Chinese companies have sidestepped Trump’s tariffs. They could do it again.

After President Donald Trump slapped tariffs on Chinese bicycles in 2018, Arnold Kamler, then the chief executive of bike maker Kent International, saw a curious trend play out in the bicycle industry.

Chinese bicycle factories moved their final manufacturing and assembly operations out of China, setting up new facilities in Taiwan, Vietnam, Malaysia, Cambodia and India. Using parts mostly from China, those companies made bicycles that they could export directly to the United States — without paying the 25 per cent tariff had the bike been shipped straight from China.

“The net effect of what’s going on with these tariffs is that Chinese factories in China are setting up Chinese factories in other countries,” said Kamler, whose company imports some bicycles from China and makes others at a South Carolina factory.

Donald Trump has announced tough new tariffs - but there is a way around them.Credit: AP

Pushing those factories into other countries resulted in additional costs for companies and consumers, without increasing the amount of manufacturing in the United States, Kamler said. He said he had been forced to raise his prices several times as a result of the tariffs.

“There’s no real gain here,” said Kamler, whose bikes are sold at Walmart and other retailers. “It’s very inflationary.”

As Trump prepares to return to office with sweeping plans to impose more levies on foreign goods, economists and business owners are pointing to unintended consequences that resulted from his tariffs the first time around.

Beginning in 2018, Trump imposed tariffs on hundreds of billions of dollars of foreign metals, washing machines, solar panels and products from China. His administration said the measures would force companies to set up factories in the United States. President Joe Biden chose to maintain most of those tariffs — and added a few of his own on strategic goods like electric vehicles and semiconductors.

Some industries that compete with cheap Chinese products — like apparel and cabinet makers — credit those tariffs with keeping US manufacturers in business.

But for many other industries, the tariffs simply spurred a global reshuffling of manufacturing operations, one that did little to strengthen US production or reduce ties with Chinese firms. Companies have merely shifted their factories to other low-cost countries in Asia or Latin America instead, and US imports from those countries have surged.

Some companies have severed their ties with China. But others have retained close connections, even as they have moved their operations out of China. Economists say many companies, both Chinese and multinational, have continued to rely on Chinese products and parts, which are now flowing into the United States from factories set up outside China’s borders.

Connector countries: Kuka Home furniture factory at Hofusan Industrial Park is one of many Chinese companies investing in Mexico.Credit: Bloomberg via Getty Images

In other words, some Chinese products are merely taking a longer trip around the world on their way to the United States, in an attempt to avoid tariffs. Rather than making global supply chains stronger and more diversified, economists say, this may be weakening them — while adding costs for companies and consumers.

In a speech in May, Gita Gopinath, the first deputy managing director of the International Monetary Fund, said trade and investment were being rerouted through what she called “connector countries,” partly offsetting the erosion of more direct links between the United States and China.

The role of these connector countries, most notably Mexico and Vietnam, “may have helped cushion the global economic impact of direct trade decoupling between the US and China,” Gopinath said. “But whether it has helped to diversify exposures and increase supply chain resilience remains an open question.”

Brad Setser, an economist and senior fellow at the Council on Foreign Relations, said the main effect of US levies on China was to encourage companies to “find a way around the bilateral tariff.”

“It reduces bilateral trade; it doesn’t impact global trade,” he said.

Setser added that China’s role as a global exporter had not diminished, and neither had the United States’ role as an importer. It was just the countries through which trade was being routed that had shifted.

“Even though we have less direct bilateral trade, in a global sense, there’s one surplus country, China, and there’s one deficit country, the US,” Setser said. “We are still interconnected indirectly.”

Trade data reflects this: The gap between the goods the United States exports to and imports from China narrowed to $US278 billion in 2023 from $US417 billion in 2018. While that level is set to rebound this year, economists say US imports of goods from China that are covered by tariffs have clearly dropped.

The Port of Lianyungang in Jiangsu Province, China. The country’s role as a global exporter had not diminished, one economist said.Credit: Olivia Martin-McGuire

At the same time, China’s exports globally have surged, and US trade deficits with Vietnam, Taiwan, Mexico, Canada and elsewhere have been widening. Economists say exports to the United States from some of those countries now contain more Chinese parts and raw materials than they did before.

Trump and his advisers are eyeing these new back doors that Chinese products are using to enter the United States. Trump has proposed an additional 60 per cent tariff on US imports from China, as well as a “universal” tariff of 10 per cent to 20 per cent on goods from elsewhere.

He and his advisers also appear to have doubts about the trade deal they renegotiated with Mexico, called the United States-Mexico-Canada Agreement, or USMCA. They want to adjust its rules to try to ensure that more Chinese cars and auto parts will not find their way to the United States through Mexico.

But it is unclear how effective their efforts will be against the creativity of global companies that are driven by strong financial incentives to maintain access to the US market.

In industry after industry, Chinese companies have found footholds abroad that allow them to bypass trade barriers with the United States. After the United States put hefty tariffs on Chinese solar panels, for example, many Chinese companies opened solar factories in Southeast Asia. US solar companies have initiated trade cases, successfully appealing to the government for more protection from these factories.

US efforts to block critical minerals and electric vehicle batteries from China from receiving government subsidies have also pushed Chinese companies to set up battery-making subsidiaries in Morocco and Singapore.

Alan Wm. Wolff, a senior fellow at the Peterson Institute for International Economics and a former deputy director-general of the World Trade Organisation, said he anticipated an attempt by the Trump administration to follow Chinese trade further down the path it was taking through other countries to the United States.

But ultimately, those trade measures would not affect the US economy much if the United States and China did not make bigger economic changes, he said.

“The US has a trade deficit of a trillion dollars,” he said. “If we don’t change our macroeconomic policies, we’re going to have a trade deficit of a trillion dollars rearranged.”

This article originally appeared in The New York Times.