which has concentrated on establishing manufacturing bases in Southeast Asia. That would be a headache for firms like Samsung Electronics 005930.KS and Nike NKE.N, with significant operations in the country.

By contrast India has an opportunity to gain, Varma says. It’s notable that during Prime Minister Narendra Modi's U.S. visit last month, both nations agreed to work on the first segment of a trade deal by the fall of 2025, aiming for bilateral trade worth $500 billion in 2030.

Though Delhi still relies heavily on Chinese components, India is attracting a greater share of its investment from the U.S., which accounted for 10% of the total foreign direct investment equity inflows into India since 2000 according to India’s Department for Promotion of Industry and Internal Trade. Only tax havens Mauritius and Singapore had a higher share.

Even so, India has only made limited progress so far on capturing the redomiciled Chinese production, beyond some high-profile success with Apple AAPL.O suppliers. And on Wednesday, in an address to Congress, Trump called out India’s high duties.

Ultimately China’s manufacturing prowess makes it difficult to shut the country out, warns Varma. “It’s like a whack-a-mole strategy, every time policymakers try plug in one loophole there is another route firms find to bypass tariffs”.

The upshot may be a cleaner segregation of U.S.-centric supply chains that minimise the use of Chinese components. It’s challenging to replicate the efficiencies and economies of scale of existing supply chains, so this may happen on a product level rather than a country level, says Frederic Neumann, chief Asia economist at HSBC. In this case, Vietnam may continue to churn out goods, but they’ll get sent to different markets depending on where the components came from.

Overall, animosity in Washington toward Beijing runs deep and it is hard to envision the world’s two largest economies striking a grand bargain that will ease the U.S. assault on China’s exports and investments. More importantly, third countries and companies are unlikely to bank on any such arrangement holding up. That points to a harder reset of China-plus-one trade regardless of what the unpredictable U.S. president does in the coming weeks and months.

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