Chinese manufacturers scramble to mitigate tariff pain

As Washington-Beijing trade tensions flare, Chinese manufacturers are scrambling for ways to adjust their supply chains and head off the escalating tariffs.

U.S. President Donald Trump’s additional 10% tariffs on goods from China took effect Tuesday, bringing the cumulative new tariffs in just about a month to 20%.

The fresh tariffs also came on top of several existing tariffs on Chinese imports, put in place under the Biden administration, including 100% duty on electric vehicles, 50% on solar cells and 25% on steel, aluminum, EV batteries and key minerals.

The average effective U.S. tariff rate on Chinese goods is set to hit 33%, up from around 13% before Trump began his latest term in January, according to estimates from Nomura’s Chief China economist Ting Lu.

China on Tuesday retaliated to U.S. tariffs with additional tariffs of up to 15% on select U.S. goods and restricted exports to 15 U.S. companies. The measures are set to come into force from March 10.

“It will be a survival game for Chinese companies, [as] their bottom line will be affected,” Edwin Tan, general manager at global logistics firm Asian Tigers China, told CNBC.

A number of business owners that engaged in selling goods to the U.S. took to various social media platforms to voice concerns about the mounting tariffs. Some posted screenshots of emails from U.S. clients requesting to cut prices and failure to do so would lead to cancellation of existing orders.

In the lead-up to last year’s U.S. presidential election, Mian Bing, owner of a Guangdong-based stationary manufacturer, received requests from a key client in Hong Kong to consider setting up production in Southeast Asia amid expectations that more tariffs would come under Trump’s second term.

Soon after, the company bought industrial land in Cambodia and started building a factory that will be up and running later this year, she told CNBC.

When Trump raised tariffs on Chinese goods during his first presidential term, many Chinese companies have embarked on the so-called “China+1” strategy, expanding sourcing and manufacturing to a third country, such as Vietnam, Thailand and Mexico.

Unlike the last U.S.-China trade war, Chinese companies may now hold off on their relocation plans due to the “unpredictability of [Trump’s] tariffs,” said Lynn Song, chief China economist at ING. “The last thing companies want would be to commit huge resources to move to a country only to find it is also subject to heavy tariffs,” he added.

Trump’s tariff agenda in his second term has extended beyond just China. His administration has pressed ahead with 25% tariffs on Canada and Mexico and warned of further tariffs on any country that has a significant trade surplus with the U.S.

“As per Trump’s policy, nobody knows where he will hit tariffs,” Tan said, before adding: “No country is safe at the moment.”

Consequently, Chinese companies searching for a third country to reroute their supply chains with the goal of sending its goods to the U.S. are finding that task much more difficult.

Rather than the typical “China + 1” plan, many have adopted a “China + many” strategy,” Cynthia Ding, founding partner of Sega ventures, a Singapore-based venture capital firm told CNBC, referring to the practice of establishing operations across multiple countries.

“This inevitably raises operating costs, but it’s a necessary trade-off for supply chain security. Ultimately, these costs are passed on to customers,” she added.

Chinese companies looking for ways to mitigate the impacts from U.S. tariffs have expanded production to Southeast Asian countries in recent years, primarily Singapore, Indonesia and Vietnam.

Apparel and consumer electronics sectors have seen more production shifted out of China than others, such as automotives and solar industries, according to Rhodium Group.

Outward direct investment from China into the manufacturing industry in ASEAN, a bloc of Southeast Asian countries, nearly tripled to about $9.2 billion in 2023, up from around $3.2 billion in 2017, according to China’s Ministry of Commerce.

Greenfield investment, which refers to the setting up of factories and new operations in a foreign country, dominated the outbound foreign direct investment by Chinese companies in 2024, accounting for more than 80% of the total transaction value, according to data compiled by Rhodium Group.

“Vietnam has offered manufacturers an easy and practical way out of China,” the research group said in a Feb .4. report, but the country is likely to come under increasing scrutiny from the White House due to its large surplus with U.S. and substantial investment from China.

Vietnam’s trade surplus with the U.S. soared roughly 18% annually to a record high last year. The country’s simple average tariff rate on partners with the most-favored-nation status, including the U.S., stood at 9.4%, compared with the U.S. that levied 3.3%, as of 2023.

Other countries such as Indonesia, Philippines and Singapore may see lower risks, but they are also not “immune” to potential tariffs, according to Tianchen Xu, senior economist at the Economic Intelligence Unit.

Thus, that has fueled a trend of enterprises diversifying operations into multiple countries in the region.

“Companies are hedging their bets because they are unable to identify today what will be the differentiation in tariff from one country to the other,” said Eric Martin-Neuville, vice president of Asia-Pacific and Middle East at global logistics firm Geodis.

Some Chinese companies are considering moving part or all of the production into the U.S., with a desire to dodge the tariffs and access the U.S. market directly.

Bryan Zheng, founder and CEO of Livall, a Guangdong-based company selling smart cycling helmets, said he’d decided to “wait and see” how the tariff actions will play out before embarking on an outsized greenfield investment.

While gradually raising prices for its inventories that are already in the U.S., Zheng is considering to bring forward by two years a plan of moving some production to the U.S. That would involve sourcing parts from Chinese suppliers but keeping the last-mile packaging and assembling work in the U.S., he said.

Official data from China’s commerce ministry showed the U.S. remained the fifth-largest destination of China’s outward foreign direct investment, with $83.7 billion flowing to the U.S. as of the end of 2023.

The manufacturing sector saw the largest investment from China that year, the data showed, accounting for 30.6% of the total amount.

Nonetheless, investment flows in sensitive technologies, such as semiconductors, artificial intelligence and biotech are likely to continue face certain restrictions, said Cao Yuan, a partner at Beijing-based Yingke Law Firm.

— CNBC’s Yulia Jiang contributed to this report.