Reroute, Reshore, Rebuild: Chinese Companies’ Playbook for A Post Tariff World

Since the U.S.-China trade war began in April, Chinese companies have faced high tariffs and economic uncertainty, prompting them to reshore production to the U.S., shift manufacturing to developing countries, and diversify into other markets. Despite higher costs and regulatory challenges, they are balancing supply chain stability with expansion in Latin America, Southeast Asia, and Europe to maintain their low-cost business models.

Since the declaration of the new U.S.-China trade war on April 2nd, companies in both countries have struggled with economic uncertainty. With peak tariffs of 145% on Chinese exports to the U.S. and 125% on U.S. exports to China, the conflict amounted to an effective embargo on trade between the two countries. Businesses, especially small-and-medium enterprises (SMEs) dependent on U.S.-China exchange, faced dangerously high costs. 

Companies like solar power component manufacturer Xinte Energy were burning through cash even before the trade war as slow domestic spending dented profits. Factories continue to sell at a loss, leading to the assessment they are "slowly dying", even amidst the recent London truce. In the U.S., companies are reevaluating their relationship with Chinese manufacturing amid the turmoil. HP. Inc’s Enrique Lores said the tariffs negatively impacted operating profit in the most recent quarter, while Best Buy’s CFO Matt Bilunas said the company cut sales and earnings projections to account for tariffs. And when asked if their organization would plan to reshore or intermediate production from abroad in the next six months, 52% of manufacturing companies and 28% of service companies said they planned to “pass on some costs, absorb some”, according to a poll by the Institute of Supply Management. Although the effective tariff rates were reduced to 30% (U.S. rate on Chinese goods) and 10% (Chinese rate on U.S. goods), the trade war has forced Chinese businesses to rethink the relationship they have with their most important market. These companies are leaning on three strategies: reshoring manufacturing to the U.S., moving production to developing nations, and diversifying to non-U.S. markets. 

U.S. Manufacturing

Although President Trump declared he wanted to bring American manufacturers back to the country, some Chinese companies are “reshoring” as well. Besides avoiding tariffs, Chinese companies consider producing in the U.S. to maintain supply chains, comply with labor laws, better follow environmental regulations and handle concerns of espionage. For some executives, like novelty gift manufacturing head Ryan Zhou, American consumers are “not a market we [Chinese companies] can afford to lose.” Mr. Zhou’s sentiment is echoed by China’s largest companies; Insta360 (the largest stock offering Shanghai’s tech-heavy STAR board) reported 23% of revenue generated in the U.S. Furthermore, the percentage of companies on STAR saying at least half their revenue came from outside the country rose from 12% in 2019 to 14% in 2024. 

Slow domestic growth is pushing these companies to develop “international brands.” As foreign demand looks increasingly attractive, executives are investing more in targeted market research, as well as building offices staffed with local employees. Charlie Chen, managing director and head of Asia research at China Renaissance Securities, highlights this as a major development from the times when Chinese companies pursued joint ventures or were manufacturers for “foreign brands.” 

 Despite sentiment to put boots on the ground, production costs are generally higher in the U.S. due to a lack of infrastructure, more difficult labor laws, and higher wages. Last year, 21% of Chinese businesses in the U.S. said in a survey that they experienced losses exceeding 20%. Chinese reshoring to the U.S. is thus selective. For example, radiology companies like United Imaging are looking to diversify supply chains and manufacture close to target markets. The company plans the "tripling" of their production space in Houston, accelerating their previous 2020 investment. Companies are also targeting particular geographies, notably Texas and Nevada according to Ye Yingmin (founder of chemical consulting firm in Beijing). Especially compared to the rest of the U.S., these states’ favorable tax environment and low housing costs are a draw for Chinese firms.

Manufacturing Outside the U.S.

However important the U.S. market is, Chinese companies are still generally reluctant to produce there. America’s lack of infrastructure and manufacturing expertise means that “much of the capacity leaving China has been redirected to emerging economies in Asia rather than returning to the United States,” according to Leci Zhang and Botao Xu of The Diplomat. But where are they going?

Latin America has been a beneficiary of Chinese attention amid the trade war. Chinese firms’ interest has increased from 5% to 15% after Liberation Day due to the region’s generally lower tariff rate. This interest appears to be sustained as 35% of Chinese firms with supply-chain exposure to the region say they want to stay there after Liberation Day compared to 24% before. 

Brazil has emerged as one of the region’s darlings. Chinese companies plan to invest ~$4.7 billion in the country’s mining, renewable energy and automotive manufacturing sectors. Meituan, the largest food delivery company in China, said it would spend $1 billion to begin operations there. Other top firms, like leading mobility app Didi and fast-fashion giant Shein, are also pushing into Brazilian markets.

Chinese companies are not completely bullish on Latin America, though. For example, there has been a "drastic downshift” in inquiries in Chinese companies looking for Mexican land. Monterrey, a production hotspot during Trump’s first term, has seen its industrial property vacancy rate rise to 5.6%, up from below 1% in the past four years. Shipments worth less than $50 from Temu and Shein have also been hit with a 20% tax in Brazil. While the region holds promise, Chinese companies must be willing to sacrifice profitability to move there, at least in the short-term.

Another target for reshoring is Southeast Asia (ASEAN). Similar to Latin America, Southeast Asian countries face lower tariffs. They also have a unique hold on “strategic” goods. For example, 28% of U.S. solar products are imported from Vietnam, 22% from Thailand, 17% from Malaysia and 12% from Cambodia, for a combined 79%.

Vietnam has been a key target for companies looking to pivot from Chinese manufacturing. The country exported $142.48 billion to the U.S. last year, more than double the amount from Thailand, the second-most lucrative exporter. However, even Southeast Asia is not safe; Trump imposed duties of 46% on Vietnam, 36% on Thailand, 36% on Cambodia, and 25% on Malaysia. These tariffs can still take effect and have only been delayed until August 1st.

Due to the bloc’s “developed” image, readers may find it surprising that Chinese companies are producing in the EU. Yet, the environmental campaign group Transport & Environment has warned Europe is on track to becoming “‘an assembly plant’” for Chinese battery makers. Even before the trade war, the continent drew major battery investment, such as a €4.1bn lithium battery factory in Spain, built by Stellantis and China’s CATL, the world’s largest battery manufacturer. And in 2024, total Chinese FDI in the EU and UK rose 47% from the previous year. Despite generally high labor costs, European production has unique upsides. Like in the U.S., producing locally allows Chinese companies to bypass increasingly strict “Made in Europe” laws. European countries also offer generous incentives to green tech companies: the Spanish factory received almost €300mn in government aid.

Producing in Europe has its own challenges, however. Much of Chinese investment has been done with little knowledge sharing, and Brussels is growing increasingly worried against perceived one-sided business arrangements. In response to Chinese firms buying stakes in more than 30 ports, Transport Commissioner Apostolos Tzitzikostas stated European leaders must “examine foreign presence more carefully.” Some are more explicit in their anxiety. Ana Miguel Pedro, a Portuguese Member of the European Parliament (MEP) in the European People’s Party warned that Chinese shipping company COSCO’s “‘growing presence in ports is not just an economic concern,” but a “strategic vulnerability.”      

Non-U.S. markets offer lucrative opportunities for Chinese companies. However, regulatory concerns and lack of profitability mean that Chinese companies are still looking to develop other fail safes in an uncertain policy environment.

Shipping to New Markets

As the world’s largest economy, the U.S. market is impossible to fully replace. However, trade war tensions have accelerated Chinese companies’ search for new markets. Exports to the U.S. plunged 21% year over year (YoY) in April as tariffs increased. In contrast, Chinese companies flooded global markets with goods, causing the country’s trade surplus with the rest of the world to climb to $500 billion, a 40% YoY increase. 

Europe has emerged as a strong alternative. Exports to the bloc rose from 3.7% increases in March to 8.3% in April. Much of this growth was driven by Germany, which experienced a 20.4% gain. Analysts speculate that this increase could be driven by reallocating orders to dodge tariffs or the region’s high demand for green tech.

ASEAN destinations saw a more dramatic increase. Chinese exports to ASEAN countries more than doubled from 8.1% increases in March to 20.8% in April. According to China Briefing, “Indonesia (+36.8 percent), Thailand (+27.9 percent), and Vietnam (+22.5 percent)” all experienced double digit growth. Belt & Road partners also picked up the slack, with exports to India increasing from +13.8% to +21.7%, and South Africa jumping to 21.1%.

Flooding world markets with billions of dollars of goods has not gone unnoticed. From European leaders calling for knowledge sharing and more equal deals to Brazilian car makers clamoring for an antidumping probe into Chinese vehicles, non-U.S. countries have expressed they are not passive targets for overproduced goods. 

A Multifaceted Strategy

Although decoupling has been one of Beijing’s policy goals for years, the trade war has pushed Chinese companies to reduce their reliance on American customers or change their strategy regarding this now unsteady market. From rerouting products to new markets, reshoring to the U.S. or moving production to alternate locations, Chinese companies have developed a varied toolbox. Driven by stuttering growth at home, and an unreliable U.S. market abroad, Chinese companies are fighting to maintain their low-cost business models amid political chaos.