Many observers have been impressed by China’s response to the aggressive tariffs imposed by the White House in early April.
At first glance, an import duty of more than 100% on Chinese goods entering the US appears disastrous given China’s status as one of America’s largest trading partners and the massive surplus it runs with the world’s largest economy.
However, a new report from payments firm Convera notes that China has reduced its reliance on the US market, with America’s share of Chinese exports dropping from 23% to 16% since the early 2000s. This shift has been accompanied by growing trade ties with non-core regions like Africa, Latin America and Oceania.
David Gantz, Will Clayton Fellow for Trade and International Economics at the Baker Institute’s Center for the United States and Mexico at Rice University agrees that China has begun to avoid the US, Canadian and to a lesser degree Mexican markets in favour of rapidly expanding markets in developing countries in Asia, Latin America and Africa.
“China is unique in its ability to flood the world’s markets with inexpensive, high-quality goods,” he says. “No other country, including the US or the members of the EU, can begin to compete across the board with China, particularly in autos, solar panels and steel.”
One relationship that has grown steadily over the last decade has been Mexico’s relationship with China. Since 2016, China has become Mexico’s second largest trade partner, with Mexican manufacturers increasingly integrated into supply chains and rising demand in China for Mexican agricultural products are key drivers of this relationship.
“Chinese firms have also been setting up physical operations in Mexico, bringing production closer to critical markets, which is indicative of a broader trend in nearshoring,” observes Marissa Adams – Regional Head of Europe and Americas, Global Trade Solutions at HSBC.
Another factor for Chinese exporters to consider is the extent to which tariff announcements from the US are a bargaining tool in trade deal negotiations rather than measures that are likely to remain in place for some time.
Francisco Suarez, Director Equity Research LatAm, Global Banking and Markets at Scotiabank notes that during the first Trump administration, tariffs resulted in a new trade agreement that increased value chain integration across North America – cutting exposure to value chains from other regions, notably China.
“We think that higher tariffs on China relative to those that may endure in North America are more likely to continue, encouraging the de-risking of value chains in North America from their exposure to value chains linked to China, particularly in sectors that are key for national security,” he says.
Many companies began supplementing or replacing their Chinese-based supply chains during the first Trump administration (and later as a result of the pandemic) as well as due to Biden’s de-linking or de-risking policies. But this was and continues to be a time-consuming and expensive process.
Restructuring supply chains is a lengthy, complex and costly process that is usually not done in the short term. Most private sector participants are waiting for greater clarity on actual policy changes that will be sustained in the long run to make proper risk assessments and more structural investment and trade decisions.
While new markets should always be explored, a proper evaluation of risk reduction and risk management and taking advantage of new opportunities should be based on factual information and real policies and trends, even in a highly uncertain environment.
