“Eroding Tariff Advantages and Manufacturing Constraints”: China Diversification Through Southeast Asia Under Strain, With Key Manufacturing Hubs’ Capabilities a Decisive Factor

Fading benefits of export rerouting as U.S. tariff differentials between Southeast Asia and China reverse
Supply-chain, infrastructure and workforce constraints prompting more production relocations back to China
Success of China diversification strategies contingent on the development of Southeast Asia’s manufacturing ecosystem

Chinese manufacturers’ efforts to relocate production to Southeast Asia have encountered setbacks. The United States’ partial withdrawal of additional tariffs on low-cost Chinese consumer goods has reduced the benefits of rerouting exports, while shortcomings in local manufacturing conditions have become increasingly apparent, including △shortages of skilled workers △underdeveloped component and materials supply chains △inadequate power infrastructure. As Chinese companies begin moving production back to the mainland, market observers increasingly expect the direction of global diversification away from China to depend on the steps taken by Southeast Asia’s leading manufacturing hubs.

Lower U.S. Tariff Barriers Against China

According to a September 30 report by Hong Kong’s South China Morning Post (SCMP), China’s Ministry of Commerce and the U.S. White House recently finalized a trade agreement removing additional tariffs on $30 billion worth of imports from each other. The ministry said more than 90% of the Chinese products included on the tariff-relief list were everyday, low-cost consumer goods, including toys, small household appliances and household sundries. If these goods receive most-favored-nation tariff treatment, effective tariff rates on most products will fall sharply to 10% or less under official U.S. Customs schedules, with some becoming entirely duty-free.

These changes have substantially reduced China’s need to reroute exports through Southeast Asia. Major production hubs such as Vietnam, Malaysia and Thailand, which have served as key bases for rerouted Chinese exports over the past decade, have been subject to across-the-board additional tariffs of 10–12.5% since July, following the Office of the U.S. Trade Representative’s (USTR) Section 301 investigation into forced labor in supply chains. A reversal has thus taken hold: tariffs on goods exported directly from mainland China to the United States are now lower than those on shipments routed through Southeast Asia.

China’s Competitive Manufacturing Ecosystem

China’s distinctive manufacturing ecosystem is also cited as a constraint on diversification strategies. Reuters reported last month that “companies that moved production outside China have retained or restored parts of their Chinese supply chains after encountering shortages of skilled workers, underdeveloped supplier networks and unreliable power supplies at overseas factories.” Major manufacturing hubs on the Chinese mainland host dense concentrations of not only final-product assemblers but also suppliers serving each stage of production, including tooling, casting, injection molding, electronic components and packaging, as well as production equipment manufacturers. This allows companies to source replacement components or modify molds and product specifications whenever problems arise. China also has a relatively abundant supply of skilled workers experienced in mass production, alongside robust power networks and logistics infrastructure, including ports and roads.

Some companies have moved production back to China to take advantage of these strengths. Jinqiaofeng, an outdoor furniture exporter based in Hangzhou, for example, opened a workshop in Ho Chi Minh City, Vietnam, in 2024 to avoid U.S. tariffs on China, but closed the facility and returned to China this year. The company struggled to obtain the necessary production equipment locally and could not reliably source even basic items such as screws and molds for cup holders. Jinqiaofeng said that once the cost of shipping Chinese components to Vietnam and then exporting the finished products was included, total production costs differed little from those in China.

Table 1. Factors Reducing China’s Need for Production Through Southeast Asia

Mixed Results of Efforts to Shed a Chinese Identity

Questions about the effectiveness of China diversification strategies themselves are also mounting. Some Chinese companies have recently gone beyond establishing production outside China, using localized marketing to play down their Chinese identity. A prominent example is Pop Mart, the major Chinese designer toy company. After opening its first permanent U.S. store in 2023, Pop Mart positioned itself as a “global lifestyle and art IP company,” successfully circumventing resistance among U.S. politicians and consumers. It also targeted young American consumers through its “blind box” sales format, in which buyers do not know the contents in advance, and its proprietary character designs, while pursuing broader local appeal through licensing agreements with major Western IP owners behind properties such as Disney and Harry Potter. As a result, Pop Mart’s physical store network in the Americas expanded to 64 locations last year, while its first-quarter earnings disclosure showed U.S. business revenue rising 55–60% year on year.

The problem is that such strategies do not always succeed. Chinese household goods retailer Miniso, for example, initially appointed a Japanese designer as its chief designer and entered overseas markets by presenting itself as a “Japanese-style lifestyle brand.” Observers frequently likened its image to that of Japanese consumer brands such as Muji and Uniqlo. In 2022, however, its Spanish subsidiary’s social media account described dolls wearing the traditional Chinese qipao as “Japanese geisha dolls,” provoking a backlash among Chinese consumers and a sharp decline in its share price during the controversy. Miniso ultimately issued a public apology acknowledging that its initial brand positioning and marketing direction had been misguided, removed Japanese-language elements from more than 3,100 stores in China, and pledged to revise signage and interiors at more than 1,900 overseas stores.

Shein’s Difficult Path to Capital Markets

Shein, the fast-fashion retailer founded in China, has faced similar problems. Headquartered in Singapore, Shein has presented itself as a global fashion platform while working to dilute its Chinese identity through initiatives such as a pop-up store in New York’s Times Square and a partnership with U.S. brand Forever 21. These localization efforts, however, failed to dispel suspicion among U.S. politicians. Members of Congress continued to raise concerns about Shein’s Chinese supply chain and its possible use of cotton from Xinjiang, while in 2023 Republican attorneys general from 16 states called on the U.S. Securities and Exchange Commission (SEC) to investigate whether forced labor was present in the company’s supply chain.

These controversies also affected Shein’s access to capital markets. The company pursued a New York stock market listing in 2023 but shifted its plans to London after encountering political opposition in the United States. The British Parliament, however, also scrutinized labor conditions in Shein’s overseas supply chain, while its Chinese ties and supply-chain issues remained obstacles during the listing review. After repeatedly being rebuffed in Western markets, Shein ultimately turned to Hong Kong, where it listed last month at a substantially reduced valuation. The company was valued at $100 billion in a private funding round in 2022, but its valuation fell to $64 billion–$66 billion in 2023–2024. At its Hong Kong listing, Shein was valued at $26.5 billion, more than 70% below its peak.

Southeast Asia’s Industrial Capabilities Put to the Test

As corporate strategies to diversify away from China lose momentum, experts expect the actions of Southeast Asia’s major manufacturing hubs to determine the direction of the market. They argue that further strengthening the region’s manufacturing ecosystems is essential, as low-cost labor and tariff avoidance alone cannot retain global corporate investment over the long term. Vietnam provides a leading example supporting this assessment. After U.S. trade barriers against China rose, Vietnam absorbed demand for expanded production facilities from Samsung Electronics and Apple suppliers Foxconn and Luxshare, emerging as one of the biggest beneficiaries of the “China plus one” (China+1) strategy. According to the Vietnamese government, registered foreign direct investment (FDI) reached $38.23 billion in 2024, with manufacturing and processing accounting for $25.58 billion, or 66.9% of the total. Vietnam’s trade surplus with the United States also exceeded $123 billion that year, setting a record.

For this investment expansion to translate into meaningful diversification away from China, however, Vietnam must move beyond its role as an assembly base. Developing local component and materials suppliers is considered the foremost priority, as many exports produced in Vietnam still rely on Chinese components and materials. Expanding power infrastructure is also urgent. Although Vietnam has rapidly developed into an export production hub for electronics and smartphones, its electricity supply capacity has failed to keep pace with manufacturing expansion, intensifying bottlenecks. In 2023, power shortages in the north disrupted industrial park operations. Securing skilled workers is another critical challenge. For Vietnam to establish itself as a hub for high-value manufacturing such as semiconductors and advanced electronics, analysts say it must expand vocational education, engineering training and on-the-job training in partnership with global companies.