Donald Trump’s sky-high tariffs are not a ban on trade with China, but they come close. Although it is hard to estimate quite how sharp the decline in business between the two countries will be, since firms will find new routes and Mr Trump keeps changing the scope of the levies, a vertiginous drop is assured.
Once turned away, where will China’s exports to America go instead? As supply chains adjust, firms will expand abroad to qualify for lower tariffs, as many did in Mr Trump’s first trade war. Less scrupulous types may try to dupe American customs officials. But rerouting, legal or otherwise, is unlikely to offset a steep drop in demand from the world’s biggest goods importer. The rest of the world will make up much of the difference, whether it wants to or not.
By the end of Mr Trump’s first term American tariffs covered two-thirds of imports from China at an average rate of 19%, up from 3% before. However, newly incentivised tariff-dodgers found workarounds. They undervalued shipments, relabelled goods, forged paperwork and rerouted goods via third countries. Goldman Sachs estimates that Chinese exports worth around $120bn bypassed tariffs in 2023.
This time it will be much harder to avoid border levies. One reason is that Mr Trump has introduced prohibitive tariffs on all Chinese goods—bar, for the time being, certain electronics and pharmaceuticals—rather than a subset, meaning exporters have less to gain from relabelling products. Rerouting hubs including Mexico and Vietnam have become wary of Chinese firms using them to dodge tariffs, owing to threats of American retaliation against their own export industries. Claudia Sheinbaum, Mexico’s president, has announced her willingness to work with Mr Trump on transshipment, including with new tariffs aimed at Chinese goods and raids on Chinese-owned stores.
There is a reason for her obsequiousness. Mr Trump’s fixation on bilateral trade balances observes little distinction between dubious rerouting and supply chains legally adjusting to tariffs. At risk are countries such as Cambodia, India, Mexico, Thailand and Vietnam, which all now supply more of America’s imports than before Mr Trump’s first trade war. Thai negotiators have offered a crackdown on “counterfeiting from third countries”; Vietnamese officials promise to stamp out “trade fraud” and tighten rules of origin.
Building barriers
Chinese goods that cannot be sold to America will head elsewhere. This comes at a time when neighbours are already concerned by Chinese industrial production. In response to weak economic growth, the country’s policymakers are funnelling cash and loans to manufacturers, leading output to surge. Chinese firms have cut export prices by 20% since 2023, and the country’s manufacturing trade surpluses with Asian and Latin American countries have grown much more quickly than those with America or Europe. Last year 198 complaints were filed against China at the WTO, a record, including 37 from India.
Although a flood of cheap goods would be a boon for consumers, politicians worry it will put domestic manufacturers out of business. Take Thailand, where industrial production has shrunk by a tenth since 2019, at the same time as the country’s trade deficit with China has doubled in size. Computer and electronics firms have suffered most of all, with their output falling by 40%, despite hopes that Thailand could fashion itself into a production centre for laptops. China last year exported portable computers worth $33bn to America, which will have to find a new home.
This could bite even in countries that benefited from the first trade war. One example is the toy market in Vietnam, worth $1bn a year, in which firms such as Bandai Namco and Lego have invested. The industry now faces competition from cut-price Chinese goods that would have gone to America. Another is textiles, where America imported $29bn-worth of goods from China last year. Mr Trump has scrapped “de minimis” rules, which let packages under $800 into America duty-free, aiding Chinese firms including Temu and Shein. Trade deflection could hurt manufacturers in Bangladesh and India.
More protectionist countries will not hesitate to hit back against China. India and Indonesia were fast to do so last time round. Others were more cautious, however. Malaysia and Thailand have largely refrained from counter-measures, for instance, fearful of angering their imposing neighbour. The pressure on their leaders will only grow in the months to come.
Read More: US sanctions two Chinese firms over weapons sale to Russia
Read More: Top Chinese Science and Tech Official Urges Priority on Research
