President Trump’s challenge to global value chains

US President Trump has announced a significant set of tariffs and resumed the trade wars that were prevalent during his first administration. America’s actions raise questions about the global value chains (GVCs), which are an integral part of international trade.

President Trump’s statement that he does not want to see Chinese cars coming from Mexico challenges the long-standing structure of GVCs. Global Value Chains operate while respecting ‘rules of origin’ requirements. These are in place to prevent companies from routing trade through markets that have favourable trade arrangements, such as the one that Mexico has with the United States in its free trade agreement, known as The U.S.-Mexico-Canada Agreement (USMCA) in the US that replaced NAFTA (North American Free Trade Agreement).

So, the aforementioned Chinese car plant in Mexico would have only produced using de minimus levels of non-North American-made inputs to qualify for preferential access to U.S. markets. But, if the objection is to the source of capital, then that raises a challenge to a structural feature of global value chains.

If a foreign company invests in a plant in a country and produces a good that is substantially made in that country, for example, then that product would be considered as having “originated” from that country and be eligible for preferential trade arrangements when exported. Trump’s objection to Chinese investment in Mexico goes beyond the usual origination criteria, which increases uncertainty about how global value chains operate.

Of course, such “look through” to the owner of capital has been evident in the foreign investment restrictions which have also been a feature of the ongoing U.S.-China trade tensions. The restrictions around semi-conductor chips are a prominent example. If the U.S. restricts the sale of chips to China, then it would want its trading partners to act similarly so the chips don’t travel via intermediaries. Therefore, there’s been pressure on other countries to align with US investment restrictions.

Indeed, foreign direct investment and trade are often different aspects of the same coin. The Chinese car factory in Mexico selling to the US is an example of both. So, it may not be entirely surprising to Chinese companies that President Trump does not want to see Chinese cars coming via Mexico when he objects to them coming directly to the U.S.

For Chinese companies, they don’t appear to be surprised and a number have indicated that their intent is to sell electric vehicles in Mexico and not export to the U.S.

For other multinational companies, President Trump’s targeting of countries running bilateral trade surpluses raises a further challenge to how countries have reconstituted their supply chains in what’s been called a ‘China+1’ strategy.

For reasons of geo-politics as well as rising wage costs in China, companies undertook ‘China+1’ approaches for their global value chains. They reduced their reliance on China by re-locating production in a ‘connector’ country, for instance, Mexico or Vietnam, which have been beneficiaries of supply chain diversification in the past few years. This has contributed to exports from Mexico and Vietnam growing to the US.

For those companies that have been investing in ‘connector’ countries to diversify the risks in their global value chains, they may start to worry about the tariffs being imposed on ‘connector’ countries like Mexico or Vietnam. These two nations rank only behind China in terms of the size of their trade surplus in goods with the U.S. Vietnam has overtaken Canada, Germany and Japan in the past couple of years.

Both have trade surpluses with the US at least partially as a result of the reconfiguration of global value chains. If tariffs are levied on them because they have sizeable bilateral trade surpluses with the U.S., then that would increase firms’ costs on top of the money already spent setting up reconfigured supply chains.

As the US current account deficit is a long-standing, structural feature of its economy, it’s likely that future connector countries would also have trade surpluses with the US. If they are also then targeted, then that would make global value chains very challenging indeed.

Therefore, for both Chinese and other multinational companies, the next four years could be a period of high uncertainty around global value chains and indeed international trade routes.

 

Linda Yueh is Adjunct Professor of Economics at London Business School, Fellow in Economics at St Edmund Hall, Oxford University and the author of The Great Crashes and The Great Economists.

This article was first published in Forbes magazine on 6^th February 2025.