China's share of U.S. imports peaked at 22% in 2018 during the U.S.-China trade conflicts and sits at 11.5% as of June 2024.
Rising geopolitical tensions, pandemic-related disruptions, and tariffs concerns are prompting multinationals to reassess their reliance on China. Many are adopting a “China+1” strategy or favoring nations with stable political ties and proximity to key markets. But where are they relocating, and how quickly is the trend unfolding?
The change is most evident in international trade data. China's share of U.S. imports peaked at 22% in 2018 during the U.S.-China trade conflicts and sits at 11.5% as of June 2024. Additionally, FDI into China turned negative for the first time on record in 3Q23, suggesting that foreign companies are divesting at a faster rate. Meanwhile, business surveys, like the 2024 AmCham survey shown below, indicate the trend remains in early stages. Specific country developments also provide further evidence:
- India: Reforms to boost manufacturing and exports in high-tech goods and services are attracting multinationals. Key initiatives include “Make in India”, which cut corporate taxes for new manufacturing firms to 17%, and a $2.0 trillion infrastructure investment. This has helped increase greenfield investments inflows in India, which averaged $87 billion in 2022-23, up 54% from the 2015-19 average.
- Southeast Asia: Markets like Vietnam, Thailand, and Indonesia are also benefitting from increased trade and investments. For example, Vietnam has established major trade agreements with the EU and reduced its standard corporate tax rate to 20%. Its exports as a share of GDP have risen 17% in the past decade, and credit growth continues to be concentrated in trade and industrial sectors. Additionally, as China looks to design and manufacture more advanced products, like electric vehicles, other Asian countries are gaining market share for labor-intensive goods.
- Mexico: Mexico has become the U.S.’s top individual trading partner, with its share of U.S. exports rising from 13.5% to 15.9% since 2018, highlighting its nearshoring potential. However, MORENA’s landslide victory1 in June and the recently approved judicial reform, combined with long-term bottlenecks, have dampened nearshoring momentum and investor confidence. Consequently, investment announcements have dropped to an average of $3 billion YTD, down from $6 billion in 20232. Markets have been accounting for these elevated risks, with Mexican equities and the peso down 19.2% (in USD) and 14.5% year-to-date, respectively.
While some doors may be closing, others are opening for China. Its share in U.S. exports has dropped 8% since 2017, but its share in global exports has continued to rise, hitting 14% in 2023, as it strengthens trade with neighbors and seeks ways to bypass punitive tariffs. U.S.-China tensions will likely remain high regardless of the U.S. election outcome3, making risk management essential to identify exposed companies. As global supply chains evolve, investors should diversify their emerging market exposure, focusing on the beneficiaries of this powerful long-term trend.