Politics
US Tariff Pause on Beijing Boosts China-Plus-One Strategy Impact
China-plus-one strategy
Reuters, Beijing/Mexico City/Hanoi, May 13 In order to continue to profit from a “China-plus-one” strategy by multinational companies, manufacturing hubs like Vietnam and Mexico are under pressure to negotiate better deals with the United States in light of a recent agreement between the United States and China to halt exorbitant tariffs on one another.
Under the new global order brought about by President Donald Trump’s shifting tariff pronouncements, nations evaluate their performance by comparing themselves to other nations rather than by the terms of their trade agreements with the United States.
Under Trump’s now-paused “reciprocal” global tax regime announced on April 2, many countries that have been subject to high penalties for the past five weeks have found comfort in having lower rates than China, where U.S. tariffs on Chinese imports increased from 20% to an embargo-like 145% between March and May.
For instance, Vietnam’s rate of 46% was higher than China’s, although Thailand’s was 36% and Malaysia’s was 24%.
Because of their comparative advantage, manufacturing hubs expected more international companies to open offices in their nations and lessen their reliance on China, which might continue the “China-plus-one” trend that has been going on for years.
Following a breakthrough in U.S.-China trade negotiations that led in a 90-day reprieve from the startlingly high tariffs on China, leaving a base import tax rate of 30% for goods made in China, everything is now up in the air once more.
Even with Trump’s 90-day suspension on reciprocal charges, tariffs on China are still higher than those on rival industrial centers, which pay 10%. However, some analysts believe the agreement may slow the trend of multinational corporations moving their supply chains further away from China.
“The rules of the game are still uncertain,” said consultant and North American trade specialist Diego Marroquin Bitar. “I think companies are just going to delay their investments as much as they can.”
Trump attempted to use tariffs on China as pressure to compel businesses to move their manufacturing to the United States beginning in his first term.
Over the past ten years, corporations like Apple (AAPL.O) have begun searching for alternatives to China, with an emphasis on nations that offered relatively low labor costs and fewer tariffs. However, the “reshoring” to the U.S. did not materialize in major part.
Mexico and Southeast Asian countries benefited the most, but if the U.S.-China tariff hiatus is prolonged, those nations may lose their comparative edge.
At the moment, Vietnam, Thailand, and Malaysia are negotiating their own tariff agreements with the US. Mexico is attempting to lower separate import taxes on particular goods, including cars, after avoiding reciprocal tariffs.
DEALS FOR SWEETER
According to Wu Xinbo, director of the Center for American Studies at Shanghai’s Fudan University, businesses that had thought about accelerating their efforts to offshore manufacturing from China may now put the brakes on because of the U.S.-China trade thaw.
“They will maintain their current situation, keep China as their main operations hub and make appropriate partial arrangements in neighbouring countries, but the bulk of their business will remain in China,” he stated.
The unpredictability of Trump’s policymaking is “very painful for companies” attempting to determine whether or how much to decouple from China, according to Sun Chenghao, a fellow at Tsinghua University’s Center for International Security and Strategy.
“The current cooldown in tensions does not mean that U.S. firms dare to boldly engage in business activities in China,” he stated. “Everyone is still waiting for the possibility that tariffs might be imposed again.”
The surprise U.S. thaw with Beijing increases pressure on nations like Vietnam, which had also drawn Chinese manufacturing since Trump slapped tariffs during his first administration, to negotiate better terms of their own.
According to Leif Schneider, head of the international law firm Luther in Vietnam, “Vietnam will position itself as an appealing alternative to China in regional investment strategies if it is able to negotiate a better deal than China, which is more than likely after today.”
“This was already the outcome of the ‘First Trade War’ introduced by the first Trump administration,” he stated.
Pledges for new foreign investments in Vietnam have already decreased due to trade tensions and uncertainties; in April, they totaled $2.84 billion, a 30% decrease from March and an approximate 8% year-over-year loss.
President Claudia Sheinbaum has emphasized Mexico’s comparative advantage over the United States on numerous occasions. Under the U.S.-Mexico-Canada trade agreement, the majority of exports to the United States are duty-free; nevertheless, Trump has placed significant tariffs on steel, aluminum, automobiles, and car parts.
Even if Monday’s trade agreement with China is upheld, multinational corporations will still be hesitant to rely entirely on Chinese production, according to Jorge Guajardo, a former Mexican ambassador to China and international trade adviser. Mexico stands to gain from this.
“If you are Walmart, Target, Home Depot or any other important importer who just went through five weeks of hell, you appreciate the reprieve but you are looking for a different supply source,” he stated.