The Digester

China becomes 'factory to the factories' as US-China trade plunges

Mar 20th 2026

China is exporting more industrial components while finished assembly moves to places like Southeast Asia, driven by U.S. tariffs and a broader geopolitical realignment that is reshaping trade and investment patterns.

  • China's exports of intermediate goods such as smartphone parts, processors, memory chips and batteries rose 9% last year while consumer goods exports fell 2%, according to McKinsey's MGI report.
  • Trade between the U.S. and China declined about 30% last year, driven largely by steep U.S. tariffs on Chinese goods.
  • MGI found the U.S. replaced roughly two thirds of the goods it previously sourced from China by shifting procurement to countries like India and Southeast Asia.
  • ASEAN acted as a major assembly hub and matchmaker for supply chains, with its exports growing about 14%, more than twice the global average.
  • China increased trade with emerging markets in Southeast Asia, Europe, Latin America and Africa as it diversified partners amid geopolitical tensions with the U.S.
  • Foreign direct investment patterns are realigning: China is now a net investor overseas while U.S. investment into China has declined, and the geopolitical distance of FDI fell 13% versus a 7% decline for trade last year.
  • MGI concludes that globalization is being reconfigured along geopolitical lines rather than reversing, with supply chains shifting to aligned partners and 'China plus one' strategies accelerating.

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