US Tariff Flooding will Reshuffle Supply Chains

The recent escalation of U.S. tariffs under the second Trump administration, including a blanket 10% levy on all imports but with clear differences across countries, with China at the top so far with about 54% (additional 30% in 2025 together with the tariffs from previous administration) and Singapore at the bottom with 10%. India has ended up faring quite poorly with 25% tariffs, compared to Vietnam (20%) and others. On top of that, the US is also introducing transshipping tariffs (of the order of 40% based on Vietnam’s case), aimed at countering goods routed through intermediary countries to evade higher duties.  In addition, a number of Asian economies, basically the largest net creditors like Japan and South Korea (and potentially soon also Taiwan once its temporary tariffs announced yesterday are converted into a more permanent deal, will need to invest hundreds of billions of US dollar in the American economy. The stated goal of such large investments is to help create a US-centric supply chain, thereby, reducing dependence on China.All of the above has sent shockwaves through Asia’s economic landscape and more is to come as the consequences are huge.  Firstly, the U.S. appears determined to reduce China’s dominance in global supply chains by recreating its own and reducing China’s importance in other economies’ manufacturing activities.  In other words, a massive reshuffling of supply chains, is to be expected with relevant consequences for companies all over the world, especially multinationals.  Such “tectonic shift” will affect some Asian countries more than others, depending on the openness of their economy and the level of tariffs imposed by the US, but no one is spared.The trend that companies during the first Trump administration of adopting “China + 1” strategies and diversifying production to Southeast Asia to hedge against U.S.-China trade tensions will now become much more global as the rest of Asia is also badly hit by US tariffs. Furthermore, the latest tariffs are also much more granular as they scrutinize not just the final assembly location but also component origins and ownership structures. This means that the countries which absorbed part of the production that left China (and not only from multinationals but also from Chinese firms), such as Vietnam, Thailand, and Indonesia, will now see some of that activity go where tariffs are lower. One of the biggest beneficiaries could be Mexico if its current level of tariffs into the US (of 25%) comes down after the renewal of the US-Mexico-Canada Agreement is renewed.The other important push for the reshuffling of supply chains is the closer relation between Southeast Asia and China with further cooperation in research, production, and distribution capabilities, if not for the US market, for others. Malaysia and Singapore, with robust digital infrastructure, are emerging as hubs for high-tech manufacturing. India, instead, might remain less integrated to the Asian supply chain waiting for US and European investment which might not come in the light of the high level of US tariffs. In other words, from a potential big winner, India might now look more of a loser unless the US changes its decision to impose such high tariffs. In the same vein, the ongoing discussions for a free trade agreement between the EU and India would help reduce that potential isolation but are not moving forward fast enough for India to get out of this potential impasse.Going back to the wave of investment that the US aims at receiving from major Asian investors – as well as the European Union (EU) – this is by no means a new development. Biden’s inflation reduction act, as well as the US Chips Act, acted as a magnet for investment from Taiwan, Japan, South Korea and the EU. Trump’s call for investment is clearly much more forceful (more a stick than a carrot), compared to Biden’s programs, but the ultimate goal is the same. In fact, so far a number or Asian companies have already responded to Trump’s wishes by announcing multibillion projects in the US. This is the case of Taiwan’s semiconductor producer, TSCM, Japan’s automaker, Toyota, and  Korea’s telecom and semiconductor company Samsung, which aim at mitigating tariffs risks but also placating Trump’s thirst for investment.Chinese firms face a tougher road. With 54% tariffs and heightened scrutiny, direct investment from China into the US has dwindled, dropping from tens of billions annually to near negligible levels by 2023. However, some Chinese companies are using indirect routes, funnelling investments through subsidiaries in neutral countries like Singapore or Mexico to establish U.S. operations. At the same time China has proven to have more leverage than any other economy in the world as the US has had to engage in a number of bilateral discussions, leading to the reduction of tariffs from very high levels and more could come soon, based on the tone of the ongoing negotiations. In other words, while the U.S. tariff strategy appears laser-focused on sidelining China, the U.S. is also very hesitant in pushing further as it needs Chinese goods to avoid an inflation shock as well as more market access in China for its companies. This is clearly the case of hardware manufacturers, especially in the artificial intelligence space, as China’s demand is huge.All in all, the US’ tariff flooding is clearly not good news for Asia and this is not a China issue only but a regional one where hardly any economy is spared. The U.S. tariff regime will reshaping Asia’s economic landscape, in particular the supply chain configuration with large shifts from one country to another. Trump’s push to invest in the US will only accelerate this process even further. For Asia, the challenge is to adapt swiftly, leveraging internal demand and further regional integration. India will have a harder time in doing so given its starting point in this Asia-centric supply chain.