But for many other industries, the tariffs simply spurred a global reshuffling of manufacturing operations, one that did little to strengthen US production or reduce ties with Chinese firms. Companies have merely shifted their factories to other low-cost countries in Asia or Latin America instead, and US imports from those countries have surged.
Some companies have severed their ties with China. But others have retained close connections, even as they have moved their operations out of China. Economists say many companies, both Chinese and multinational, have continued to rely on Chinese products and parts, which are now flowing into the United States from factories set up outside China’s borders.
Connector countries: Kuka Home furniture factory at Hofusan Industrial Park is one of many Chinese companies investing in Mexico.Credit: Bloomberg via Getty Images
In other words, some Chinese products are merely taking a longer trip around the world on their way to the United States, in an attempt to avoid tariffs. Rather than making global supply chains stronger and more diversified, economists say, this may be weakening them — while adding costs for companies and consumers.
In a speech in May, Gita Gopinath, the first deputy managing director of the International Monetary Fund, said trade and investment were being rerouted through what she called “connector countries,” partly offsetting the erosion of more direct links between the United States and China.
The role of these connector countries, most notably Mexico and Vietnam, “may have helped cushion the global economic impact of direct trade decoupling between the US and China,” Gopinath said. “But whether it has helped to diversify exposures and increase supply chain resilience remains an open question.”
Brad Setser, an economist and senior fellow at the Council on Foreign Relations, said the main effect of US levies on China was to encourage companies to “find a way around the bilateral tariff.”
“It reduces bilateral trade; it doesn’t impact global trade,” he said.
Setser added that China’s role as a global exporter had not diminished, and neither had the United States’ role as an importer. It was just the countries through which trade was being routed that had shifted.
“Even though we have less direct bilateral trade, in a global sense, there’s one surplus country, China, and there’s one deficit country, the US,” Setser said. “We are still interconnected indirectly.”
Trade data reflects this: The gap between the goods the United States exports to and imports from China narrowed to $US278 billion in 2023 from $US417 billion in 2018. While that level is set to rebound this year, economists say US imports of goods from China that are covered by tariffs have clearly dropped.
The Port of Lianyungang in Jiangsu Province, China. The country’s role as a global exporter had not diminished, one economist said.Credit: Olivia Martin-McGuire
At the same time, China’s exports globally have surged, and US trade deficits with Vietnam, Taiwan, Mexico, Canada and elsewhere have been widening. Economists say exports to the United States from some of those countries now contain more Chinese parts and raw materials than they did before.
Trump and his advisers are eyeing these new back doors that Chinese products are using to enter the United States. Trump has proposed an additional 60 per cent tariff on US imports from China, as well as a “universal” tariff of 10 per cent to 20 per cent on goods from elsewhere.
He and his advisers also appear to have doubts about the trade deal they renegotiated with Mexico, called the United States-Mexico-Canada Agreement, or USMCA. They want to adjust its rules to try to ensure that more Chinese cars and auto parts will not find their way to the United States through Mexico.
But it is unclear how effective their efforts will be against the creativity of global companies that are driven by strong financial incentives to maintain access to the US market.
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In industry after industry, Chinese companies have found footholds abroad that allow them to bypass trade barriers with the United States. After the United States put hefty tariffs on Chinese solar panels, for example, many Chinese companies opened solar factories in Southeast Asia. US solar companies have initiated trade cases, successfully appealing to the government for more protection from these factories.
US efforts to block critical minerals and electric vehicle batteries from China from receiving government subsidies have also pushed Chinese companies to set up battery-making subsidiaries in Morocco and Singapore.
Alan Wm. Wolff, a senior fellow at the Peterson Institute for International Economics and a former deputy director-general of the World Trade Organisation, said he anticipated an attempt by the Trump administration to follow Chinese trade further down the path it was taking through other countries to the United States.
But ultimately, those trade measures would not affect the US economy much if the United States and China did not make bigger economic changes, he said.
“The US has a trade deficit of a trillion dollars,” he said. “If we don’t change our macroeconomic policies, we’re going to have a trade deficit of a trillion dollars rearranged.”
This article originally appeared in The New York Times.
