Supply chain tensions

| January 30, 2025

At the beginning of the US–China trade conflict in 2018, manufacturers indulged in temporary workarounds such as adjusting suppliers and transshipment to avoid tariffs, expecting tensions to be short-lived. But the conflict has persisted, prompting a complete change in supply chain strategies.

Diversification was the primary supply chain strategy for global executives in 2022 and 2023, according to Economist Impact’s Trade in Transition surveys. Many operations in the Asia Pacific are adopting a ‘China+1’ strategy, where companies expand their operations and invest beyond just China. While this approach is not solely in response to the trade conflict, it remains central, with ongoing tensions as the most significant future trade concern.

But diversifying supply chains is not a seamless process. Rule of law, political stability and dispute resolution are key factors that influence business relocation decisions.

Such shifts are slow to materialise. Nearly half of German executives still rely on China for key intermediate goods, highlighting how sourcing dependencies — particularly for critical minerals — complicate decoupling. For Newell Brands, a US consumer goods company, reshoring from China poses capacity challenges as North America lacks China’s production scale. Chinese imports continue to influence US manufacturing output, despite reduced direct sourcing since 2017 following changing trade dynamics.

As diversification plays out gradually amid a tense geopolitical environment, companies are turning to friendshoring to manage risks. Businesses are consolidating suppliers among their trusted networks by reducing supply chain tiers, a strategy that saw a 16 percentage point increase in respondents to 26 per cent between 2022–23.

Regional trading blocs like ASEAN have registered strong GDP growth (1.5 percentage points higher than the global average of 3.2 per cent in 2024) as they feel the ripple effects of these shifts. Treaties like the Regional Comprehensive Economic Partnership are tapping into integrated supply chains and could accelerate reshoring to Southeast Asia, as tariffs and non-tariff barriers are set to decrease leading up to 2045. Powered especially by investments in the electric vehicles and electronics manufacturing industries, regional economies like Vietnam could win big.

In 2023, Vietnam’s relationship with the United States was elevated to a comprehensive strategic partnership. As a growing ally, Vietnam is benefitting from increased US foreign investment in fields such as AI, semiconductors and clean energy. Vietnamese exports to the United States are increasing year-on-year as factory relocation from China to Vietnam rises. Yet, the United States’ decision to continue to classify Vietnam as a non-market economy is likely to hinder further upgrades in bilateral relations.

Mexico has also benefited from this supply chain strategy through its friendly trade relations with China and the United States. Businesses in China are engaged in a strategic offshoring manoeuvre to establish a presence in Mexico, where they are able to bypass trade barriers and benefit from access to the US market through the US–Mexico–Canada Agreement. This swelled Chinese direct investments into Mexico by 300 per cent between 2018–19 and 2022–23.

While some markets will benefit from friendly supplier networks, they are likely to strain geopolitical relations. A more regionalised global trading order will intensify geopolitical tensions, as evident from rising trade interventions justified on grounds of national security.

The US-led Minerals Security Partnership Finance Network, established with allies including India and Japan, is one such example. It aims to reduce reliance on nations like China for critical resources — particularly rare earth minerals essential for the clean energy transition — while excluding China from strategic supply chains.

The weaponisation of supply chains is also evident in the technology industry. There is a lack of substitutes for Taiwanese semiconductor chips in Asia due to limited production scales, more nascent technology and significant gaps in capital investments. Amid Taiwan Strait tensions, this allows major export countries to weaponise their advantage by imposing export bans on countries critical of their roles.

US President Donald Trump’s plans to impose unwarranted substantial tariffs on imports from China, Canada and Mexico signal a renewed weaponisation of trade. These measures risk sparking trade wars, raising consumer prices and destabilising the global economy. With globalisation politics already unfriendly, these actions pave the way for more protectionist policies in the near future.

Close to four billion people went to the polls last year, with serious implications for business environments, policy and trade strategies. While the United Kingdom’s new Labour government may be keen to improve UK–EU trade relations, the imposition of countervailing duties on Chinese battery electric vehicle imports indicates growing protectionism in the region.

In India, Prime Minister Narendra Modi’s new coalition government is likely to continue protectionist policies which will limit the global supply chain integration of some sectors. Meanwhile, new import duties on certain Chinese goods in Indonesia suggest a potential shift in President Prabowo Subianto’s aim to attract Chinese investment.

Pivotal changes by these new governments — alongside the return of the Trump administration — could markedly determine the future course of the global supply chain drift.

This article was written by Aashi Garg, a Policy and Insights Analyst at Economist Impact; Satvinderjit Kaur, a Policy and Insights Manager at Economist Impact; and Elizabeth Mackie, a Policy and Insights Senior Manager at Economist Impact. It was published by the East Asia Forum.

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