The manufacturing industry has already left China. Where will it go now?

Key Takeaways

• Many U.S. businesses have refocused the supply chain to Vietnam, Thailand and countries in the area, partly because the labor costs in China has risen over the decades.
• Those plans could be in doubt if Trump implements the tariffs expected to go into force on Wednesday.
• One expert said that the tariffs could put pressure on supply chains, and force a major reorganization of international trade and financial flows.

President Donald Trump’s new tariffs could throw a wrench into a popular business strategy: shifting production away from China to Southeast Asia.

Many U.S. businesses have refocused the supply chain to Vietnam, Thailand, and other countries in this region, partly because the labor costs in China have increased over the years. They’ve also tapped in to the once-hot “friend-shoring” trend, where firms try to shift supply chain away from China and towards U.S. Allies.

However, Trump plans to impose steep tariffs on the region—46% on Vietnam, 36% on Thailand, 49% on Cambodia, and 24% on Malaysia, for example. The countries have large trade surpluses, thanks to the factories that produce Nike apparel or Apple goods. 

In a note sent to clients, Jeremy Leonard, the managing director of Oxford Economics’ global industry services, said that this effectively closed off options for rerouting trade flows. This means that these countries will feel the full impact of tariffs, but also experience broader disruptions to global supply chains.

Southeast Asian Countries Are Looking to Make a Deal—As Apparel Makers Hold Their Breath

Changes may be coming as Wednesday's tariff deadline approaches. Cambodia has offered a reduction in tariffs for U.S. goods. Indonesia is also willing to negotiate, and Thailand is looking to boost U.S. exports. 

Trump said Vietnam offered to cut their tariffs to 0 percent. However, his trade advisor Peter Navarro later told CNBC that it “means nothing to us because it’s the nontariff cheating that matters,” citing concerns about intellectual property theft or Chinese products making their way to the U.S. through Vietnam. Bloomberg reported that a Vietnamese official of high rank was headed to Washington, D.C., in order to negotiate.

The outcome of the talks could have a significant effect on American companies. Nike’s share price fell sharply following Trump’s announcements on tariffs and has yet to recover momentum. According to its latest annual report, the company sources 50% of shoes and 28% apparel from Vietnam.

Straton writes that Vietnam exports 34% of U.S. footwear imports, and nearly 20% of apparel imports. Cambodia, Bangladesh and Indonesia also contribute significantly to the U.S. apparel market.

But It's Not Just Southeast Asia That Will Be Affected

Morgan Stanley consumer retailer analyst Alex Straton, in a note sent to clients last weekend, wrote that while markets expected punishing tariffs against China, the tough policy against Southeast Asia was a surprise. 

“Past attempts to diversify away China will no longer provide much protection,” Straton wrote.

Alejo Czerwonko is the chief investment officer at UBS for emerging markets and financial flows in the Americas. He wrote that Trump’s aim to “accelerate” a significant reorganization global trade and financial flow could also hurt global growth.

“Such a transformation won‘t occur overnight, and the transition period will undoubtedly present challenges for the global economy,” Czerwonko wrote.