US needs to look beyond tariffs to counter China's factory dominance

The US-China trade war began in March 2018 when then-President Donald Trump introduced a 25 per cent import tariff on steel and 10 per cent on aluminium. The tariffs were later extended to cover hundreds of Chinese goods in an effort to address the trade imbalance and protect US industries.

 

Now, with President-elect Trump, planning new tariffs on Mexico, Canada, China, and others, it is interesting to examine how America’s earlier tariffs and other trade restrictions affected global trade over the past six years. Who are the biggest winners and losers of the trade war? To find out, we tracked changes in global trade between 2017 (year before the trade war began) and 2023 (the latest available data). The results are surprising.

 

Rising US imports: When the US imposed tariffs, it expected fewer imports from China and the world, and a revival of American manufacturing. Between 2017 and 2023, US imports from China dropped by $81.56 billion, from $519.52 billion to $437.96 billion. However, overall US imports rose by 31.51 per cent, increasing from $2.31 trillion to $3.04 trillion — an additional $763.2 billion, nearly ten times the drop in imports from China. This highlights erosion of the US manufacturing competitiveness. Meanwhile, China expanded its global exports by an impressive $1.1 trillion, from $2.3 trillion to $3.4 trillion. US exports grew by $383 billion, from $1.31 trillion to $1.69 trillion.

 

Top gainers: While US imports from China fell, other countries stepped in to fill the gap, with Mexico benefiting the most. Between 2017 and 2023, Mexico’s exports to the US grew by $164.3 billion, followed by Canada at $124.0 billion, and Vietnam at $70.5 billion. South Korea ($46.3 billion) and Germany ($43.0 billion) rounded out the top five. India came in sixth, increasing its exports by $36.8 billion. Other notable gainers included Ireland ($33.6 billion), Thailand ($26.5 billion), Italy ($23.8 billion), and Singapore ($21.1 billion). Mexico, Canada, and Asean collectively accounted for $427.5 billion, or 57 per cent of the growth in US imports during this period. Much of this growth was due to tariff-free trade via the US-Mexico-Canada agreement  and the US-Vietnam free trade agreement (FTA).

 

China’s expanding role: Between 2017 and 2023, while China’s exports to the US declined, its exports to many countries grew significantly. Exports to Vietnam rose by 92.14 per cent to $137.61 billion. South Korea saw a 45.06 per cent increase, Malaysia 109.46 per cent, and Mexico saw the highest growth at 126.88 per cent, reaching $81.46 billion.

 

China used two strategies to bypass US tariffs. First, it exported raw materials and intermediates to Mexico, Vietnam, and other Asean countries, which processed them and exported to the US. Second, Chinese firms invested in manufacturing in these countries, particularly in the automotive, electronics, and heavy machinery sectors in Mexico, and electronics, textiles, and automotive sectors in Vietnam, Thailand, and Indonesia. Most of these exports to the US were tariff-free under the FTAs.

 

Gains to India: India experienced notable growth in its exports to the US, with an increase of $36.8 billion — from $50.5 billion to $87.3 billion — between 2017 and 2023. This made India the sixth-largest contributor to the increase in US imports. Smartphones and telecom equipment drove India’s export growth, increasing by $6.2 billion and accounting for 17.2 per cent of the total rise. Medicines contributed $4.5 billion (12.4 per cent), petroleum oils added $2.5 billion (6.8 per cent), and solar cells accounted for $1.9 billion (5.3 per cent). Gold jewellery and lab-grown diamonds together added $2.3 billion. Other exports, such as garments, motor vehicle parts, electric transformers, and transmission shafts, also showed significant growth.

 

For sustainable exports, India must boost local value addition, as many exports to the US depend on imported inputs. For instance, most parts for assembling smartphones are imported. Solar cells for assembling solar panels come largely from China. And up to 70 per cent of active pharmaceutical ingredients  (APIs) for making medicines are imported from China.

 

The US must rethink tariff: To counter China’s trade dominance and boost US manufacturing and jobs, a strategy beyond high tariffs is essential. One effective approach is limiting the use of Chinese inputs in US imports by revising non-preferential rules of origin. This common tool in FTAs could apply to all imports and prove more effective than tariffs, which risk rerouting goods through other countries. Strengthening rules of origin in trade agreements can also block Chinese goods from bypassing tariffs through minimal processing elsewhere.

 

Tariffs should target critical sectors tied to technological leadership, such as semiconductors, renewable energy, and pharmaceuticals, instead of broad measures that are easily circumvented. These targeted tariffs can be paired with tax benefits or subsidies to encourage US firms to source from domestic or allied suppliers. Expanding the CHIPS Act to include more high-tech sectors, encouraging supply chain relocation to allied countries, and investing in critical inputs like rare earth minerals, APIs, and lithium-ion batteries are also vital. Increased funding for research and development in artificial intelligence, robotics, and green technologies will further ensure the US stays competitive in the future.

 

Conclusion: As Mr Trump plans new tariffs, the US must confront a stark reality: It played a key role in making China the factory of the world. Undoing this dependence, if possible at all, will take years of efforts and strengthening of domestic industries. The results cannot be achieved overnight.

 

The author is the founder Global Trade Research Initiative