The Supply Chain Shift Is Still a China Story

In Brief

The U.S. goods deficit with China has fallen by more than half since 2018, and the political read is now familiar: tariffs worked, China lost share, the chain is moving. The trade ledger says something messier. The deficit with China shrank by about $93 billion in 2025, but deficits with Taiwan and Vietnam rose by a combined $128 billion, and the total U.S. goods and services deficit barely moved. Final assembly and the invoice line are spreading across Asia. China is still in the chain, mostly upstream. The question for investors is what happens when rules-of-origin enforcement, tariffs, and AI hardware demand collide with a supply chain that was built to look diversified faster than it actually became diversified.

The Headline Number Is Doing Less Work Than It Looks

Start with the arithmetic. U.S. goods imports from China fell to $308.4 billion in 2025, down nearly 30 percent year on year. The bilateral goods deficit with China dropped to $202.1 billion, a 31.6 percent decline. If you stop there, the story writes itself.

Widen the frame. The total U.S. goods and services deficit in 2025 was $901.5 billion, only $2.1 billion smaller than the year before. The goods deficit actually rose by $25.5 billion. The services surplus did most of the offsetting work. Geographically, the deficit with Taiwan jumped $73.0 billion, the deficit with Vietnam rose $54.7 billion, and similar moves showed up in Thailand and India. CSIS notes that Taiwan's bilateral deficit is now roughly 865 percent larger than it was in 2018, and Vietnam's is up about 351 percent over the same window.

That doesn't refute decoupling. It corrects a specific reading of it. The U.S. external imbalance, in aggregate, was nearly unchanged. The address on the box changed.

Why Taiwan Belongs in a Separate Bucket

Most of the Taiwan surge isn't a tariff-arbitrage story, and treating it as one will lead to the wrong trade. U.S. goods imports from Taiwan reached $201.4 billion in 2025, up 73.3 percent year on year. The driver is AI hardware. McKinsey's 2026 trade update flags a sharp rise in U.S. purchases of AI-related goods, and the natural beneficiary is Taiwan's leading-edge semiconductor industry.

That's demand pull, not relabeling. Blending Taiwan into a general rerouting narrative explains a structural buildout in AI compute as if it were the same phenomenon as a sneaker brand changing the country printed on the box. Different risk, different trade. Taiwan's deficit growth is mostly a bet on AI capex by a small number of U.S. hyperscalers and chip designers, with Taiwan's semiconductor industry sitting in the middle. The rerouting question lives elsewhere.

The Cleaner Example Is ASEAN, and It Is Not That Clean

For a more honest picture of supply-chain relocation, look at ASEAN and especially Vietnam. McKinsey's update reports that ASEAN manufactured exports rose nearly 14 percent in 2025, that exports to the U.S. climbed by about $80 billion, and that ASEAN purchases from China rose by more than $100 billion. Two flows are moving together: more goods leave ASEAN headed for U.S. shelves, and more components and capital goods arrive in ASEAN from China. The gap is suggestive, but some of it is ASEAN's own consumption and intra-ASEAN trade. The supply-chain piece is real; the exact share is blurrier than a single ratio can capture.

Two definitions help here. "Value-added" is the share of an export's price that was created in the exporting country, rather than imported as parts or inputs from somewhere else. "Rules of origin" is the legal test that decides which country a good counts as coming from when a tariff applies. The gap between those two ideas is what the whole story turns on.

Trade-in-value-added evidence, the kind that traces inputs back through cross-border flows, suggests that roughly 30 percent of Vietnam's exports to the U.S. reflect Chinese value added, and that direct transshipment was below 10 percent in the early 2020s. That's historical, not a live 2025 reading. Treat it as the structural prior, not the latest data point. The right description isn't "China is being cut out." It's "China is moving upstream." Components, machinery, and capital goods flow into Vietnam. Final assembly and the export invoice flow out to the U.S. The dependency didn't disappear; it became less visible.

Where This Hits a Portfolio

The reason any of this matters is that the legal classification of a good drives the tariff applied to it. As long as substantial-transformation tests are interpreted generously, an electronics product built in Vietnam from Chinese parts counts as Vietnamese for tariff purposes, and the chain works. Tighten that test, or add a Section 301-style derivative on Chinese-content goods routed through third countries, and the math reverses.

That's the live catalyst, and it shows up in portfolios in a few places. Margin risk lands first: U.S. importers and brand owners that quietly rebuilt around ASEAN assemblers with heavy Chinese input dependence have cost structures that assume the current treatment holds. Capex risk follows. New industrial capacity in Vietnam, Thailand, and parts of Mexico has been financed on the same assumption, and stranded-asset risk is the right frame if rules tighten before local content actually catches up to the legal threshold.

Valuation comes next. Equities that trade at a "de-risked" multiple, companies and country proxies bid up specifically on the diversification story, are priced as if the diversification is more complete than the value-added data suggests. If enforcement rather than headline trade flows becomes the binding variable in 2026 or 2027, that premium has to give. Then there's inventory and sourcing. Buyers running lean on stable cross-border friction face a different calculus once the classification of inputs becomes a moving target, and pre-buying and dual-sourcing show up in working capital before they show up in headlines.

Source Notes

• USTR country pages for China and Taiwan: 2025 bilateral goods import and deficit figures, including the 29.7 percent decline in goods imports from China and the 73.3 percent rise in goods imports from Taiwan.
• BEA and Census 2025 annual trade release: total goods and services deficit of $901.5 billion, down only $2.1 billion year on year; goods deficit up $25.5 billion; bilateral deltas for China, Taiwan, and Vietnam.
• CSIS analysis on the relocation of the U.S. trade deficit: cumulative changes since 2018 for Taiwan, Vietnam, Thailand, and India.
• McKinsey Global Institute, "Geopolitics and the Geometry of Global Trade, 2026 Update": ASEAN export growth, U.S. AI-related imports, and trade-in-value-added evidence on Chinese inputs into Vietnam-to-U.S. flows.

The Bottom Line

The U.S. didn't break its dependence on Chinese industrial value. It rearranged where that value gets booked. Investors who track only the bilateral China line are reading a number designed for politics, not portfolios. What matters is where value is actually created, not where the final box is sealed, and the catalyst is rules-of-origin enforcement. The shift is real but partial. Taiwan's numbers are a separate AI story that shouldn't be allowed to flatter the broader relocation case. And the next leg of tariff risk won't arrive as a new tariff. It'll arrive as a stricter definition of where a good comes from.