
With President Trump's re-election, the manufacturing world's ever-changing future will see uncertainty, and policies set forth by the administration could generate seismic changes. This is on par with the last 25 years of global, economic, and societal churn. Preparing for what could come next can be difficult in such an environment, especially regarding manufacturing operations that span countries. Manufacturing in China seems to have taken a back seat, with many of our clients wanting to “get out” of China. With what’s happening worldwide, how will these external factors affect manufacturing in China?
The China-Taiwan War
At MTG, we believe that this situation is doubtful, so much so that we think that companies should discard it as a real risk to operations. In 2022, the Brookings Institute paper stated that it was unclear if China could invade and capture Taiwan. While China has been increasing the size and sophistication of its military over the past decade, it faces several enormous challenges if it invades Taiwan. Islands are always tricky to invade. Moving the massive number of troops and equipment necessary to win a war would be difficult, especially since Taiwan is well-armed with anti-ship and anti-aircraft weapons. If there is a war, moving manufacturing out of China will not save companies from a massive disruption. The global economy will suffer as it will disrupt everything from communications to transportation and trade. Tensions will continue, but actual armed conflict is a remote possibility.
The Trump Plan
Trump’s plans on tariffs, inflation, and economic growth display a poor understanding of these subjects. Trump’s policies are mercantile and out of step with modern supply chains. Tariffs are a tax on the end consumer. Chinese manufacturers do not pay for it. This is because American companies pay higher prices for goods imported from China. Companies pass these extra costs on to the American consumer. Even if a company does not import a product from China, its suppliers and its suppliers’ suppliers probably do. The price increases go up the chain and affect nearly every business, including service businesses. The effects trickle down because the supply chain is complex, and the impact of restrictions is not often felt until there is a disruption.
What are the results? According to the Tax Foundation, the tariffs Trump already implemented amount to an estimated tax increase of $79B, with a net loss of long-run GDP of -0.20% and long-run FTE Jobs of 140,000. The tax increase applies to everyone but is most felt by lower—and middle-income people whose demand for goods is reduced, depressing the economy.
The situation is not advantageous for Chinese manufacturers even though they do not have to pay directly for the tariffs. Higher prices depress manufacturers' demand, leading to excess capacity and slowdown as companies cut personnel or close outright to reduce costs. We experience that most Chinese companies are hungry for orders and have a lot of underutilized capacity. A weakening Chinese economy could have several second—and third-order effects.
What Would Trump Mean for Manufacturing in China?
Under the expanded Trump tariffs, businesses must deal with increased prices and a weaker economy. As Goldman Sachs proposed in one of their latest analyses, the American economy could contract under a new Trump administration. Creating a multiple-prong strategy to deal with these changes is vital in this case. Ideally, you want to develop this strategy with your suppliers, as both parties have an essential state in the outcome. The plan should include optimizing, cost sharing, and reshoring in that order.
Reshoring
With Trump re-elected, companies should urgently assess their manufacturing strategies in light of expected tariff and trade policy shifts. For those who have not yet reshored operations, time is of the essence as the immediate post-election period will likely intensify pressure on companies to reduce reliance on China. Companies that delay may face significant challenges in relocating facilities due to soaring demand for resources in popular manufacturing alternatives, like Vietnam and Mexico. These countries are expected to experience a surge in demand for labor, land, and capital, further driving up costs. For instance, we recently observed a client wait over nine months to secure a facility in Mexico, only to see lease rates nearly double due to heightened competition. Manufacturers should also be aware of tax structures in foreign countries, as these could be complicated like the Mexico IVA tax scheme.
Factory Optimization
Optimization should always be the first thing you should try to do. Our experience with Chinese factories is that many are still run as they were 20 years ago. The methods used 20 years ago were effective at the time, but the world is changing. China is trying to be cleaner, and wages are increasing. China, like the United States, has challenges with labor. We have rarely seen a factory in China that could not improve efficiency by at least 25%. Optimization could be enough to nullify much of the burden imposed by the tariff.
Cost Sharing
Cost sharing with your supplier to weather the tariff storm helps create buy-in and would lead to an overall decreased risk between you and your supplier. It involves a transparent relationship that many companies struggle with. However, it can ensure that both parties can thrive together rather than in opposition. It is about seeing your supplier as your partner rather than someone you struggle against. Share the costs of improvements, changes, or relocation.
Rethinking Your Manufacturing Strategy Under Trump’s New Term
Trump’s re-election brings a renewed wave of uncertainty for global manufacturing, especially for operations rooted in China. The policies likely to be implemented under this administration will place heightened financial pressures on companies reliant on Chinese production, compelling them to rethink their long-term strategies. Although the possibility of a China-Taiwan conflict remains remote, geopolitical tensions will continue to cast a shadow over stability in the region, emphasizing the importance of foresight and resilience for companies with cross-border operations.
Now, more than ever is a great time to analyze your manufacturing strategy and understand if you are truly strategic or just running with the crowd. Does this mean that you should leave China? If that makes the most sense for your business, then relocate manufacturing. If it does not, do not fear staying in China. It may be the best option for you. Don’t know what you should do? MTG can guide you through the options and help you.
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