Chinese Manufacturers Rethink South-East Asia Pivot After Trump's Tariffs

The narrow difference between duties on China and alternative manufacturing hubs is making the costs of relocating less appealing, producers say.

- William Langley

Chinese exporters are reconsidering investment in offshore factories as US tariffs on alternative hubs and new restrictions on "transshipment" force a sweeping rethink of supply chains in Asia.

Manufacturers have poured billions of dollars into South-east Asia in recent years as part of a "China Plus One" strategy to minimise their exposure to US tariffs in the wake of US President Donald Trump's first trade war with Beijing.

But the US has slashed additional duties on Chinese goods to 30 per cent amid trade talks with Beijing and imposed tariffs ranging from 10 to 40 per cent on other countries in the region.

For the most part, tariffs on South-east Asian countries remain lower than the average duties on Chinese goods, including pre-existing duties and product-specific tariffs. But Mr Trump's tariff barrage has reoriented the region's commercial landscape, eating into manufacturers' margins and undercutting their incentives to invest in moving production away from China.

The latest salvo on July 31 imposed a blanket 40 per cent tariff on goods "transshipped" from China to the US via third countries, casting further doubt on the viability of Chinese investment abroad.

"The China Plus One strategy is going to come under tremendous stress," said Ms Louise Loo, Asia economist at Oxford Economics.

Some companies will seek new manufacturing bases further afield, but many would return to China, she added. "The upfront cost to move to new markets is going to be exorbitantly high."

Many Chinese companies, which had stepped up their investments overseas when Mr Trump imposed 145 per cent tariffs on the country's goods, said they had been wrong-footed by the increased rates in South-east Asia.