China Plus Two or Three
The point of trade agreements, above all, is to establish clear rules for cross-border commerce, so businesses can make sensible decisions about importing, exporting, and investing. One year into Donald Trump’s second presidency and that rationale is pretty much out the window when it comes to trade relations with the United States. The U.S. seems to have no compunction about ignoring agreements to which it is a party. This has major implications for value chains.
Diplomacy is a stop/start process, and no trade agreement is perfect. But agreements mean little if there is scant likelihood of compliance. Canada and Mexico were hit with 25% U.S. tariffs in 2025 in blatant disregard of the sweeping 2019 trade agreement between the three countries — never mind that negotiations to revise that agreement were already on the calendar for 2026. Colombia and the United States agreed to phase out tariffs on each other’s goods in 2012, but Colombia nonetheless got hit by a 10% tariff on most imports last April. The United Kingdom raced to get in the President’s good graces by striking a vague “Economic Prosperity Deal” in May 2025, but in mid-January Trump threatened it with additional tariffs if it did not support his demand that Denmark yield control of Greenland to the United States. Similarly, the European Union, Japan, South Korea, and other trading partners have found that their painstakingly bargained trade agreements with the United States are not binding.
While the U.S. Supreme Court may soon reject the claim that an “emergency” allows the president to impose tariffs as he desires, It is notable that neither major political party has had much to say about the Administration’s disrespect for U.S. trade agreements. This bipartisan indifference suggests that U.S. adherence to its commitments may remain uncertain even after Trump leaves office.
For more than a decade, many firms that once sourced mainly from China have quietly opened factories or sought suppliers in other countries. That approach, known as “China plus one,” may no longer be sufficient. With the United States now sanctioning numerous trading partners as it sees fit, managing value-chain risk may require multiple options in case a second-choice supplier country falls from Washington’s good graces. “China plus two or three” is likely to be an expensive strategy, making it harder to gain economies of scale, but it may be wiser than assuming that U.S. trade agreements will be adhered to.
Tags: value chains