How businesses can navigate next phase of US-China trade war

The next chapter of the US-China trade war is unfolding, and multinational businesses worldwide are having to adapt to fresh tariffs, regulatory scrutiny and geopolitical manoeuvring. Trade tensions are flaring as Donald Trump’s administration considers imposing tariffs of 25 per cent on imported cars, pharmaceuticals and semiconductors – a policy announced just last week. The US President’s team is also looking to retaliate against digital services taxes levied by European countries, arguing that these disproportionately hit American tech giants. Mr Trump’s team is weighing tariffs against a host of EU countries as well as the UK and Turkey. Yet while trade disputes have become a fixture of US-China relations, multinational corporations should resist the impulse to make sweeping structural changes based on rhetoric alone. Instead, companies should weigh measured responses, recognising that the trade reality is often more tempered than the political noise preceding it. The challenge now is for firms to mitigate risks without overcommitting to a costly realignment of supply chains. Three key reasons suggest that businesses should avoid a wholesale revision of their US-China strategy at this time. First, policy execution is often softer than the political promises. Mr Trump floated a 60 per cent tariff on Chinese goods on the campaign trail, but in the end hit China with an additional 10 per cent levy. Similarly, during his first term, from 2017 to 2021, Mr Trump announced sweeping tariffs on Chinese imports, yet some key firms and industries secured temporary exemptions through lobbying and regulatory carve-outs. In 2020, for instance, under mounting pressure from lawmakers and industry groups, the US moved to exempt medical equipment from tariffs, recognising the urgent need to secure essential supplies during the Covid-19 pandemic. This pattern suggests that companies should not panic based on rhetoric alone. Second, the measures are almost always sector-specific, rather than across the board. Mr Trump initially rolled out 25 per cent tariffs on steel and aluminium imports, set to take effect next month, escalating his protectionist trade agenda. By potentially imposing tariffs on pharmaceutical imports, Mr Trump is seeking to revive domestic drug manufacturing, which has been in decline for years due to cheaper overseas production. However, the move could also lead to higher drug prices in the US, a politically sensitive issue. The proposed 25 per cent tariff on semiconductor imports aims to shield American companies like Intel and Nvidia from foreign competition and boost domestic chip manufacturing, while the tariff on imported cars also represents an escalation. Yet while significant, these measures are far from a blanket protectionist wall against all imports. Companies in unaffected sectors should remain vigilant but avoid overreacting. Third, the possibility of a “grand bargain” is still alive. Despite escalating rhetoric, both Washington and Beijing are reported to be considering a broader trade deal that could encompass investments and technology. Multinational firms should avoid major realignments until a clearer picture emerges. Chinese firms responded to US tariffs imposed during the first trade war by shifting production to third countries such as Vietnam, Mexico or Thailand. Last year, direct Chinese exports to the US made up just 15 per cent of China’s total trade, marking a continued decline in its reliance on the American market. But this strategy is increasingly under scrutiny and faces three major obstacles. First, the US government has become more aggressive in investigating Chinese firms that re-export through third countries. The Commerce Department’s anti-circumvention rules allow for tariffs to be extended to Chinese-origin goods assembled elsewhere, if they contain substantial Chinese content – like solar-power cells. Second, Beijing discourages the offshoring of critical production and technology. The authorities have tightened controls in strategic sectors like technology and minerals, aiming to preserve domestic manufacturing capacity and technological expertise within the country. Third, a growing number of nations are curbing Chinese investments in their economies. The Committee on Foreign Investment in the US has blocked several Chinese acquisitions, such as the attempted $1.4 billion purchase of US chipmaker Magnachip by Chinese private equity firm Wise Road in 2021, citing national security concerns. The EU has also implemented stricter foreign direct investment screening. So, instead of undertaking costly and uncertain shifts in production, firms should focus on maximising resilience within their current operational frameworks. And this is how. Probably the best way for Chinese firms to mitigate US tariff risks is to expand into fast-growing, underserved markets in other economies that are showing strong demand for Chinese goods. In the first half of 2024, China’s trade with Latin America surged, with exports rising more than 20 per cent year-on-year to north of $40 billion. The growth was fuelled by a near 34 per cent jump in exports to Brazil, underscoring Beijing’s deepening economic foothold in the region. Diversifying exports reduces exposure to US protectionism. It also makes sense to leverage domestic demand in China. With a population of 1.4 billion, it is the world’s second-largest consumer market behind the US. Beijing’s recent fiscal stimulus to revive economic growth, via surprise wage increases for millions of government workers, among other measures, provides commercial opportunities for firms. What is more, sectors such as electric vehicles, advanced manufacturing and renewable energy are receiving strong state support, with subsidies, tax incentives and state-backed financing aimed at boosting domestic production. Elsewhere, businesses should double down on automation, lean manufacturing and operational efficiencies to absorb potential tariff costs. It is important to note that the situation remains fluid. Trade talks and diplomatic shifts could change things dramatically in the coming months, so companies should stay agile. Despite rising tariffs and regulatory scrutiny, the fundamental forces driving US-China trade remain intact. China remains the world’s largest manufacturing hub, and American businesses continue to rely on its supply chains. While Mr Trump’s policies will introduce tactical disruptions, a full decoupling remains unlikely. For businesses, the key is to mitigate downside risks while positioning for new opportunities. In a world where politics and economics are increasingly intertwined, agility and strategic foresight will separate the winners from the rest.