U.S. companies are pulling away from China as Democrats and Republicans increasingly impose duties on Beijing
4 min
Until a few years ago, Chinese factories supplied the world with Sharpie retractable pens and Oster blenders.
No more.
Consumer giant Newell Brands now makes those products, and more, at its own plants in the U.S. and Mexico. Many of its other products are made in factories in Vietnam, Indonesia and Thailand.
Chris Peterson , Newell’s chief executive, said the company’s shift reduces its dependence on China at a time when both the Democratic and Republican parties “are getting more protectionist in terms of trade policy.”
Tariffs are becoming an entrenched tool tying together geopolitics and trade , and they are playing a bigger role in long-term manufacturing and sourcing decisions. Nowhere are they hitting harder than in China, where importers and exporters are navigating an increasingly complicated regime of levies on goods ranging from semiconductors to mattresses.
“Tariffs have always existed and they’ve always been regarded as a cost of doing business,” said Simon Geale, executive vice president of procurement at supply-chain consulting firm Proxima. “But they’ve been getting much more teeth in the last five or six years.”
The new era of tariffs kicked off under the Trump administration with duties on imports from a swath of countries and a focus on Chinese products ranging from truck chassis to consumer goods.
The Biden administration kept most of the tariffs in place, and then added further duties on Chinese steel, semiconductors and electric vehicles, citing national security concerns and an industrial policy aimed at reviving American manufacturing .
The two candidates in this year’s presidential election look set to continue the trend, as trade, manufacturing and the tools to tie them together take a prominent role in the campaign.
Former president Donald Trump , the Republican nominee, has said he would roll out new tariffs with a potential 10% across-the-board duty on imported goods and a 60% tariff on goods from China.
Vice President Kamala Harris , the Democratic nominee, so far hasn’t indicated a desire to deviate much from President Biden’s trade policies.
Before becoming vice president, Harris diverged from Biden on Trump’s revised North American Free Trade Agreement, known as the United States-Mexico-Canada-Agreement. As a senator, Harris joined some Democratic lawmakers, saying it didn’t do enough to address climate change, suggesting Harris may have more of a focus on social justice issues when considering trade pacts.
Harris has been in lockstep with the president in the Biden administration.
At an electronics factory in Wisconsin last summer, Harris said she and Biden want to bring manufacturing jobs back to America. At a campaign event in North Carolina on July 18, she said Trump’s proposed universal 10% tariff “would increase the cost of everyday expenses for families.” She didn’t criticise current tariffs on Chinese goods .
Both Trump and Harris opposed the Trans-Pacific Partnership, the expansive multination trade deal that was designed to expand alternatives to trading with China. Trump withdrew the U.S. from the agreement immediately on taking office in 2017.
The trade policies pose a conundrum for companies. Do they continue sourcing from China and risk the potential impact of escalating tariffs? Or do they look outside China, where costs are higher, but duties and other geopolitical risks are lower?
Trump’s threat of universal tariffs has even spooked supporters. Tesla Chief Executive Elon Musk , who has endorsed Trump, said he would delay a decision on a new plant in Mexico until after the election because “it doesn’t make sense” if Trump wins and puts “heavy tariffs” on vehicles produced there.
Shifting supply chains to other countries is complex. Companies must find new suppliers of raw materials and finished goods. Suppliers and sub-suppliers must be vetted to make sure they don’t violate increasingly stringent U.S. rules on issues such as forced labor.
Anne van de Heetkamp , a vice president of product management at supply chain and logistics technology company Descartes , said when trade tensions started ratcheting up five years ago companies weren’t in a hurry to shift supply chains. Now that the duties appear more permanent, Descartes’s customers are mapping out new global supply networks.
Surging exports out of Southeast Asia, India and Mexico suggest Newell isn’t alone in its desire to reduce reliance on China. The shifts are fuelling new logistics investments in factories, warehousing and transportation operations around the world.
DHL Express U.S., a parcel unit of German logistics giant Deutsche Post , added a new direct flight between Vietnam and the U.S. in 2022 to cater to rising exports that used to reach the U.S. via Hong Kong. CEO Greg Hewitt said the unit is also looking at expanding its networks along the U.S. -Mexico border to serve surging demand there.
Hewitt cautioned that China remains the world’s top supplier of manufactured goods and will likely hold that position because of its streamlined supply chains and low costs for raw materials and labour.
Retail industry trade groups and some executives warn some items can’t be produced anywhere else in the world and that escalating tariffs will simply raise consumer prices and fuel inflation. Analysts at Goldman Sachs estimate that every percentage point increase in the overall U.S. tariff rate would increase core consumer prices by just over 0.1%.
“The problem is the best place to make shoes is China,” said Ronnie Robinson, chief supply chain officer at Designer Brands , parent company of footwear retailer DSW.
Robinson said for every dollar the government adds in tariffs, consumers pay an extra $2 to $4 at the checkout. “The reality is that you and I are paying for the tariffs as part of the ticket price when you go into the store and buy,” he said.
Robinson said Designer Brands sources about 70% of its footwear from China, down from 90% several years ago. He said the company aims to reduce its reliance further to about 50%, but China will remain the company’s largest single source of shoes.
Peterson said just 15% of Newell’s goods rely on products made in China today, down from more than 30% several years ago. He expects that by the end of next year the share will fall below 10%.
He said that when the company is searching for new Chinese suppliers one of its first questions is whether they have capacity or plan to add capacity outside the country.
“If a supplier doesn’t have manufacturing capability outside of China, we will not select them as a vendor for us,” he said.
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4 min
U.S. investors’ enthusiasm over Japanese stocks at this time last year turned out to be misplaced, but the market is again on the list of potential ways to diversify. Corporate shake-ups, hints of inflation after years of declining prices, and a trade battle could work in its favor.
Japanese stocks started 2024 off strong, but an unexpected interest-rate increase in August by the Bank of Japan triggered a sharp decline that the market has spent the rest of the year clawing back. Weakness in the yen has cut into returns in dollar terms. The iShares MSCI Japan ETF , which isn’t hedged, barely returned 7% last year, compared with 30% for the WisdomTree Japan Hedged Equity Fund .
The market is relatively cheap, trading at 15 times forward earnings, about where it was a decade ago, and events on the horizon could give it a boost. Masakazu Takeda, who runs the Hennessy Japan fund, expects earnings growth of mid-single digits—2% after inflation and an additional 2% to 3% as companies return more to shareholders through dividends and buybacks.
“We can easily get 10% plus returns if there’s no exogenous risks,” Takeda told Barron’s in December.
The first couple months of the year could be volatile as investors assess potential spoilers, such as whether the new Trump administration limits its tariff battle to China or goes wider, which would hurt Japan’s export-dependent market. The size of the wage increases labor unions secure in spring negotiations is another risk.
But beyond the headlines, fund managers and strategists see potential positive factors. First, 2024 will likely turn out to have been a record year for corporate earnings because some companies have benefited from rising prices and increasing demand, as well as better capital allocation.
In a note to clients, BofA strategist Masashi Akutsu said the market may again focus on a shift in corporate behavior that has begun to take place in recent years. For years, corporate culture has been resistant to change but recent developments—a battle over Seven & i Holdings that pits the founding family and investors against a bid from Canada’s Alimentation Couche-Tard , and Honda and Nissan ’s merger are examples—have been a wake-up call for Japanese companies to pursue overhauls. He expects a pickup in share buybacks as companies begin to think about shareholder returns more.
A record number of companies have also delisted, often through management buyouts, in another indication that corporate behavior is changing in favor of shareholders.
“Japan is attracting a lot of activist interest in a lot of different guises, says Donald Farquharson, head of the Japanese equities team for Baillie Gifford. “While shareholder proposals are usually unsuccessful, they do start in motion a process behind the scenes about the capital structure.”
For years, money-losing businesses were left alone in large corporations, but the recent spate of activism and focus on shareholder returns has pushed companies to jettison such divisions or take measures to improve them.
That isn‘t to say it is going to be an easy year. A more protectionist world could be problematic for sentiment.
But Japan’s approach could become a model for others in this new world. “Japan has spent the last 30 to 40 years investing in business overseas, with the automotive industry, for example, manufacturing a lot of the cars in the geographies it sells in,” Farquharson said. “That’s true of a lot of what Japan is selling overseas.”
Trade volatility that hits Japanese stocks broadly could offer opportunities. Concerns about tariffs could drag down companies such as Tokio Marine Holdings, which gets half its earnings by selling insurance in the U.S., but wouldn’t be affected by duties. Similarly, Shin-Etsu Chemicals , a silicon wafer behemoth that sells critical materials, including to the chip industry, is another potential winner, Takeda says.
If other companies follow the lead of Japanese exporters and set up shop in the markets they sell in, Japanese automation makers like Nidec and Keyence might benefit as a way to control costs in countries where wages are higher, Farquharson says.
And as Japanese workers get real wage growth and settle into living in an economy no longer in a deflationary rut, companies focused on domestic consumers such as Rakuten Group should benefit. The internet company offers retail and travel, both of which should benefit, but also is home to an online banking and investment platform.
Rakuten’s enterprise value—its market capitalization plus debt—is still less than its annual sales, in part because the company had been investing heavily in its mobile network. But that division is about to hit break even, Farquharson says.
A stock that stands to benefit from consumer spending and the waves or tourists the weak yen is attracting is Orix , a conglomerate whose businesses include an international airport serving Osaka. The company’s aircraft-leasing business also benefits from the production snags and supply-chain disruptions at Airbus and Boeing , Takeda says.
An added benefit: Its financial businesses stand to get a boost as the Bank of Japan slowly normalizes interest rates. The stock trades at about nine times earnings and about par for book value, while paying a 4% dividend yield.
Corrections & Amplifications: The past year is expected to turn out to have been a record one for corporate earnings in Japan. An earlier version of this article incorrectly gave the time frame as the 12 months through March. Separately, Masashi Akutsu is a strategist at BofA. An earlier version incorrectly identified his employer as UBS.
