President Donald Trump’s latest shot in his economic battle with China isn’t simply about imposing tariffs on products marked “Made in China.” It’s about tracing the crumbs of global supply chains and slamming the doors wherever Chinese goods may be slipping through. And collateral damage? Maybe it lies in your ETF portfolio.
Bloomberg Economics cautioned that Trump’s planned crackdown on transshipments, when China diverts goods through third nations such as Vietnam and Mexico, has the potential to imperil 70% of China’s exports to the U.S.
That’s not only a setback for Beijing. For economies that have become reliant on this diversion, such as Vietnam and Mexico, the effect would be a complete shock.
Also Read: Trump Wanted To Break China—Now It’s Crushing The US At Its Own Game
ETFs like the VanEck Vietnam ETF (BATS:VNM) and iShares MSCI Mexico ETF (NYSE:EWW), investor favorites of the China+1 story, might be at risk of a policy whiplash if Trump tightens the rules and widens tariffs.
Since Trump's original trade war flared up in 2018, China's manufacturers have increasingly leaned on third countries to complete and ship goods bound for the U.S. According to Bloomberg Economics, China's share of total value-added through nations like Vietnam and Mexico surged to 22% in 2023, up from just 14% in 2017.
The strategy worked, until now.
In a wave of warning letters to nations, the Trump campaign (acting preemptively, as if the return is a foregone conclusion) described a plan to raise tariffs on transshipped goods unless bilateral trade agreements are negotiated. And while the specifics are still unclear (definitions of “localized” goods are unclear, enforcement remains uncertain), the intent is clear: limit China’s ability to bypass supply chains.
ETFs In The Firing Line
VNM, which was on a rally this year, is now likely to be hit by the headwinds of tariffs. The fund has a concentrated weight in manufacturing and industrial stocks that have gained directly from China’s trade diversion.
EWW, which jumped more than 30% from the end of 2022 to mid-2023 on hopes of nearshoring, could find itself entangled in a web of new compliance hurdles and export tension, particularly if the U.S. targets autos or electronics that depend on Chinese parts.
Even widely diversified emerging market funds such as Vanguard FTSE Emerging Markets ETF (NYSE:VWO) and iShares MSCI Emerging Markets ETF (NYSE:EEM) won’t be immune, considering their large exposure to these economies and the larger China-bordering trade complex.
Also Read: Nvidia’s Jensen Huang Charms China With AI Diplomacy as Tariff Tensions Linger
But How Much Of A Threat Is It?
Of course, there’s a Belt-and-Road-size caveat: enforcement.
"Uncertainty clouds how rigorously the U.S. will be able to enforce transshipment restrictions. US definitions of localized goods remain vague, and details on verification are lacking," Bloomberg analysts conceded. Definitions are vague, verification mechanisms are missing, and global firms are old masters at the game of compliance or evasion.
For ETF investors, this translates to volatility potentially spiking; however, the longer-term trend hinges on whether an effective bite accompanies the bark. If Trump is more interested in instant bilateral bargains than blanket enforcement, the effect will be contained. However, if the approach snowballs into a tariff-drenched worldwide renegotiation of trade routes, the ripple effects will be difficult to hedge against.
Bottom Line
The next chapter in U.S.–China tensions won’t take place in Beijing or Washington, it might be written in the ports of Ho Chi Minh City and the factories of Tijuana. And for investors following emerging markets using ETFs, it may be every bit as crucial to grasp the new rules of origin as it is to follow fundamentals.
The China+1 tale isn’t over.
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