At the time of writing this, president-Elect Trump has shared his initial plans for tariff changes across countries. Key points include:
- Plans to raise tariffs by an additional 10% on all Chinese goods coming into the US
- Plans to impose tariffs of 25% on all products from Mexico and Canada, ending a regional free trade agreement
- Threatened 100% tariffs on BRICS countries (Brazil, Russia, India, China, South Africa, and recent additions like Iran and Saudi Arabia) if they attempt to develop a currency that could rival the US dollar’s global dominance
- China responds with a ban on selling rare earth minerals into the US, including gallium and germanium, as well as antimony and superhard materials, and threatens further restrictions to key US trading partners
This article started life a week or two ago as a piece about tariffs, likely incoming tariffs, and, most importantly for us, what businesses should be doing about them. At that time, the only known was that there would be some form of tariff increase and that there would be unknown and perhaps unintended consequences for businesses and nations that rely to some degree or another on global trade flow. So almost everyone, everywhere.
2024 was always set to be a landmark year for policy, with over half of the world’s population going to the polls. While some of the outcomes were predictable, others were less so. Regardless, a majority win provides validation, and with that comes an opportunity to double down or shift diplomatic, environmental, social, economic, and trade policy more significantly. In just a few weeks, the uncertainty has ratcheted up. The truth is, like all policy, there will be winners and losers; that’s the gamble politicians take.
The gambler supreme in this case, or at least the key catalyst for (more seismic) change, is, of course, President Donald Trump, elected to serve as the 47th president of the United States. While his victory was dramatic, it was also tighter than one may imagine, one of the six closest US elections in the last century. However, in what has been described as a deadlocked nation, his Republican party will hold a majority in both the Senate and House of Representatives, signaling what will likely be a rapid shift in executive branch policies.
Unsurprisingly, Trump’s pick signals a desire to shake up the establishment and, as far as trade is concerned, move the dial in relation to US trading relations, most notably with China, but also with other key partners around the world.
was deglobalization really a trend?
Deglobalization has long since been a trend, but it has not been as simple as bringing it all “back home.” in fact, according to recent research, global goods exports were forecast to increase by 3% in the decade between 2022 and 2032. Recent years have made the global picture somewhat more complicated, with trade patterns between nations and regions changing as buyers look beyond cost as a value driver and consider how various risks affect the price and availability of goods in particular.
Pre-Trump, the big loser as far as the US is concerned was forecast to be China, which would see a clear contraction under a continuation of policy. The big winners? Mexico, the EU, and ASEAN countries were forecast to see CAGR in excess of 3%. A trend toward increased state intervention clearly favors political allies, with more business going to those who share common values. Recent comms from the man himself underline that every nation is in scope, and when the game starts, we will find out who is on Team USA.
But is it that simple? In 2023, China became Mexico’s second largest bilateral trading partner, with bilateral trade reaching c. $123bn. While this positions Mexico outside of China’s top ten trading partners, the balance of about 90:10 in favor of Chinese exports (electrical and electronic equipment, machinery, and vehicles) signals Chinese businesses seeing Mexico as a more profitable route into North America under the United States-Mexico-Canada Agreement (USMCA).
China’s bilateral trade relationships have experienced notable shifts over the past three years. Below is a table summarizing China’s top trading partners from 2022 to 2024:
As Chinese businesses such as electronics giants Hisense and Lenovo made strategic investments into Mexico, directly or indirectly, in the year between 2023 and 2024, Mexican exports into the US increased by approximately $120bn. As an initial counter, in 2024, the Biden administration introduced EU-style “rules of origin” tariffs, imposing a 25% levy on Mexican imports containing Chinese steel and aluminum.
Trump has signaled an intent to go much harder on Mexico and any and all other back-door trade routes into the US, proposing a 25% tariff on all Mexican and Canadian imports (and an additional 10% tariff on all products from China). Of course, we don’t know where the numbers will land, but the threat is big enough for the rumored investment of Chinese EV giant BYD to falter as Mexican authorities reconsider potential trade conflicts with their largest partner.
will we be looking at high-value supply chains or all supply chains?
The following research by Bain & Company reinforces the idea of reconfiguring trade rather than simply reversing globalization efforts. Over the past couple of years, companies’ plans to bring supply chains closer have sharply increased in an attempt to (among other things) improve control, reduce disruption, and mitigate risks.
Conventionally, the US, like other nations, has already sought to identify “high-value supply chains” that will be key to future prosperity and build supply networks around those that seek to protect pricing, jobs, and intellectual property ownership. This need to ‘protect’ drives efforts to increase resilience, such as bringing supply chains closer to home.
When it comes to high-value supply chains, we most often talk about supply chains such as defense, pharma, and high-tech as the keys to a sustainable economic future.
In terms of US dependency on China:
- Defense Sector: The sector is dependent on some raw materials, such as rare earth elements, essential for advanced military technologies. Further, for components and finished goods, there is strategic concern that China’s national security laws could compel companies to cooperate with state intelligence operations.
- Pharmaceuticals: Between 2020 and 2022, imports from China, including active pharmaceutical ingredients and finished drugs, increased by 485%. There are concerns about over-dependence and supply disruption.
- Semiconductors: Perhaps the key battleground for US-China economic tensions, the US is seeking to maintain a technological edge when it comes to more advanced technological exports (and relations with Taiwan). In response, China has recently banned the exports of critical minerals such as gallium, germanium, antimony, and superhard materials used in producing semiconductors and batteries, as well as communications equipment components and military hardware.
According to the US Geological Survey, China produces 98 percent of the world’s supply of gallium and 60 percent of germanium, highlighting the critical interdependencies behind what we make, what we buy, and who employs us. The semiconductor supply chain is one of the most critical in the modern age and is arguably already weaponized in the battle for economic supremacy.
The Biden administration had hitherto been relatively selective about if and where tariffs were introduced in a (not always successful) effort to protect US trade and jobs. It remains to be seen what hand Trump will actually play, but the game has certainly started.
taking action now and building for the future
In the modern world, when it comes to building or recalibrating these supply networks, we put risk at the center of the economic decision model and figure out where to get things from, assemble them, ship them, etc. Where it looks too risky, we look to how we can add more resilience while delivering the best economic outcome (at an acceptable level of risk).
Those supply networks have risk at their core and, therefore, rely heavily on transparency to understand their level of exposure, what is happening at any one point in time, and what decisions to make accordingly. Transparency does not immediately come to mind when we talk about global supply chains; therein lies part of the challenge for businesses.
That level of exposure will be determined by buying patterns, whether you’re buying raw materials or finished goods from China or from an ally of China to benefit from preferential trade tariffs through the back door (e.g., Mexico). Within those patterns, it’s about identifying the level of dependency and where, if at all, you are overdependent.
Take a mobile phone, for example. If you buy that phone as a finished good from China, you will pay the tariff on the full cost of the product. Yet, suppose you deconstruct that phone and reconfigure your supply chain according to your exposure at a material or component level. In that case, you can implement a combination of risk mitigation and resilience strategies that best serve your organization, such as moving assembly to a more favorable trading location.
Accepting, for example, that little can be done about China’s market control of rare earth minerals like gallium, there is a critical dependency that, in the short term, focuses on the security of supply. In this case, resilience strategies might be to buy in greater stocks or leverage a third-party broker or secondary market.
However, where that dependence is diluted for other materials and components that feed into the assembly process (e.g., glass, silicone, aluminum), risk mitigation can come from reconfiguring the rest of your supply chain and identifying opportunities to nearshore or friendshore to drive greater resilience at a component level and reduce the cost impact from tariffs. In some cases, onshoring may be possible but will warrant a thorough make versus buy analysis, especially as the reduced domestic competition resulting from the tariffs has caused a price increase for many onshore options within the US.
Of course, there are other considerations alongside these decisions. Stockpiling will lead to paying a premium for warehouse space, drive costs up from the demand, and increase the pressure on cash flow as it becomes tied up in inventory. From a nearshore, friendshore, or onshore perspective, there will be various trade-offs to make between cost and risk, as well as considerations around how the decision impacts the broader supply chain. As such, understanding your exposure by increasing the layers of transparency in your supply chain will be key to navigating an increasingly unpredictable year ahead (and beyond), and informing key decisions as you move.
As part of this landscape, there is also a growing opportunity within the ASEAN region. Strategically, the ASEAN region is a significant trading partner of China and the US. So, while the more headline-grabbing territories of Mexico, Taiwan, and Canada play out in the media, some of the ASEAN nations with increasingly strong trade could become the new backdoor battleground. Interestingly, Vietnam’s average effective tariff rate recently dropped from a pre-Trump 7% to around 4% due to a fall in the country’s share of US imports with high tariffs (apparel and footwear) and a rise in those with low tariffs (e.g. machinery and electronics), further highlighting the reconfiguration of global trade routes at play.
Who’s paying the price?
Domestically, Trump has been signaling several policies that could run the risk of inflation, making US-made goods and services less attractive at home and abroad. A counter to this at a policy level is to introduce tariffs on foreign goods and services, leveling the playing field. However, these efforts also result in a lack of domestic competition, paving the way for increased costs within the US and placing buyers between a rock and a hard place.
Trump’s intentions regarding tariffs are clear: to reestablish America at the top of the world order and to double down on illegal cross-border activity. However, the tariffs also hold significant potential to upend supply chains and exacerbate the reconfiguration of global trade. As with any policy, there are supporters and detractors, but the reality is that we just don’t know how things will play out. Except that is for businesses, who in the short term, need to get clarity on the composition of supply chains and the likely implications of tariffs. One thing is for sure: risk and resilience are front and center of decision-making.
