Will the New US Tariff Lead to Manufacturing Relocation from China?

　On 10 May 2019, the White House imposed a 25% tariff on USD 200 billion worth of imports from China, bringing the total imports from China carrying a tariff of 25% to USD 250 billion.

　The tariffed product list covers more than 6,000 products across various industries with electric machinery, nuclear reactors and machinery, furniture and lamps, and vehicles and articles of iron or steel accounting for close to 73% of the value of imports subject to tariff.

　The imposition of these new tariffs may lead some manufacturers based in China to start exploring plans to relocate to other (lower-tariffed) countries as a long-term solution. Besides relocation, some manufacturers may also consider strategies such as moving parts of the supply chain out of China; for instance, relocating assembly operations. Besides, underlying trends such as the gradual increase in operating expenses (wages and lease) also create a strong case to relocate to a new manufacturing destination, in our view. This is reflected in recent surveys within Chinese manufacturing firms where 8% responded they were ‘considering relocation’ and 19% responded they may ‘adjust the supply chain’.

　 　Taking into consideration the five main industries above (at the 2-digit HS code level), we have analysed 112 product categories (at the 4-digit HS code level) based on both China’s relative dependency on exports to the USA and USA’s relative dependency on imports from China. Based on our analysis, we identified 25 categories that could be at risk of relocation (four categories at high risk and 21 categories at medium risk).

　Of the 25 product categories identified, most products are part of the electrical machinery and equipment manufacturing industries that come under nuclear reactors, boilers and machinery (2-digit HS code: 84), vehicles, except railway and tramway (87), and electric machinery, sound equipment, tv equipment etc. (85) categories. Vietnam and India lead, in our view, as the most suitable relocation destinations, based on lower operating costs and favourable business environment relative to peers. Current exports of these 25 categories to the USA from Vietnam and India also suggest a fair development of the supply chain infrastructure within the electrical machinery and equipment manufacturing industry, and point towards the two countries being suitable relocation destinations.

Report Index

• Executive Summary
• Trump Administration Moves Ahead with the Imposed Tariff Hikes
• Is Relocating Manufacturing out of China the Ideal Solution?
• Machinery, Electronic Machinery, Vehicles and Vehicle Parts are amongst the Industries with the Highest Risk from the US Tariff
• Vietnam and India Gain Popularity as Relocation Destinations Supported by the Existing Infrastructure for Electrical Machinery and Equipment Manufacturing

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