U.S. Tariffs Could Have Five Key Impacts on Chinese Manufacturing

Summary

The U.S. government’s tariff policy is expected to impact multiple manufacturing sectors, and the effects will be felt across the Chinese economy. As such, we are closely monitoring these developments and updating our market forecasts accordingly.

Based on recent economic data and insights from discussions with clients, Interact Analysis has identified several key impacts the tariffs could have on China’s manufacturing sector:

1. Pressure on China’s exports

2. Tariffs may affect China’s manufacturing recovery, but rising domestic demand helps

Chinese manufacturing entered 2025 with solid momentum, with the housing market stabilizing, industrial production gradually recovering, and domestic consumption on the rise. Before the tariff announcement, we were confident in the continued recovery of China’s manufacturing and industrial automation sectors.

3. Price fluctuations in the short term

Rising tariffs are likely to fuel inflation in the U.S. by increasing the cost of imported goods. In response, some Chinese suppliers are facing pressure from U.S. buyers to lower prices as profit margins tighten. At the same time, reduced exports to the U.S. could result in excess supply in China, potentially adding to deflationary pressures there. However, we expect only a limited impact on Chinese manufacturers’ ARPU, as they’ve already endured two years of intense price competition in the domestic market, margins have been heavily compressed, and further price cuts are becoming increasingly difficult.

4. Manufacturers reviewing production locations

Current policy trends indicate that, while U.S.-China tensions remain high, there is more room for negotiation between the U.S. and other regions. Multinational companies are thus expected to continue the “China+1” strategy to reduce reliance on China.

However, we have also noticed that many global companies are increasing investment in China and pushing for localization to stay cost-competitive. Companies heavily reliant on the Chinese market are unlikely to reduce local production in the short term, while those with broader Asian operations may accelerate capacity expansion outside China.

Leading Chinese manufacturers have also been setting up operations overseas, particularly in Europe and Southeast Asia. Notable examples include EV maker BYD, battery producer CATL, and electronics manufacturers such as Luxshare and Goertek. However, these overseas operations still largely adopt Chinese supply chains for system integration and core machinery.

In general, production shifts will impact China’s end-product manufacturing more than its machinery sector. Southeast Asia and other “China+1” regions are expected to see strong growth in components, services and aftermarket demand–an observed trend frequently mentioned in our recent interviews.

5. Collaboration of Chinese manufacturers with external manufacturers

With a challenging exports market, Chinese manufacturers will try to expand business in Europe, Japan and Korea, leading to more competition within those regions, but also potential cooperation.

Establishing cooperation with local peers or partners is a common idea for manufacturing companies to expand their regional markets. For example, Chinese machine builders may consider using local suppliers’ components or automation systems to gain the trust of local customers. Furthermore, even direct competitors can strengthen their product portfolios by offering complementary products. There are numerous industry examples of this, such as Chinese robot vendor Rokae’s collaboration with Siemens, and the recently announced partnership of EVE Energy and KION Battery Systems in the new energy sector.

Conclusion

During the first quarter of 2025 we had already observed signs of a recovery in China’s manufacturing sector. While there is still room for negotiations and stimulus policies, we expect tariff disruptions will negatively impact our baseline forecast for global manufacturing in 2025.  China is also expected to align with global manufacturing trends and experience a slowdown in momentum, weighing on the ongoing recovery of its manufacturing industry in 2025.