The China Bypass

On July 6, 2018, the first wave of tariffs hit: 25% on $34 billion of Chinese goods. By September, the list had expanded to $250 billion. By 2019, another round added 10–15% on a further $120 billion. The stated goal was simple: make Chinese goods expensive enough that American companies would stop buying them or, better yet, manufacture at home. The result was something else entirely.

The China deficit did shrink. From its 2018 peak of $417 billion, it fell to $295 billion by 2024 — a $122 billion reduction. If you looked only at the China column of America’s trade ledger, the tariffs appeared to work. But trade ledgers have many columns, and what happened in the others tells the real story.

Over the same period, the Mexico deficit grew by $112 billion (from $69 billion to $181 billion). The Vietnam deficit grew by $91 billion (from $32 billion to $123 billion). Taiwan’s deficit grew by $61 billion. South Korea’s grew by $39 billion. India’s grew by $21 billion. The goods didn’t stop flowing into America. They just changed the return address.

The mechanics of trade diversion through Mexico are straightforward. A Chinese electronics manufacturer facing a 25% tariff on TVs shipped directly to the U.S. has three options: absorb the tariff (cutting margins to zero), lose the American customer, or build a factory in Mexico where the product ships tariff-free under USMCA. The math is compelling. A $500 television with a $125 tariff becomes a $500 television with $30 in Mexican assembly costs and zero tariff. The savings are immediate, and the factory qualifies for USMCA treatment as long as sufficient value is added in North America.

Hisense, the Chinese appliance giant, provides the textbook case. In 2018, the company operated a small factory in Monterrey assembling TVs for the Mexican market. By 2023, the plant had tripled in size and was primarily serving American consumers. Hisense TVs sold at Walmart and Best Buy carry “Assembled in Mexico” labels, with screens and circuit boards manufactured in China, shipped to Monterrey, snapped into housings, and trucked to U.S. distribution centers. The tariff on a Chinese-origin TV is 25%. The tariff on a Mexican-assembled TV using Chinese components? Under USMCA, zero — as long as sufficient manufacturing occurs in Mexico.

The evidence shows up in the capital goods data. Mexico’s non-auto capital goods exports to the U.S. — the category that includes computers, semiconductors, telecom equipment, and electronics — exploded from $89 billion in 2016 to $170 billion in 2024, a 91% increase. This is the single largest driver of Mexico’s widening goods deficit, and it tracks almost exactly with the decline in Chinese capital goods imports. The goods didn’t change. The shipping route did.

Samsung moved TV production from its Tianjin, China plant to Tijuana. Lenovo shifted some laptop assembly to Monterrey. Chinese automaker BYD, anticipating both U.S. tariffs and future EV demand, announced plans for a Nuevo León factory. Foxconn, the Taiwanese contract manufacturer that builds Apple’s iPhones, expanded its Ciudad Juárez operations. Even the raw materials shifted: Chinese steel and aluminum, facing their own tariffs when shipped directly, increasingly flow through Mexican intermediaries. A 2023 investigation by U.S. Customs and Border Protection found that several Mexican steel exporters were simply relabeling Chinese steel with Mexican certificates of origin.

If Mexico is China’s front door to America, Vietnam is the back door. The U.S. goods deficit with Vietnam grew from $32 billion in 2016 to $123 billion in 2024 — nearly quadrupling. In absolute terms, the $91 billion increase almost matches Mexico’s $112 billion growth. Vietnam is now America’s fourth-largest goods deficit partner, behind China, Mexico, and the European Union.

The shift was already underway before tariffs. Apple had been diversifying iPhone production from China to India and Vietnam since 2017, driven partly by geopolitical hedging and partly by Vietnam’s lower wages (roughly $300/month for factory workers, compared to $800 in coastal China). Samsung had already made Vietnam its global smartphone manufacturing hub — its Bác Ninh and Thái Nguyên factories produce half the world’s Samsung phones. But the 2018 tariffs accelerated the shift dramatically.

The timing is visible in the data. From 2010 to 2018, Vietnam’s deficit grew by about $3.5 billion per year. From 2018 to 2024, it grew by $14 billion per year — four times the pre-tariff pace. Furniture, textiles, and footwear were the first wave (Chinese factories relocated to Vietnamese provinces). Electronics were the second wave (Samsung, LG, Intel, and dozens of Chinese-linked suppliers). By 2022, Vietnam was exporting $127 billion in goods to the U.S. — more than the entire country’s GDP had been in 2011.

Vietnam’s transformation raises the same questions as Mexico’s. How much of a Vietnamese export to America is genuinely Vietnamese, and how much is Chinese content in Vietnamese packaging? A 2023 study by the Peterson Institute found that Vietnam’s imports from China grew by $40 billion over the same period its exports to the U.S. grew by $80 billion. The correlation isn’t proof of transshipment, but it’s suggestive: Vietnam may be adding value, but it’s adding it to Chinese inputs.

The table below captures trade policy’s most uncomfortable arithmetic. The China tariffs achieved their narrow objective: the China deficit fell by $122 billion. But the deficit didn’t go to American factories. It went to other countries. And it grew in transit.

The combined deficit across these six countries — the five largest Asian deficit partners plus Mexico — grew from $513 billion to $784 billion, an increase of $272 billion. China’s $52 billion improvement (comparing 2016 to 2024) was overwhelmed by increases everywhere else. And this table doesn’t include the dozens of smaller countries — Thailand, Indonesia, Malaysia, Cambodia — that also absorbed redirected Chinese production.

Taiwan deserves special attention. Its deficit exploded from $13 billion to $73 billion — a fivefold increase driven almost entirely by one company: TSMC, the Taiwan Semiconductor Manufacturing Company. As the AI boom drove demand for advanced chips, American tech companies bought an unprecedented volume of Taiwanese semiconductors. Apple, Nvidia, AMD, and Qualcomm all depend on TSMC fabrication. Taiwan’s deficit growth has nothing to do with China trade diversion — it’s the semiconductor supply chain asserting itself. But it illustrates the broader point: structural trade deficits reflect where production capabilities exist, and tariffs cannot move those capabilities overnight.

South Korea’s $39 billion increase was more diversified — Samsung semiconductors, Hyundai and Kia vehicles (which surged in U.S. market share from 8% to 11% during this period), LG appliances, and petrochemicals. India’s $21 billion increase reflects Apple’s early iPhone manufacturing diversification plus traditional Indian exports (pharmaceuticals, textiles, refined petroleum). In every case, the growth correlates with production that left China or that China could no longer serve tariff-free.

Mexico’s role in this global rerouting is unique because of USMCA. Vietnam, Taiwan, South Korea, and India all face U.S. tariffs on most goods (normal MFN rates of 2–25% depending on the product). Mexico faces zero tariffs on USMCA-qualifying goods. This gives Mexico a structural advantage as a tariff-arbitrage platform that no other country can match. A Chinese company routing goods through Vietnam still pays U.S. duties. A Chinese company routing goods through Mexico — with enough local assembly to meet USMCA rules — pays nothing.

This is the irony at the heart of the NAFTA experiment’s latest chapter. The trade agreement designed to integrate North American manufacturing has become the backdoor that allows Chinese manufacturing to reach American consumers duty-free. The USMCA’s rules of origin, intended to keep non-North American content out, apply stringently to automobiles (75% content, $16/hour labor) but much less stringently to electronics, appliances, and other consumer goods. A television assembled in Mexico from Chinese panels and chipsets qualifies for USMCA treatment far more easily than a car, because the auto-specific rules are the agreement’s tightest.

The 2026 USMCA review, discussed in Episode 8, will likely attempt to close this gap. Proposals already circulating in Washington include extending auto-like content rules to electronics and appliances, adding “anti-circumvention” provisions targeting Chinese-owned factories in Mexico, and potentially requiring that USMCA benefits be denied for goods produced by companies headquartered in non-market economies. Whether these proposals become policy depends on the same political dynamics that produced the original tariffs: concentrated industrial interests, consumer price sensitivity, and the eternal tension between free trade and domestic manufacturing.