Trade wars can discourage domestic production
Summary
Companies that sell products internationally may find it advantageous to avoid tariffs by building factories closer to their customers.
When Taiwan Semiconductor Manufacturing Co. announced its $165 billion investment in Arizona this month, many in the U.S. hailed it as a victory for American manufacturing. Considering the company’s strategic calculus, however, TSMC’s decision is an ill omen for President Trump’s plan to rebalance industry through tariffs.
TSMC’s move reveals a counterintuitive reality in global trade policy: Tariffs intended to bring manufacturing home may actually accelerate the exodus of production. Early market evidence suggests this is what Mr. Trump’s chaotic trade policy is doing. TSMC illustrates why. By shifting some production to Arizona, the Taiwanese company is strategically positioning itself to avoid tariffs that might hamper its access to its predominantly North American customer base, including Apple and Nvidia. But reaching customers isn’t a problem unique to foreign firms. For U.S. companies that predominantly serve customers abroad, tariffs and the risk of retaliation can lead them to increase relationships with foreign suppliers and loosen ties with domestic ones.
In responding to tariffs or other trade restrictions, a crucial issue businesses have to consider is the cost of distribution to customers. For companies with mostly domestic customers, trade policy uncertainty may indeed encourage reshoring. Intel’s decision in 2022 to invest $20 billion in semiconductor fabrication facilities in Ohio made strategic sense because a significant portion of its customer base is domestic and Washington was making noise about limiting strategic tech entanglement with foreign supply lines, especially connected to China. If Intel’s production remained abroad, tariffs or other trade restrictions done in the name of national security could restrict the company’s access to its primary market.
But this calculus is flipped for firms that get most of their revenue from foreign sales. These companies face a stark choice: continue manufacturing in the U.S. and risk being caught in the trade-war crossfire, or relocate their entire supply chains overseas to bypass American borders and thereby retaliatory tariffs.
Relocating and changing supply chains is costly, but it can quickly become the cheaper option over weathering unknown, potentially sudden production cost hikes due to volatile trade policy. As attitudes in the U.S. have turned against free trade over the past decade, some companies seem to have already decided restructuring is worth the price. Nike, which gets more than 55% of its revenue from abroad, has shifted manufacturing out of China but not to America. Instead, it’s basing production in Southeast Asia. Or take Apple. Aside from some token reshoring of components production, the company maintains the vast majority of its production overseas. It isn’t just about labor costs—it’s about proximity to the company’s large international customer base.
This dynamic could even shift overall supply-chain patterns away from the U.S. as uncertainty about Washington’s trade policy grows. Around 40% of public American companies that participate meaningfully in global markets get a majority of their revenue from abroad. If these firms shift their supply lines out of the U.S. in favor of their foreign customers, it would push a significant portion of overall production out of America.
Early global supply-chain data after Mr. Trump’s “liberation day" tariff announcements suggest we are witnessing not simply the relocation of individual factories but a restructuring of global production networks into more regionally coherent systems disconnected from America. In addition to changing U.S. firms’ behavior, Mr. Trump’s trade policies are catalyzing the formation of new trade blocs and accelerating regional integration that previously depended on American market access. Asian manufacturers that held plants in China have increasingly relocated production to Southeast Asia. These companies will still serve as regional manufacturing hubs, while avoiding any Beijing-Washington trade spats.
This problem isn’t confined to Asia. The eurozone seems to be focusing production within its own bloc, too, as trade policy uncertainty builds.
This fragmentation of previously U.S.-centric supply chains could become a structural shift in global economic architecture with serious consequences for America. As firms with global customer bases relocate entire supply chains to circumvent U.S. trade-policy uncertainty, they transfer not only jobs but also critical technological capabilities, organizational knowledge and capital investment to emerging manufacturing hubs. This could diminish U.S. economic leverage and innovation advantages.
In an interconnected global economy, effective American industrial policy requires nuanced approaches that recognize how important overseas customers are to U.S. corporate decision making and the complex, systemic effects of trade interventions. Unfortunately for Americans, Mr. Trump doesn’t appear to have taken either into account.
Mr. Charoenwong is a finance professor at INSEAD.
