Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The US government began applying section 301 tariffs on Chinese imports
in 2017. The disruption eventually led to the negotiation of a
'Phase One agreement' a year ago. On its anniversary, we revisit a
2019 research note, in which we analyzed in detail the lists of
products targeted by the US administration in its trade war against
China, showing that the initial tranches were designed so to target
in priority the products for which the US economy can find
substitutes; spare US consumers as much as possible; and countries
like Mexico, Canada and Japan could capture the markets likely to
be lost by mainland China once the dust dissipates.
Hitting China
The tariffs were applied in tranches. The introduction of the
tariffs was followed by a sizable reduction of US purchases from
mainland China (down 25% from Q4 2018 to Q4 2019 - see chart 1),
starting at the end of 2018 with the first two tranches, and
amplified in 2019 as the effect of tranches three and 4.A kicked
in. The loss of China's market share can be seen in chart 2. But
most of China's losses in exports to the US between 2018 and 2019
(USD84bn) were partially offset by rising exports by other
Asia-Pacific countries (USD25bn), Canada/Mexico (USD8bn) and the
European Union (USD7bn).
Strategic trade to allies
Mexico consistently captured US market share that China lost,
increasing its weight in US imports by 1.6pp for the tariffed goods
on average between 2017 and 2019 (chart 3). Several US allies in
Europe - the UK, France, Slovakia - also benefitted on the first
two tranches. Asian allies benefitted most on the third and fourth
tranches - Taiwan, Singapore and, most clearly, Vietnam. The
message varies by industry. While Mexico, Canada, and Europe
increasingly replaced China in the minerals sector, Asian gains
were concentrated in textiles, fur, plastic and chemical products
(chart 4). The sizable Chinese loss in the machinery/equipment
segment - which includes the strategically prized electronics
business (7.4% less market share between 2017 and 2019) was
captured by Canada / Mexico, Europe, and Asia, each having seen
increases of exports by USD15-25bn, 2-3% of the market.
Relocation - to SE Asia
One stated aim of the tariffs, 'reshoring' manufacturing from
China to the US, instead became relocation to, mostly, Southeast
Asia. A May 2019 survey by the American Chamber of Commerce in
China found "40.7% of respondents considered relocating
manufacturing facilities outside of China"; of those, 24.7%
preferred Southeast Asia, 10.5% Mexico, 3.8% Europe, and only 5.9%
the US (table 1). However, 35.4% of respondents were already
planning to relocate production away from China by September 2018,
when only two tranches of tariffs on trade worth USD50 billion were
in place. Available data on trade related to tranche 4.B (which saw
no tariff increase) are also consistent with this: the retreat of
Chinese market share in US imports for those products was more than
offset by the gain recorded by Vietnam - over three quarters of
which was attributable to the sole telephone segment (chart 5).
In many cases, the data for Asia should be read as a
consolidation, rather than surprising new gains: for many of the
exports to the US, a good portion of the upstream work is done
within the region and outside of China. Chart 6 shows that in a few
key sectors - electronics, transportation, electrical equipment -
the share of value-added in Chinese exports attributable to its
Asian neighbors is substantial - up to 30% in electronics.
Bottom line
Sun Tzu wrote "who wishes to fight must first count the cost".
The section 301 tariffs met only part of the Trump administration's
stated objectives: they reduced mainland China's share in the US
trade. But manufacturing was not 'reshored' to the US but rather
consolidated the position of Asian economies - all of them US
allies - in strategically important sectors.
Posted 19 January 2021 by Yacine Rouimi, Senior Economist, IHS Markit