- The extremely high US import tariffs imposed on China will likely strengthen the forces that have driven multinational corporates to shift production for the US market away from China and towards other EMs in recent years. Those EMs with spare capacity in their manufacturing sector are likely to gain US market share from China in the near term. But until some of the uncertainty about future tariff rates clears, many large long-term investment decisions about building new capacity in EMs are likely to be on pause.
- The tariffs imposed by President Trump on China in 2018 and broader efforts by manufacturers to ‘de-risk’ supply chains led to the friendshoring of new production capacity in manufacturing-oriented, US-aligned emerging markets including Mexico, parts of South East Asia and India.
- On paper, there might be a stronger argument for friendshoring away from China today. Even with the latest exemptions that have been announced for electronic products, we estimate that the average US tariff on Chinese goods is now above 100%. Other countries received a 90-day reprieve on reciprocal tariffs – they now face the minimum 10% tariff (and many of Mexico’s exports to the US remain tariff free).
- Significant manufacturing re-shoring back to the US seems unlikely in our view, particularly in the lower value-added industries where EMs have a significant cost advantage. The upshot is that US import demand is likely to shift towards other EMs. Those EMs that have spare capacity in sectors that overlap with what China produces for the US market are likely to raise output. Countries such as Mexico, India and Vietnam will probably continue to gain US market share at China’s expense.
- But the unpredictability of US trade policy is likely to affect decisions about investment in new production capacity for the US market. Investments planned prior to Trump’s tariff announcements may be on pause, resulting in lower investment relative to the pre-tariff outlook. And while the high import tariffs on China may incentivise investments in non-China EMs (that hadn’t been planned prior to the tariff announcement), those too may be hobbled by uncertainty over future tariff rates.
- After all, although President Trump delayed the introduction of reciprocal tariffs, the possibility of big differences in tariff rates across countries remains on the table. That creates enormous uncertainty for firms making long-term decisions about supply chain locations. As things stand, Vietnam could plausibly face a tariff rate of 10% or 46% on much of its exports to the US in a few months’ time.
- Chinese firms may have a stronger incentive to locate production for the US market outside China irrespective of future tariff rates (where they’ll almost certainly be lower than China’s tariffs). But policymakers in the host country may be reluctant to receive investments from China that result in a wider trade surplus with the US. That could invite higher future tariffs and put them at a competitive disadvantage.
- So the benefits from friendshoring for those EMs supplying the US market are only likely to be reaped once firms have more clarity on future tariff levels. For some EMs (such as India) a degree of clarity could come relatively quickly if policymakers are able to agree low-tariff trade deals soon. In India’s case, its large domestic market provides a hedge against trade uncertainty too. For others, the threat of high US tariffs may linger to the end of Trump's term, leaving them unable to capitalise on friendshoring opportunities.
- In so far as friendshoring investment continues apace in the near term, it is likely to be in those countries and sectors geared towards non-US markets. US tariffs will have little direct impact, for example, on investments into Central and Eastern Europe or Morocco, whose exports are directed towards Western Europe, although uncertainty about the impact of Trump’s tariffs on the global economy may dampen this nonetheless.