'China plus' is collateral damage of 'America First'

Trump tariffs are unlikely to give a strong immediate push to supply chain diversification. We expect the impact to be quite the opposite amid skyrocketing uncertainty.

US-China relations are in a freefall

Any doubts that a full-blown trade war is on between the world’s two largest economies have been put to rest in recent days. China has responded to Trump’s 84% tariff in equal measure. In addition, it has announced several export and import controls against the US and US entities and added more US companies to its unreliable entity list. The US, on its part, has also changed de minimis and imposed higher duties on low value shipments from China¹.

This is not all. The verbal sparring between the two countries has reached concerning levels. China has vowed to fight the US “to the very end”. We don’t claim to know how this will unfold. But the risks that the situation worsens, before it improves, have risen.

Source : PIIE Charts, as of 10 April 2025

Where now for supply chains?

Ordinarily, the swift escalation in the US-China trade war would have been a big push for foreign companies to accelerate their China supply chain diversification plans. Only now they don’t know where to go.

The countries most preferred as alternatives to China have all been hit by high tariff rates by the Trump administration. The most notable is Vietnam. A clear winner of the US-China trade war so far, Vietnam now faces 46% additional tariff on all goods shipped to the US (except for the built-in exemptions²).

True, this is significantly lower than the 100% plus rate on Chinese imports; and others have fared better. Thailand and Malaysia, that are also beneficiaries of ‘China plus’ strategies, have reciprocal tariff rates of 36% and 24% respectively. And in a ‘very, very tough’ decision, India has been let off relatively lightly with a 27% tariff increase (though this has got nothing to with friendship and everything to do with India’s lower share in US imports).

But are the tariff differentials enough for firms to switch their production bases at a faster pace? Companies have been gradually diversifying their China supply chains since the start of the US-China trade war in 2017/18. Will the process accelerate, as some are suggesting? Will Vietnam also be a casualty? And will US onshoring receive a boost? These are the big questions that the Trump tariff shock raises.

We suspect the impact might be quite the opposite. Investments will likely slow to a crawl over 2025-26, as heightened trade and policy uncertainty delay decisions on expansions and relocation of production to new destinations.

For starters, tariffs are not etched in stone

There is little certainty on the announced tariff levels that range between 10-49% for Asia Pacific. Already, Trump has indicated willingness to negotiate in return for “phenomenal” offers. We are likely to hear more about this in the coming days as the ongoing tariff negotiations pick speed.

We doubt that US tariffs will fall back to pre-liberation day levels anytime soon. The threshold level of 10% looks here to stay based on the ‘America First’ plan, which draws on the ‘Miran playbook’ succinctly outlined by

Stephen Kirchner

here. But additional exemptions and carve-outs are possible, and tariff levels could even be further ‘discounted’ for some.

For what it’s worth, Miran acknowledges the risks emanating from large tariff shocks in his paper and advocates for gradual implementation. Whether this might still guide the Trump administration is up for debate. But at least we now know that there are senior members in the Trump team who advocated for a more measured approach than Navarro. From Bloomberg

Trade adviser Peter Navarro urged the president to implement either an across-the-board 25% tax on imports or a so-called “reciprocal” formula based on trade deficits, people familiar with the matter said. The latter was incorporated in Trump’s proposal announced last week, on top of a baseline duty of 10%.

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In the run-up to Trump’s announcement in the Rose Garden last week, the internal discussions featured moderates — who supported the lower 10% rate for universal tariffs, perhaps with exceptions — and maximalists.

Treasury Secretary Scott Bessent was a voice of caution, encouraging the use of tariffs primarily as a negotiating tool, the people said. Navarro viewed them as something more fundamental — the means to transform US trade relationships — and Commerce Secretary Howard Lutnick also struck a strident tone.

So, sense may still partially prevail.

But even if tariffs prove sticky on the downside, businesses have no guarantee that they will not rise again. There is a clear risk that duties rise in the future in the countries they relocate to. This is because the reciprocal US tariff is simply a function of how reliant the US is on a country for imports. This reliance is bound to increase if a country gets more plugged into the global production networks that supply the US with most of its goods - an arrangement that is not going to change overnight.

This is very much the case for Vietnam. It’s trade surplus with the US is almost entirely driven by foreign companies operating on its soil, including US headquartered ones. So, a similar fate might await India or Philippines, 18 to 24 months down the line, if their exports to the US begin to surge driven by supply chain shifts.

Supply chain shifts are complex decisions

Beyond the tariff headlines, the fundamental case for faster supply chain diversification is weak. Let us look at this from the perspective of two large US companies caught in Trump’s tariff crossfire.

Case study I - Apple

With assembly operations in China, Vietnam and India, the tech giant appears well positioned to adjust its supply chains relatively quickly and shift more production to less tariff hit India. However, this simplified view overlooks significant procedural challenges. Most importantly, India’s own preparedness to accommodate large-scale high-tech production reallocation in a short span of time.

Apple’s suppliers started setting up factories in India roughly a decade back. Production efforts picked up in earnest in 2017. Even then, India accounted for only 11% of iPhone production in 2024 as per investment bank JP Morgan (JPM), with the rest staying in China. It was expected to produce 25%. JPM now projects a more measured rise in India’s share to 21% in 2027³. In contrast, Vietnam has rapidly moved up Apple’s suppliers and production rankings in the last eight years. According to Evercore ISI, around 20% of iPads and 90% of Apple’s wearable products are now assembled in Vietnam.

A weak manufacturing ecosystem, less efficient work force and early learning curve are some of the issues that overshadow the advantages of a large, cheap labour pool and government subsidies that India offers. India’s barriers against Chinese imports and investments, that impact Apple’s assembly margins, also dent the case for a rapid shift of assembly production to India with the components supply chain remaining in China.

Anecdotally, India has been slow to give approval to Apple’s Chinese suppliers. Only 16 Apple vendors were based in India in 2024, as opposed to 35 in Vietnam. Business visa applications of Chinese engineers and technicians, required for smooth operation of Apple’s India supply chains, have also met with heightened scrutiny and many rejections.

With regards to attracting production from Vietnam, there is the additional challenge of no product overlap. Vietnam doesn’t produce iPhones and AirPod production in India is set to begin only this year.

Meanwhile, China too is delaying shipments of equipment and raw materials to Vietnam and India to impede tech supply chain shifts.

The numerous geopolitical crosscurrents underscore the enormity of the decisions facing Apple. Proceeding cautiously and staying on the gradual diversification path, until more certainty on tariffs emerges, seems to be its best option.

For US consumers, however, this is likely the worst outcome. Depending on how much tariffs Apple chooses to pass on to buyers, iPhones could get costlier by $200-$300. But the company has been preparing. It reportedly brought in emergency shipments of iPhones from China and India in late March to boost US inventory. This gives it some additional time to deliberate on production and tariff exemption plans. From WSJ

Apple plans to send more iPhones to the U.S. from India to offset the high cost of China tariffs, people familiar with the matter said.

The adjustments are a short-term stopgap while Apple attempts to win an exemption from President Trump’s tariffs—which Chief Executive Tim Cook obtained during the first Trump administration. The company sees the current situation as too uncertain to upend long-term investments in its supply chain, which is centered around China, the people said.

Source : WSJ