The Trump-Putin meeting this Friday and the oil trade spat with India have been hogging the headlines these days, but meanwhile, the tariff war continues—and it may end with a complete rearrangement of global supply chains.

The central target, of course, is China. Amid the latest negotiations between Beijing and Washington, China faces a 30% blanket tariff on goods sold to the United States. And in a positive turn of events, the deadline for the entry of these tariffs into effect has been pushed back by 90 days. This has provided space for some hope that any disagreements about trade balance could be resolved without blood being spilled, figuratively. But if the tariffs do take effect, there will be blood.

All Asian countries became targets for Trump’s tariff offensive, as did India and Brazil, and every other trade partner that the United States has. Yet Asia is one of the most important parts of the trade equation due to its lead role as exporter to the U.S.—mostly of Chinese goods.

The Financial Times recalled in a recent analytical piece how Chinese companies had spent billions on building manufacturing capacity in neighboring countries in Southeast Asia with the precise purpose of insulating themselves against a potential tariff war initiated by the White House. Yet Trump has easily seen through that and imposed tariffs on all those Southeast Asian countries as well.

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In fairness, those tariffs are lower than the ones for China, but the so-called transshipment tariffs for goods originating in China but being routed via third countries before getting shipped to the United States are not. Those are at a hard 40%.

“It’s a gut punch to these countries and they need to try to negotiate it lower,” Dan Ives, global head of research at financial services provider Wedbush Securities, told CNN this week. “The worry is US is trying to cut off China’s export routes and it speaks to the high tariffs facing these nations.”

If the U.S. is trying to cut off China’s export routes, Chinese exporters would have to work hard to forge new ones, and that may well start by returning home. “The China plus one strategy is going to come under tremendous stress,” Louise Loo, Asia economist at Oxford Economics, told the Financial Times. “The upfront cost to move to new markets is going to be exorbitantly high,” Loo added, noting that the tariff pressure will prompt many to retrench.

This means that Chinese investments overseas, notably in Southeast Asia, would diminish, if not dry up completely, affecting the economies of these countries, including Vietnam, Malaysia, Cambodia, and Indonesia, and not in a positive way because there isn’t a line of companies from other countries waiting their turn to pour some billions into, say, solar panel manufacturing capacity in Vietnam.

This means that, if implemented, all these tariffs may well spark a race for new low-cost manufacturing locations in low-tariff jurisdictions, wherever they might be. Some analysts suggest Mexico. Others note that the tariffs might actually do what Trump wants them to do, namely, revive local manufacturing in the United States. Or Chinese manufacturers will get more creative.

“The new punitive treatment would either short-circuit this Southbound shift in manufacturing we’d seen over the past decade, or incentivise more creative ways of rerouting by Chinese manufacturers,” Oxford Economics’ Louise Loo told CNN.

None of this, however, would make goods cheaper. This means that whichever way supply chains shift, chances are that imported goods will likely become more expensive for U.S. buyers in the near future—if all those tariffs enter into effect, of course.

By Irina Slav for Oilprice.com

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