The Reality of the US Tariff War: The Illusion of Reshoring and Structural Supply Chain Shifts [EN]

"Tariffs do not reduce imports; they merely reroute them."

 — Pablo Fajgelbaum, Professor of Economics at UCLA 

(Brookings Institution Presentation, March 2026)

[Prologue: The Market Observer's Perspective]

On April 2, 2025, the Trump administration declared a so-called 'Liberation Day,' imposing blanket reciprocal tariffs on trading partners worldwide. The White House rhetoric was resolute: American manufacturing would return, factories would run, and workers would get their jobs back. Roughly a year later, the numbers tell a different story.

US tariff revenues surged, and US-China trade plummeted. However, the US trade deficit in goods slightly increased compared to 2024, and manufacturing employment actually declined. Conversely, Vietnam's exports to the US hit record highs, India's greenfield FDI inflows became the highest in Asia, and Chinese companies are building factories in Southeast Asia and Mexico. Tariffs did not bring production back. They merely altered the geography of production. The core question this report tracks is: Are the Trump tariffs actually rebuilding the US manufacturing base, or are they redrawing the power map of global supply chains?

EXECUTIVE SUMMARY

According to a March 2026 joint paper published by the Brookings Institution, UCLA, and Yale, the average US tariff rate rose from 2.4% to an 80-year high of 9.6% in 2025, yet the US trade deficit in goods slightly widened and manufacturing employment declined.^¹ The core effect of the tariffs was not reshoring, but the rerouting of supply chain paths. US imports from China hit a post-2009 low of $308 billion in 2025, while the relocation of production to Vietnam, India, and Mexico accelerated.^² The structural limitations of reshoring—labor shortages, cost disparities, and the absence of a supply chain ecosystem—cannot be resolved by short-term tariff policies, suggesting that the narrative of a US manufacturing renaissance is clashing with actual industrial realities.

01. The Reality of Tariffs: An 80-Year Protectionist Experiment

Legal Structure and Scale of Trump's Second-Term Tariffs

Upon taking office on January 20, 2025, the Trump administration mobilized various legal authorities, including the International Emergency Economic Powers Act (IEEPA) and Section 232 of the Trade Expansion Act, to impose across-the-board tariffs. It adopted a tiered structure, applying a baseline tariff of at least 10% on all trading partners and cumulatively up to 145% on China.^³ According to the Penn Wharton Budget Model, revenues collected from new tariffs over the one-year period from January 2025 to January 2026 reached $209 billion.^⁴

However, this experiment faced fractures in its legal legitimacy. In February 2026, the US Supreme Court ruled that approximately 70% of the tariffs based on the IEEPA were unconstitutional as they were imposed without explicit congressional approval. In response, the Trump administration immediately pivoted to a 10% blanket tariff based on Section 122 of the Trade Act of 1974.^⁵ The legal instability of tariff policies acted as a variable complicating long-term corporate investment decisions.

Effective Tariff Rates and the Reality of Household Burden

Announced tariff rates must be distinguished from actual collected rates. According to Penn Wharton, as of January 2026, the effective tariff rate on Chinese imports was 33.9%, with steel and aluminum at 41.1% and automobiles at 14.9%.^⁴ The Tax Policy Center estimated that the tariffs announced by 2025 burden US households by roughly $1,230 annually, reaching $1,500 by 2026.^⁵ This tax has a regressive structure. The real burden on low-income households, which rely heavily on imported consumer goods, is relatively greater than that on high-income households.

02. The Illusion of Reshoring: The Gap Between Rhetoric and Reality

Why is Employment Falling While Factory Announcements Pour In?

Announcements for US factory construction and investment indeed surged. Approximately $1.7 trillion in new manufacturing investments were announced, spanning semiconductor fabs, EV battery plants, and steel facilities.^⁶ However, the UCLA/Yale paper cited by Brookings revealed that the US goods trade deficit slightly increased in 2025 compared to 2024, and manufacturing employment fell despite the tariffs.^¹ Kearney's Reshoring Index, after rising for two consecutive years, plummeted into negative territory in 2025. The reason was companies returning to low-cost production sites in East Asia.^⁷

There are three structural causes for this discrepancy. First, the cost gap. The average hourly wage in US manufacturing is $25-$30, compared to $6-$7 in China. Automation can narrow this gap, but it requires substantial upfront capital investment.^⁶ Second, labor shortages. As of August 2025, there were roughly 409,000 unfilled jobs in US manufacturing, and Deloitte projected that nearly half of the 3.8 million new workers needed by 2033 will remain unfilled.^⁸ This is due to a severe lack of personnel with the digital, robotics, and AI skills required by modern factories. Third, the supply chain ecosystem. Building a factory does not complete a supply chain. The multilayered ecosystem of parts procurement, logistics, and subcontracting takes decades to form and cannot be transplanted with a single tariff.

The Practical Limits of Reshoring: OECD's Warning

A 2025 OECD report pointed out that reshoring actually created domestic supply chain dependencies and bottlenecks, making half of the analyzed countries more vulnerable to external economic shocks.^⁹ In a 2025 survey by the Reshoring Initiative, 30% of manufacturers responded that they would "reshore if there were enough skilled workers," identifying labor issues as a more critical hurdle than tariffs, tax rates, or deregulation.^¹⁰

03. Supply Chain Seismic Shift: Where Capital is Actually Heading

The US-China Trade Cliff and Route Realignment

The most distinct effect of tariff policy is the structural severance of US-China trade. According to the US Department of Commerce, US imports from China hit a post-2009 low of $308 billion in 2025, a 42% drop from 2018.^² However, the key point is that this trade severance was not replaced by US domestic production. According to a March 2026 report by the WTO and McKinsey, despite high US tariffs, global goods trade volume grew by 4.6% in 2025. This is the result of China diverting its export routes to Europe and emerging markets, and Southeast Asia emerging as a new hub for exports to the US.^¹¹

Vietnam: The Biggest Beneficiary of China+1

Vietnam is the clearest beneficiary of this supply chain realignment. In 2024, Vietnam's manufacturing and processing FDI hit $25.58 billion, establishing it as Asia's top reshoring destination.^¹² In the first half of 2025, Vietnam's exports to the US exceeded $85.1 billion, and the automotive manufacturing sector grew by 27.4% during the same period. Apple produces about 65% of its AirPods and some iPads and Apple Watches in Vietnam, and Foxconn's relocation of iPhone assembly lines to Vietnam is a prime example.^¹³

However, it's a notable variable that Vietnam is also subject to the US reciprocal tariff (20%). Yet, according to FT Locations analysis, this 20% rate remains lower than the rates applied to China and India, maintaining Vietnam's comparative advantage and forecasting a resilient FDI recovery in 2026.^¹⁴

India: Coexistence of Potential and Structural Friction

India rose to third globally in greenfield project inflows, according to FT Locations, surpassing Germany and the UK.^¹⁵ Apple's production share in India was targeted at 25% of all devices for 2025. However, India faces structural friction. While the labor base is vast, it lacks the technical skill levels required for advanced manufacturing, national labor law reforms are delayed, and logistics infrastructure maturity is lower than Vietnam's. India's opportunity is real, but the pace of realization will likely be slower than announced expectations.

China's Counterattack: Route Bypassing and the "Third-Country Production Base" Strategy

Another structure to note is the movement of Chinese capital itself. According to an analysis by Rhodium Group, Chinese companies are executing direct FDI in Southeast Asia, Mexico, and North Africa, securing third-country assembly and export routes. For instance, Sunwoda (EV batteries) announced a $1 billion factory in Thailand, and BYD is expanding production bases in Hungary and Vietnam.^¹⁶ This is the so-called "China for China, Non-China for the World" strategy. In a structure where Chinese companies produce and export from third countries, the tariff effect of the US is largely diluted. The very definition of "Made in China" is becoming ambiguous within the global supply chain.

04. Macroeconomic Ripple Effects: Growth, Inflation, Geopolitics

Downward Pressure on Global Growth

J.P. Morgan Global Research analyzed that due to the cumulative effects of tariff shocks, the global real GDP growth rate for Q4 2025 is expected to be revised down to 1.4% from the initial 2.1% forecast.^¹⁷ The WTO projected global goods trade volume to shrink by 0.2% in 2025, forecasting extreme outcomes for North America, where exports would plunge by 12.6% and imports by 9.6%.^¹⁸ Canada saw its exports to the US drop 5.8% year-over-year in 2025, and southbound FDI plummeted 65% to $27.6 billion, the lowest level since 2013.^¹⁹

Inflation: Costs Absorbed by Companies Begin Passing to Consumers

Initially, many companies absorbed the tariff costs and held off on price hikes. However, researchers at the Federal Reserve Bank of St. Louis revealed that in October 2025, durable goods prices rose noticeably in alignment with the timing of tariff hikes. The Fed's Beige Book confirmed that companies had begun passing tariff costs onto consumers to maintain profit margins.^¹⁹ According to estimates by the Tax Foundation, the Trump tariffs represent the largest tax increase in US history since 1993, entailing an additional average burden of $1,500 per household by 2026.^²⁰

05. Historical Analogies: Comparison and Differences with the Smoot-Hawley Tariff

The 1930 Smoot-Hawley Tariff Precedent

The Smoot-Hawley Tariff Act of 1930 is the last precedent of the US implementing comprehensive protectionist tariffs. The average tariff rate at the time reached about 45%, and the orthodox economic view is that retaliatory tariffs by trading partners plummeted US exports and deepened the Great Depression. The Brookings paper explains two reasons why the macroeconomic shock to date remains relatively limited despite the absolute scale of the 2025 tariffs exceeding Smoot-Hawley: most trading partners besides China have refrained from retaliatory tariffs, and announced tariff rates are exaggerated compared to actual collected rates.^¹

Structural Differences: The Buffer of the Service Economy and Digital Trade

The crucial variable distinguishing today from 1930 is the scale of service trade. According to the WTO, services accounted for 26.4% of global trade in 2024, the highest share since 2005. Goods tariffs do not apply directly to service trade, and service sectors such as digital infrastructure, finance, and travel are buffering some of the goods trade shock.^¹⁸ However, this buffer also has limits, as the contraction of goods trade cascades into decreased demand for shipping, logistics, and aviation services.

06. Variables and Limitations: The Structure of Uncertainty

Policy Volatility: The Biggest Hurdle for Corporate Decision-Making

The most difficult aspect of the 2025 trade environment for companies was not the level of tariffs, but their unpredictability. A cycle repeated where tariffs were announced then delayed, delayed then reimposed, ruled unconstitutional by courts, and immediately replaced under new legal authorities. In ISM's December 2025 survey, 31% of responding manufacturers stated they were not pursuing reshoring but exploring alternative trading partners with lower tariff impacts.^⁷ A survey indicating that while 81% of CEOs/COOs plan to nearshore supply chains, only 2% have fully implemented those plans encapsulates this dilemma.^⁹

Tariff Evasion and the Gray Area of Rules of Origin

The utilization of the USMCA (US-Mexico-Canada Agreement) to avoid tariffs also surged. According to Penn Wharton, the share of imports from Canada and Mexico claiming USMCA rules of origin exemptions reached 85% as of January 2026.^⁴ This shows that companies are rapidly exploring practical avenues for tariff evasion. Simultaneously, the structural circumvention issue—where Chinese parts are assembled in Vietnam or Mexico and exported to the US—remains an ongoing target of investigation by the Office of the US Trade Representative (USTR).

Macro Scenario: Probabilistic Future Trajectories

The scenarios below are constructed based on 2025-2026 forecast data from J.P. Morgan, the WTO, and the Brookings Institution. Due to extreme policy uncertainty, quantitative probability figures for each scenario are omitted.

Scenario A (Base Case): Tariffs are Entrenched and Supply Chain Realignment Proceeds Gradually

While the current 10% baseline tariff and high sector-specific tariffs are maintained, companies gradually execute China+1 or China+N strategies. Vietnam, India, and Mexico absorb a certain level of production relocation, but a substantial revival of US manufacturing will only materialize after 2027-2028 when automation investments take full effect. The inflation burden on US consumers rises structurally, and per J.P. Morgan's base forecast, global growth stabilizes in the low 2% range.^¹⁷

Scenario B (Structural Shift Case): Conclusion of Bilateral Negotiations and Selective Tariff Easing

If bilateral trade agreements with the EU, Japan, and South Korea materialize within 2026, and tariff rates are adjusted through negotiations by sector, a "friendshoring" structure of supply chains accelerates in strategic sectors like semiconductors, autos, and pharmaceuticals. In this case, US-China decoupling persists, but a dual structure takes root where trade with allies expands. US manufacturing employment sees limited growth centered around automation-based, high-value-added jobs.

Scenario C (Tail Risk Case): Escalation of Retaliation and Chain Proliferation of Global Protectionism

A scenario where the EU executes substantial retaliation against 30% tariffs, China strengthens export controls on rare earths and semiconductor materials, and other emerging markets impose tariffs on US agricultural products and services. In this event, the long-term effects warned by Brookings—an additional GDP decline of over 0.5% and a contraction of global trade volume by over 1.5%—become a reality.^¹ This marks the critical threshold where complete structural similarities with the Great Depression era post-Smoot-Hawley begin to operate.

Conclusion

What the tariff experiment of 2025 has shown over the past year is that supply chains cannot be forced. Tariffs can change the direction of trade. However, the geography of manufacturing is determined by four gravities: wages, workforce, infrastructure, and ecosystem—and these gravities cannot be reversed by a single tariff. The reality that manufacturing employment fell and the reshoring index turned negative while factory announcements poured in corroborates this.

The structure that observers must note exists on two levels. First, the true beneficiaries created by these tariffs are not American workers, but the industrial bases of Vietnam, India, and Mexico, which have become the new hubs of the supply chain. And ironically, a significant portion of the capital investing in those bases comes from Chinese companies. Second, the global supply chain absorbs the shock of tariffs without being destroyed. It alters routes and rearranges structures. By the time this rearrangement is complete, the global manufacturing map will be entrenched in a form different from before. Now is the time that map is being redrawn.

※ Disclaimer

This report does not recommend the purchase or sale of any specific assets, nor does it support or criticize any specific regime, government, or politician. It is an article of macroeconomic system analysis based on publicly disclosed data and historical indicators. It is impossible to predict all market variables, and the responsibility for all judgments and subsequent consequences rests entirely with the reader. While the author (Neutral Observer) makes every effort to ensure the reliability of the analysis, the flawless accuracy of the provided information is not guaranteed.

Sources and References

¹ Brookings Institution, Tariffs in 2025: Short-run impacts on the US economy (2026.03.26) — https://www.brookings.edu/articles/tariffs-in-2025-short-run-impacts-on-the-us-economy/

² Z2Data, Everything You Need to Know About China Plus One (2026.02) — https://www.z2data.com/insights/everything-you-need-to-know-about-china-plus-one

³ Congressional Research Service, Presidential 2025 Tariff Actions: Timeline and Status (2025.12.31) — https://www.congress.gov/crs-product/R48549

⁴ Penn Wharton Budget Model, Effective Tariff Rates and Revenues (2026.03.16) — https://budgetmodel.wharton.upenn.edu/p/2026-03-16-effective-tariff-rates-and-revenues-updated-march-16-2026/

⁵ Tax Policy Center, TPC Tariff Tracker (2025~2026) — https://taxpolicycenter.org/features/tracking-trump-tariffs

⁶ Supply Chain Management Review, Six months in: Are tariffs really rebuilding American manufacturing? (2025.11.24) — https://www.scmr.com/article/tariffs-us-manufacturing-reshoring-impact-2025

⁷ Manufacturing Dive, By the numbers: 2025 manufacturing trends (2025.12.23) — https://www.manufacturingdive.com/news/by-the-numbers-2025-manufacturing-trends/808583/

⁸ Deloitte Insights, A shrinking workforce may thwart US manufacturing ambitions (2026.01.07) — https://www.deloitte.com/us/en/insights/topics/economy/spotlight/us-manufacturing-labor-impact.html

⁹ BRG ThinkSet, Reshoring American Manufacturing: Why It May Not Be Possible—or Even Desirable (2025) — https://www.thinkbrg.com/thinkset/reshoring-american-manufacturing/

¹⁰ AMT, Reshoring Survey Reveals 4 Priorities for US Reindustrialization (2025) — https://www.amtonline.org/article/2025-reshoring-priorities

¹¹ Axios, Global trade grew in 2025 despite Trump tariffs (2026.03.20) — https://www.axios.com/2026/03/20/trump-tariffs-trade-ai-oil

¹² Market Research Vietnam, Vietnam Manufacturing Reshoring Trend 2025 Surge (2025.10.30) — https://marketresearchvietnam.com/insights/articles/vietnam-manufacturing-reshoring-trend-how-2025-is-redefining-global-supply-chains

¹³ Acclime, The China+1 Manufacturing Diversification Strategy (2025.12.22) — https://china.acclime.com/guides/china1-strategy-diversifying-manufacturing/

¹⁴ FT Locations, FDI data trends of 2025 (2025) — https://www.ftlocations.com/knowledge-hub/blog/FDI-data-trends-of-2025

¹⁵ FT Locations, FDI in Asia: Resilient growth and shifting priorities (2025) — https://www.ftlocations.com/knowledge-hub/blog/fdi-in-asia-resilient-growth-and-shifting-priorities

¹⁶ Rhodium Group, China and the Future of Global Supply Chains (2025) — https://rhg.com/research/china-and-the-future-of-global-supply-chains/

¹⁷ J.P. Morgan Global Research, US Tariffs: What's the Impact? (Updated 2025~2026) — https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs

¹⁸ WTO, Temporary tariff pause mitigates trade contraction, but strong downside risks persist (2025.04.16) — https://www.wto.org/english/news_e/news25_e/tfore_16apr25_e.htm

¹⁹ The Globe and Mail, How Trump's tariffs have reshaped the global economy, in 11 charts (2026.02) — https://www.theglobeandmail.com/business/economy/article-trump-tariffs-world-economy-charts/

²⁰ Tax Foundation, Tracking the Impact of the Trump Tariffs and Trade War (2026.03) — https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/