US tariff pause on China and its impact on global manufacturing hubs

A recent agreement between the United States and China to pause tariffs has shifted the dynamics for manufacturing hubs such as Mexico and Vietnam. These countries now face pressure to negotiate favorable trade deals with the U.S. to continue benefiting from the "China-plus-one" strategy used by many global producers. This strategy involves diversifying supply chains beyond China to reduce dependency.

For the past several weeks, nations with tariffs lower than China’s have taken solace in their comparative advantage. For instance, while U.S. tariffs on Chinese imports increased significantly from 20% to a staggering 145%, countries like Vietnam, Thailand, and Malaysia faced far lower rates—46%, 36%, and 24%, respectively. This prompted multinational corporations to consider relocating their manufacturing operations to these countries.

However, a breakthrough in U.S.-China trade talks led to a 90-day pause on the highest tariffs, with a base 30% rate on Chinese imports. Despite tariffs still being higher on Chinese goods than on those from other hubs, experts warn that this pause may reduce the momentum pushing companies to shift supply chains away from China. As a result, countries like Vietnam, Thailand, and Malaysia are working to secure their own favorable tariff deals with the U.S., while Mexico is negotiating reductions in specific duties, such as those on automobiles.

The U.S.-China trade thaw could slow the offshoring of production from China, said Wu Xinbo, Director of the Center for American Studies at Fudan University. While companies may continue operating in China as their primary hub, they might diversify some operations to nearby countries. This uncertainty in policy-making presents challenges for businesses attempting to navigate the shifting landscape.

In countries like Vietnam, which had benefited from Chinese manufacturers relocating due to previous U.S. tariffs, the U.S.-China rapprochement is creating additional pressure to secure advantageous trade deals. Leif Schneider, a legal expert in Vietnam, noted that if Vietnam can strike a better deal than China, it would position itself as an attractive alternative for regional investments.

The uncertainty surrounding trade relations has already affected foreign investment in Vietnam, which saw a 30% decline in new investments in April compared to March. Meanwhile, in Mexico, President Claudia Sheinbaum continues to highlight the country’s competitive edge under the U.S.-Mexico-Canada Agreement (USMCA), where most exports are tariff-free, except for certain sectors such as steel, aluminum, and automotive parts. Even with the U.S.-China tariff pause, Mexico is poised to benefit as multinational companies seek more reliable alternatives to China.