The working assumption in Washington and on Wall Street is that tariffs are slowly weaning the world's production networks off Chinese factories.
Yet McKinsey Global Institute's latest trade report - covering more than 90% of global goods flows - says otherwise.
It shows that U.S.-China bilateral trade fell ~30% in 2025, with $130 billion in Chinese exports evaporating under tariff rates that peaked at 137% in April.
American importers scrambled and found alternative suppliers, swapping out about two-thirds of what they'd been buying from China with shipments from ASEAN and India.
Global trade, far from collapsing, grew 6.5% and outpaced GDP.
None of these things changes the underlying shift in what China actually sells to the world.
So how come Chinese exports of intermediate goods - the components, materials and semi-finished products that other countries need to make things - expanded 9% in 2025, up from 6% the year prior?
Intermediate goods climbed to 47.4% of China's total exports in the first three quarters, up from 41.7% in 2017, according to Chinese customs data, and accounted for just over 40% of worldwide exports in this segment at the start of 2025.
Beijing's manufacturers contributed close to 50% of all global growth in intermediate inputs and capital goods over the year.
That's not derisking.
The replacement mirage
India's smartphone shipments to the United States jumped by ~US$15 billion in 2025, covering about 40% of the volume China had been supplying.
A "Make in India" win - except India's imports of Chinese components, from batteries to screens to semiconductors, tracked upward in lockstep.
Ireland quickly became one of India's fastest-growing trade partners by shipping chips into Indian assembly lines.
Vietnam ran the same playbook louder - electronics exports topped $100 billion and leapt 48%, but those products were largely assembled from Chinese parts.
ASEAN's imports from China ballooned by more than $100 billion during the year, roughly half of the total import growth for the bloc.
One trade analyst summed up the arithmetic: firms are relocating the assembly, not the production network.
Laptops sourced from ASEAN were on average 20% more expensive than equivalent units once bought from China, according to MGI data.
Somebody pays that premium eventually - whether it's the importer's margin or the consumer's wallet.
Factory to the factories
Beijing has spent years building out capacity in the upstream stages of manufacturing, from industrial components and machinery to the capital goods other factories need.
Government money poured in, backed by policies that nudged manufacturers toward local sourcing, just as domestic production capacity grew while reliance on foreign inputs shrank.
China is no longer just the "factory of the world" churning out toys and t-shirts for Western consumers - it now supplies the kit that powers production lines from Ho Chi Minh City to Chennai.
Exports of intermediate inputs and capital goods to production centres across the Global South swelled to nearly half of China's total exports in 2025, up from one-third in 2017.
Electronic components - chips, lithium-ion batteries, smartphone and computer parts - made up ~50% of the increase.
Oxford Economics found China is now the largest exporter in nearly 60% of product categories globally, commanding >20% of industrial goods export flows, up from 5% in 2001.
Every time a multinational moves final assembly out of China to dodge tariffs, it creates fresh demand for Chinese intermediate goods at the destination.
About half of China's intermediate and capital goods exports recorded lower prices alongside rising volumes in 2025.
Yet prices in intermediates barely moved - down just 1% on average - while volumes surged 10%.
For consumer goods redirected away from the U.S. market, prices fell an average of 8% while volumes lifted 5%.
The Bruegel Institute estimated in February that the price gap between Chinese and European manufactured goods has widened by 30 points since the post-Covid reopening.
That gap stretches past 40 points after exchange rate adjustments.
Oxford Economics notes the renminbi remains >20% undervalued in real terms by some market estimates.
And with ~30% of Chinese industrial entities now operating at a loss - per the U.S.-China Economic and Security Review Commission's latest data - firms are shipping below cost to hold market share.
That's rational enough for any single company, but zoom out, and it's locking in a cost advantage that emerging competitors will struggle to undercut for years.
Europe got squeezed, not saved
The European Union was supposed to pick up U.S. demand that shifted away from China, which manufactures many of the competing products.
In practice, the EU captured less than 3% of that redirected demand.
Outside of frontloaded pharmaceutical shipments - a one-off tariff arbitrage play - EU exports to the United States actually fell in several key sectors, including a 7% drop in transport equipment.
Overall imports of Chinese goods into Europe piled up by more than $60 billion.
Germany imported more cars from China than it exported there for the first time, just as the country's trade deficit with China hit a record €90 billion in 2025.
Strip out the pharmaceutical frontloading, and the EU's manufacturing trade balance with the United States and China deteriorated by $70 billion in a single year.
The competitive erosion mirrors what's playing out across developing markets - the intermediate goods pricing squeeze - just with higher costs and less room to absorb it.
Tail risk
The whole "China+1" architecture is built on the assumption that Washington keeps treating Chinese component content in ASEAN-assembled goods as invisible.
That assumption took a hit on March 11, when USTR launched Section 301 investigations into "structural excess capacity" across 16 economies.
Targets include Vietnam, Cambodia, Thailand, Indonesia, and Malaysia - precisely the ASEAN nations that absorbed the bulk of redirected Chinese supply chains over the past year.
Hearings are set for May, with a target date for tariff determinations around late July - roughly when the 150-day Section 122 stopgap expires.
If Section 301 tariffs land on ASEAN manufacturing hubs, firms that built their sourcing on the tariff arbitrage are exposed on both flanks.
They've unwound their direct China procurement relationships, their ASEAN routing gets challenged, and the Chinese component suppliers they still depend on have no reason to help them retool.
Rhodium Group's research found that emerging economies were reliant on China for more than half their imports in 20% of all product categories by 2022, up from 15% in 2019.
The 2025 data suggests that the ratio has widened further.
Oxford Economics' assessment was blunt - Chinese inputs have burrowed deeper into global production networks, not retreated from them.
