Companies globally have been quietly shifting production to avoid the tariffs U.S. President Donald Trump slapped on China during Trade War 1.0. Now, the president’s “Liberation Day” levies are skewering that strategy.
The so-called reciprocal tariffs announced Wednesday impose the highest charges on a slew of nations that have become key alternative production hubs. Levies rose to 46% on Vietnam, a vital location for the likes of Apple Inc. and Nike Inc. Cambodia, where Abercrombie & Fitch Co. gets about one-fifth of its merchandise, faces a 49% rate. Indonesia, where Japan’s Panasonic Holdings Corp. is among producers, is hit with 32%.
The scale and breadth of tariffs suggests that Trump and his advisors have learned from the 2018-19 tariffs, which failed to dent China’s global manufacturing dominance nor tackle America’s record $1.2 trillion goods trade deficit. Firms simply shifted production rather than reshore to the US, while Chinese factories started shipping low-value, duty-free parcels directly to American consumers.
This time, the White House is set on cutting off companies’ escape routes. That heralds deeper and more prolonged pain for financial markets, the global trading system and wider economy.
“Goods are transnational, they cross borders multiple times, so to target a country cleanly with tariffs is almost impossible,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “You’ll have collateral damage, you’ll hit other producers globally.”
Given how integrated supply chains are, companies are likely to face many tariffs throughout their purchasing and production process, according to Andrei Quinn-Barabanov, supply chain industry practice lead at Moody’s Analytics.
“One question that looms is how much of a surprise a company is in for in terms of hidden costs that will be inflated by tariffs,” he said. “There will be a chain reaction of all those additional costs that come into supply chains.”
Vietnam is a case in point. Hon Hai Precision Industry Co. and GoerTek Inc. — key suppliers to Apple Inc., Microsoft Corp. and Samsung Electronics Co. among others — have led more than $140 billion in global foreign direct investment into the Southeast Asian country since 2019, according to fDi Markets data.
It’s become Apple’s fourth-largest supplier in the world, spurring additional investment from other global firms in infrastructure, energy and other industries. SK Group, South Korea’s second-largest conglomerate, plans to build three LNG-fueled power projects in Vietnam in coming years, in just one example of major expansion plans.
The American Chamber of Commerce in Vietnam conducted a survey of its members, which include Alphabet Inc., Intel Corp. and Nike, earlier this year and found at least 9 in 10 were concerned about tariffs disrupting their operations and two-thirds of manufacturers foresee layoffs if levies were imposed.
Supply chains are also inextricably linked to the economic fate of the emerging nations such as Vietnam and Cambodia, which until now had relatively low barriers of entry into the US. Asia is the most exposed to the new landscape due to the hefty trade surpluses most of the region’s economies enjoy with the US.
The extra costs for companies operating in tariff-hit countries will, of course, depend on the end-destination. For example, Apple supplier Hon Hai, known as Foxconn, also takes advantage of Vietnam’s free-trade agreement with the European Union, with exports there rising to about $200 billion, according to Vietnam’s Ministry of Industry and Trade.
And Vietnam and other countries may still offer an advantage over China when it comes to manufacturing, given that US levies on the world’s second-largest economy have now risen above 60%.
The tariffs are generally bad for all companies, said the Lowy Institute’s Lead Economist Roland Rajah. “There’s quite limited ability to shuffle things around because you’re actually hitting all of the alternative suppliers all at once, particularly for electronics,” he said.
Among the companies that have shifted production away from China are Chinese firms themselves. As the country’s share of US imports declined, its share of the world’s total exports actually increased since 2017 and its share of global manufacturing rose to about one-third. More than half of Cambodia’s factories, for example, are now Chinese-owned.
The latest round of levies will force Chinese firms to scramble yet again.
In the past few months alone, Pang Ling, a sales manager for a Shanghai-based medical equipment maker, went from planning a new factory in Mexico to considering Costa Rica. With a new 10% levy on the Latin American country, that plan is also being re-evaluated.
“The non-stop tariff news threw our overseas factory plan into huge uncertainty,” said Pang. “That drives me crazy as the American clients warned they would only purchase from factories outside China from next year.”
Trump’s aim may be to bring manufacturing jobs back to the US, but it’s not clear companies will invest that way. In the meantime, uncertainty looms, which itself will add substantial costs to businesses.
“I would expect most of these countries to try and negotiate reductions and exemptions, but in the meantime, firms will need to make a choice about what to do about the increase in price,” said Inu Manak, fellow for trade policy at the Council for Foreign Relations. “These new tariffs and the possibility that they may be indefinitely modified,” she said, means “a lot more trade uncertainty in the months and years to come.”
--With assistance from Gao Yuan, Daniela Wei and Debby Wu.
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