The Great Reshuffle
Chinese companies and multinationals operating in China are actively reshaping global supply chains to circumvent U.S. tariffs. Instead of exporting directly to the U.S., they ship intermediate goods to other countries where products are assembled and then sent to the American market. This has led to a decrease in the U.S. trade deficit with China but a surge in deficits with other countries like Mexico, Vietnam, Canada, Taiwan, Ireland, South Korea, and Thailand.
Catalysts Beyond Tariffs
The reshuffle isn’t solely due to tariffs. The COVID-19 pandemic exposed vulnerabilities in supply chains centered around China. Rising geopolitical and climate risks have also pushed companies to diversify. Meanwhile, China’s slower economic growth has incentivized multinationals to seek production bases elsewhere.
China’s Hidden Trade with America
While direct data on how much of the U.S. trade deficit with other countries reflects China’s indirect exports is unavailable, proxies help estimate this “hidden trade.” One method examines correlations between a country’s rising exports to the U.S. and its imports from China. Another looks at China’s outward foreign direct investment (FDI), which has sharply increased in countries where the U.S. trade deficit has worsened, signaling manufacturing shifts to those locations.
Conclusion
The global supply chain reshuffle driven by Chinese firms and multinationals is well underway. Regardless of the U.S. presidential election outcome, further tariffs on China seem inevitable. However, applying tariffs only to Chinese imports may accelerate supply chain shifts without reducing the overall trade deficit. A broader tariff approach across all imports might be necessary to effectively address the trade imbalance.
