The United States Supreme Court held oral arguments on Wednesday morning (November 5th) regarding the legality of President Trump’s tariffs, a case that will determine the fate of the tariffs imposed by President Trump on most countries around the world. Regardless of the Supreme Court’s ruling, one trend will remain unchanged: manufacturers will continue to withdraw from China.
The Supreme Court’s scrutiny only involves the tariffs imposed by President Trump under the International Emergency Economic Powers Act (IEEPA), while tariffs imposed under other legal provisions are not affected.
President Trump’s tariffs imposed under the IEEPA are divided into three categories: tariffs related to fentanyl; equivalent tariffs imposed on other countries to reduce the U.S. trade deficit; and punitive tariffs imposed on certain countries.
For buyers and sellers of American consumer goods, from fast fashion to holiday decorations, the risks of relying entirely on Chinese production have begun to outweigh China’s advantages as a low-cost manufacturing hub. Even if there is a ceasefire in the trade war, American retailers are unlikely to reconsider their plans to relocate their supply chains out of China, while Chinese manufacturers are expanding into overseas markets to reduce their own risks. This is equally applicable to American manufacturers.
The Wall Street Journal reported on November 5th that even before President Trump was elected, companies like Stanley Black & Decker had planned to shift their supply chains out of China. However, the high tariffs have added additional costs to imported products and components, making this plan more urgent.
Stanley Black & Decker, a tool manufacturer headquartered in Connecticut, has already shifted some production to Mexico. On Tuesday, company executives stated that despite President Trump’s recent reduction in tariffs on China, the supply chain shift will continue.
“The 10% reduction in tariffs on China will not substantially change this outcome,” said Patrick Hallinan, Chief Financial Officer of Stanley Black & Decker.
President Trump recently signed an executive order reducing the 20% punitive tariff on Chinese goods related to fentanyl to 10%.
Off-road vehicle manufacturer Polaris is also taking similar measures. The company faced about $90 million in tariffs this year and plans to cut spending on Chinese suppliers by 80% over the next two years.
“This will be a significant reduction, undoubtedly benefiting the company,” CEO Mike Speetzen said last week.
On the other hand, many American buyers are also beginning to rethink their reliance on China’s procurement strategy. Even if it is more costly and less efficient in the short term, they are demanding that suppliers establish production bases outside of China.
According to Bloomberg, Lin Qian operates toy factories in Shenzhen and Vietnam. The reduction in American tariffs means that his Chinese factory will continue to handle the majority of orders from American customers in the short term. However, in the long run, he believes that production will gradually shift away from China to avoid further tariff disruptions.
“Both we and our customers are clear that the pace of diversified production will not change because the U.S.-China relationship remains complex,” he said.
For a company where three-quarters of its revenue comes from American toy brands, establishing a production base in nearby Vietnam is non-negotiable. Lin Qian did not disclose specific customers, but they warned earlier this year that unless he moves more production to Vietnam, they will cease placing orders entirely.
Lin Qian’s toy factory in Vietnam finally started production in September this year, three months later than expected. “The challenges are obvious,” he added, “We really must step out of our comfort zone.”
Having factories both domestically and overseas gives many Chinese exporters a sense of security.
“We no longer worry about fluctuations in tariffs,” said Barry Shan. His company currently produces holiday decorations for Walmart at a factory in Zhejiang Province and will soon commence the same business at a new factory in Cambodia.