With Trump’s second term on the horizon, raising China tariffs remains central to his strategy for revitalizing US manufacturing jobs. While the intent is clear, what are the likely outcomes?
For simple, low-cost, low margin products, it’s unlikely that manufacturing will return to the US. Instead, these goods may be supplied by other low-cost countries like Mexico, Vietnam, and India. Many of these intermediary countries will still source components from China, finishing the products locally to circumvent the elevated China tariffs. This approach does little to restore jobs in the US and could lead to increased costs and higher inflation due to less efficient supply chains.
For more complex goods, which are now increasingly being designed and manufactured in China due to major advancements in technical and manufacturing capabilities, high tariffs may prove more effective. However, establishing new manufacturing facilities in intermediary countries would require significant investment and time. For strategic industries, such as automotive, which could be subject to high tariffs globally, companies might be deterred from investing in regions outside China due to the risk of targeted tariffs making new factories uncompetitive. Given the current geopolitical climate and a four-year presidential term, relocating complex manufacturing may be a high-risk strategy.
Building complex manufacturing facilities within the US appears to be a safer alternative. This would align with Trump’s goal of bringing industry back to the US and offer political advantages. However, the time required to plan, build, and commission such facilities may lead potential investors to wait out the next four years instead of investing heavily now for an unclear future advantage.
Strategically important US businesses, such as chip manufacturers and those in the automotive and energy sectors, stand to benefit from Trump’s tariff strategy. Incentives like tax breaks and grants, along with protection from import controls or tariffs, would foster growth for these companies within the US. One caveat however, is that these companies could face retaliatory tariffs overseas.
More Likely Results
The impact of Trump’s tariffs is difficult to predict as he won’t take office until 2025, and there is currently no clearly defined tariff policy.
Onshoring and overseas investment in the US manufacture of complex and/or capital goods seem the most logical options for US job creation. However, will tariffs drive these investments by companies faced with a short four-year time horizon?
Simple, low-cost goods will likely be produced in intermediary countries. For the remaining products, it may still be cheaper to manufacture these goods in China, absorb the tariff, and export directly to the US. Historically, companies have found that the costs associated with moving production—tooling, samples, requalification, additional shipping, and oversight—can negate the savings from tariffs and add lead time and risk. This assumes there is sufficient capacity to accommodate the move, which might not be the case in the short term.
If a 60% blanket tariff is applied to all Chinese imports, significant inflation and shortages could result due to as much as a 60% price increase and insufficient global capacity to replace China’s exports to the US. While capacity could increase over time, building new manufacturing facilities in the US or elsewhere is a time-consuming process, and a four-year term is a short period to realize a full return on investment.
Instead of escalating trade wars, why not flip the script? Focusing on tariff reduction might be a more positive approach. The media often highlights Trump’s use of tariffs as punitive measures against China, but there is little discussion about reducing or eliminating tariffs. China has long imposed high tariffs on US goods, including car parts (29%-38%), luxury products (34%-61%), electronics (33%-58%), and clothing (29%-50%).
Removing these tariffs could boost demand for US-made goods, create jobs in the US, and reduce the trade deficit. As China’s primary customer, the US has significant market power, and Trump has shown he is not afraid to use it.
Trump has mentioned “tariff matching,” but a more ambitious goal would be to work towards eliminating tariffs wherever possible. China is unlikely to do this voluntarily but, if the alternative is punitive tariffs imposed by the US, they may choose the removal of Chinese tariffs over the imposition of US tariffs. With that said, protecting strategic industries, combating subsidies, and preventing dumping would still be necessary, but lower tariffs generally lead to increased trade, which benefits both China and the US.
The Verdict
Trump’s tariff strategy is a high-stakes gamble. It may nudge some strategic industries home but is unlikely to significantly boost US onshoring. And at what cost? Inflation, inefficiency, and strained international relationships could overshadow any gains. Instead of doubling down on trade wars, a collaborative effort to reduce tariffs and level the playing field could unlock global growth and stabilize markets.
America, the customer, holds the cards. The question is: Will it play them wisely?