Key Takeaways
- Effective February 1, 2025, the US imposed new tariffs on imported goods, significantly impacting businesses engaged in cross-border trade.
- The tariffs include:
- A 25% tariff on goods imported from Canada (other than in respect of Canadian oil and energy products which face a 10% tariff) and Mexico
- A 10% tariff on goods imported from China
- Geopolitical factors such as regional conflicts, sanctions, and regulatory changes have significantly impacted the global M&A landscape.
- Many multinational companies are relocating from China and Mexico to the US, India, Malaysia, Japan, and Vietnam due to tariff concerns.
- Retaliatory measures may weaken the multilateral trading system and affect global trade dynamics.
Jump to:
- The Impact of Proposed Tariffs
- To Stay or To Go – China +1 Strategy
- Trends from Southeast Asia – Malaysia
- Trends from East Asia – Japan
- To Stay or To Go – Mexico
- The Role of M&A in Strategic Realignment
- What We Know: Public News & Reports
- A Clear Example: Automotive & EV Industries
- Other Examples
- Ongoing Efforts
- Conclusion
In recent years, the global landscape of mergers and acquisitions (M&A) has been significantly influenced by geopolitical factors, including regional conflicts, sanctions, regulatory changes, economic rivalries, and the potential imposition of tariffs by US President Donald Trump, which has now become reality in relation to North American trade.
In light of this increasing complexity, many multinational companies (MNCs), particularly those with smaller operations, are leaving China and Mexico in favor of the US, India, Malaysia, Japan and Vietnam. In Mexico, some of this trend is offset by US MNCs nearshoring from China and other countries to Mexico. While such migrations were historically driven by income tax or commercial purposes, in the current environment they are instead increasingly politically and tariff driven.
Even where MNCs are staying put, MNCs are shelving expansion plans in such jurisdictions or otherwise diversifying production elsewhere to reduce reliance on potentially exposed jurisdictions and to create a more resilient supply chain. Some companies have established substantial investments in infrastructure and facilities over the years and/or are operating in an established ecosystem that does not exist in other jurisdictions. The cost and complexity of relocating these established operations can be prohibitive, making it more viable to manage and mitigate the existing risks rather than uproot and move (or at least plan for a gradual move over time).
Many companies are not eager to repeat their experiences suddenly pulling out of Russia as both cost and complexity mounted dramatically. Such movement out of a jurisdiction is almost never accompanied by a press release. It is “quiet quitting” and the volume numbers are hard to determine with certainty. Given President Trump’s foreshadowing of heavy tariffs, including in his inauguration address, we expect these trends to continue during the second Trump Administration with some significant increase in tariffs already announced.
Back to top of pageImpact of the Proposed Tariffs
On President Trump’s first day in office on January 20, 2025, the new Administration issued a wide-ranging trade policy memorandum. on January 31, initial tariffs were proposed. Effective February 1, 2025, the US will impose new tariffs on imported goods, significantly impacting businesses engaged in cross-border trade. The tariffs include:
- A 25% tariff on goods imported from Canada (other than in respect of Canadian oil and energy products which are subject to a 10% tariff) and Mexico
- A 10% tariff on goods imported from China
Tariffs are different from other taxes that are recoverable, such as value added taxes (VAT) and goods and services tax (GST). Any increase in duties to goods originating from Mexico or Canada is inconsistent with the US’s obligations under the USMCA and GATT, both of which expressly prohibit increasing any existing customs duties or adopting new ones on originating goods. However, the benefit of such obligations is under review in the US
As this article is printed, counter tariffs are being enacted on an hourly basis. Canada responded hours later with retaliatory tariffs of its own, while Mexico said it was also planning to issue tariffs on the US as well. China's commerce secretary said that China would challenge the tariffs through the World Trade Organization, according to Reuters, claiming that the move "seriously violates" WTO rules.
Back to top of pageTo Stay or To Go – China +1 Strategy
China, once heralded as the manufacturing hub of the world, is witnessing a shift as global companies move their operations elsewhere. The ongoing trade tensions and tariffs have prompted businesses to reevaluate their dependence on Chinese production. This shift is not merely a short-term reaction but a strategic move to diversify supply chains and reduce single or primary-source vulnerability. This is not only because of trade policy, but also because of broader geopolitical tensions as well as the supply chain issues exposed during the COVID-19 pandemic.
However, most global companies are not completely relocating their manufacturing operations from China. Instead, they are expanding into other countries for their manufacturing needs. Factors such as China’s well-developed manufacturing infrastructure, extensive supplier networks, and vast consumer market make it challenging for them to leave China entirely.
A critical initial question to address in any relocation is whether to move only the final assembly line elsewhere, or go further upstream and even persuade the suppliers to move along. This fork-in-the-road decision impacts other business decisions, such as local licensing requirements, investment commitments, tax planning, and transfer pricing.
Several industries, including technology, automotive, and consumer goods, are leading the relocation of their manufacturing from China. Companies that have long relied on Chinese manufacturing are now exploring alternatives in Southeast Asia and India. Further, many companies are relocating company headquarters from China to Singapore to take advantage of Singapore’s strategic location as a gateway to ASEAN markets as well as its competitive tax environment and business-friendly legal regimes.
Bain & Company conducted a survey in 2024 of 166 CEOs and COOs (90% of which represented MNCs with revenues in excess of $1 billion) to understand the companies’ plans in regards to their investments in China. 81% of the companies interviewed plan to bring supply chains closer to domestic markets. Almost two-thirds (64%) of the companies reported investment in split-shorting (46%) or near-shoring (18%), but only 2% of the companies reported having fully completed their plans.
Of course, not all businesses are choosing to leave China. Some companies are staying due to the immense opportunities presented by China’s large consumer base. With a population of over 1.4 billion, China offers a vast market for businesses, especially those in the retail, life science, industrial, technology, and luxury goods sectors. Despite the tariffs and trade uncertainties, the sheer volume of potential customers and the growing middle class in China present significant revenue opportunities that are difficult to ignore.
Furthermore, many companies have established extensive supply chains and infrastructure in China over the years, making it logistically and financially challenging to relocate. The existing manufacturing ecosystem in China, with its highly skilled workforce, years of locally accumulated R&D capabilities, and advanced technology and infrastructure, continues to support efficient and competitive production capabilities.
Instead of leaving China altogether, many companies are diversifying their manufacturing and supply chain operations by maintaining presence in China while establishing operations in at least one other country. Popular targets including Vietnam, India, Thailand, Malaysia, Indonesia, Mexico, and the Philippines. Many of these countries see opportunities in positioning themselves as part of the global supply chain puzzle while maintaining good relations with both the US and China.
While the outbound migration trend is prominent, there are also some strategic inbound migration to China occurring. Companies in sectors such as healthcare and analytical instruments are redeploying their China operations in order to meet the new “buy-local” requirements, as China raises the standards for “made-in-China” products in its government procurement projects.
Back to top of pageTrends from Southeast Asia – Malaysia
As a result of anticipated Trump tariffs on China, the “China + 1” strategy has gained significant traction in Malaysia, where major MNCs are increasingly diversifying and relocating their manufacturing and supply chains to Malaysia. This strategy involves a shift from a “just-in-time” (JIT) to a “just-in-case” (JIC) inventory management approach.
Situated between the Indian Ocean and the South China Sea, Malaysia is in strategic position as a shipping and logistics hub, serving as a key intermediary point between the East and the West in global trade and supply chains. Malaysia also serves as a gateway to the dynamic and rapidly growing Southeast Asian market, providing access to a large consumer base and potential for regional integration. Compared to many developed economies, Malaysia offers competitive labor costs, making it an attractive destination for labor-intensive industries.
By example, Malaysia is a prime benefactor of the US-China chip war. It is the sixth largest exporter of integrated circuits, contributing to 7% of global market share. It controls 13% of the global market for packaging, assembly and testing services for semiconductors.
Malaysia is the foreign direct investment leader in Southeast Asia in the electrical and electronic equipment segment, with RM 34.3 billion (USD 7.9 billion) in approved investments in Q1 2024. Fueled by the government’s National Semiconductor Strategy unveiled in 2024, leading companies recently announced their investments into Malaysia, amounting to billions of dollars dedicated to set up new assembly and testing facilities, as well as power semiconductor plants.
The ongoing US-China trade tensions have also prompted the relocation of data centers to Malaysia. Malaysia boasts a robust digital infrastructure, reliable power, abundant water resources essential for cooling data centers, and ample land availability for the construction of large-scale facilities. The southern state of Johor has emerged as a key data center hub, with 13 facilities already operating across over 1.6 million square feet.
This transition has resulted in a rise in inbound investment to Malaysia as well as M&A and commercial activities with Malaysia. Malaysia, once a lesser known location for manufacturing, is now receiving increased investment and transition of corporate headquarters. However, there has also been an acute increase in enforcement activities against companies that are suspected of routing Chinese products through third countries, such as Malaysia, to avoid tariffs.
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Trends from East Asia – Japan
Some MNCs, in particular those with advanced technological needs or specific workforce needs, are also increasing their investment in Japan as a diversification strategy for China. With the Yen (JPY) to Dollar (USD) ratio higher than in prior decades, investments in Japan have become feasible for a number of companies, and there has been a growing interest in joint ventures with Japanese companies as an alternative place to expand Asian operations.
Likewise, many Japanese MNCs that had expanded into China previously are now seeking other locations for continued expansion. We expect to see more Japan MNCs going through similar supply chain realignments to other domestic companies, as the state of Japan’s national budget has been incentivizing MNCs to bring ex-Japan supply chains back home. This form of realignment in fact started in the pre-pandemic period.
Back to top of pageTo Stay or To Go – Mexico
Mexico has faced its own set of challenges, particularly with the threat of tariffs on automotive and agricultural products. The previous uncertainty surrounding US-Mexico trade relations has compelled companies to reconsider their investments in the country. In response, businesses are pursuing M&A transactions to exit or reduce their exposure to the Mexican market. This trend is particularly pronounced in industries that are highly sensitive to trade policy changes.
At the same time, we have seen an influx of Chinese manufacturing investments to Mexico at the time to potentially reduce Chinese content and avoid US-to-China tariffs, similar to what is happening in Malaysia. Since Trump has now imposed tariffs on Mexico, this may not actually minimize the tariff effects. Applicable trade agreements may apply different Rules of Origin in determining the origin of a product, which results in the possible scenario where a product manufactured in Mexico qualifies as originating in Mexico for purposes of USMCA yet still qualifies as originating in Chinese under the Trade Act. Failure to bring the origination of the products outside China under the Trade Act would render the migration fruitless.
We have seen a rise in M&A activities in the Mexican automotive industry as companies seek to shift production to other regions. While the Rules of Origin set forth in the USMCA for the automotive sector is already quite stiff and burdensome, it focuses on promoting the use of components that are originating in the North American region. There are currently no restrictions or requirements associated with the nationality of the investment and therefore, a Chinese investor who sets a manufacturing facility in Mexico can export its products to the US duty free, so long as the products are “substantially transformed” in Mexico and meet the applicable USMCA Rules of Origin. However, that may change as the USMCA will be subject to review in 2026, and US government may try to impose new requirements to discourage Chinese investment so close to its borders.
In addition to the challenges posed by tariffs, businesses operating in Mexico are also contending with the threats posed by cartel violence and water shortages. The presence of powerful drug cartels has resulted in significant security concerns for companies, with frequent reports of extortion, theft, and violence disrupting operations. Moreover, Mexico is facing water shortages that are severely affecting industrial operations. This crisis stems from a combination of climate change, over-extraction of water resources, and inadequate infrastructure. This environment of instability has made it difficult for businesses to maintain consistent production schedules and has increased the cost of doing business due to the necessity of enhanced security measures.
Despite these challenges, however, many companies are choosing to stay in Mexico for several compelling reasons. Firstly, Mexico’s geographic proximity to the US is a significant advantage, especially for industries reliant on just-in-time delivery systems. The short transit times and reduced shipping costs bolster the appeal of maintaining operations within Mexico.
Secondly, Mexico benefits from a multitude of trade agreements beyond NAFTA (now USMCA), including pacts with the European Union and Japan, and access to US government procurement under the Trade Agreement Act. These agreements provide companies with preferential access to multiple markets, presenting a strategic advantage in global trade. Moreover, Mexico boasts a skilled labor force adept in various manufacturing sectors, particularly in automotive and electronics. The availability of trained personnel and competitive labor costs also continue to attract businesses despite the prevailing issues.
Back to top of pageThe Role of M&A in Strategic Realignment
M&A transactions have become a critical tool for companies aiming to navigate the complexities of the current geopolitical environment. By acquiring or merging with entities in regions less affected by tariffs, businesses can achieve several strategic objectives:
- Supply Chain Diversification: M&A allows companies to establish operations in multiple regions, thereby reducing reliance on any single market and diversifying the supply chain base.
- Cost Efficiency: Shifting production to countries with lower tariffs and operational costs can enhance profitability.
- Market Expansion: Entering new markets through M&A provides access to a broader customer base and growth opportunities.
- Divestiture: Sometimes the easiest way to reduce your exposure to a jurisdiction is to sell assets in such jurisdiction.
Small and medium-sized enterprises are also leveraging M&A to reposition themselves in a more favorable business environment. This trend underscores the widespread impact of tariffs across the business spectrum.
Back to top of pageWhat We Know: Public News & Reports
Based on public reports, we know that a number of major players with substantial business operations in China and Mexico are shifting away from those countries due to tariff impacts. As most companies leaving China and Mexico opt to “quiet quit” their businesses abroad, exact details of those departures are not typically announced and public reporting on this subject matter is limited. What has been announced are the following through media reports by Bloomberg News, Reuters, and alike:
Back to top of pageA Clear Example: Automotive & EV Industries
Several major manufacturers and retailers in the automotive industry have anticipated the effects of the potential tariffs. Wall Street Journal has reported a Fortune 100 automotive manufacturer and retailer pursuing M&A transactions to diversify its production base, including investments in Southeast Asia and Eastern Europe. The Executive Vice President of another Fortune 100 company said at CES 2024 that the company “might have to consider that [they’re] changing production location . . . from Mexico to Japan, or Mexico to somewhere else,” depending on the tariff level, as Reuter reports. At that time, the company VP clarified that it had “not formalized what it can do, but were elaborating what it will be able to do.”
Manufacturers in the automotive industry are also considering their options. The North America regional president of a Fortune 200 German car parts manufacturer said at the CES 2024 tech conference that the company had been reviewing alternative markets to China for its manufacturing, in “areas where it has a footprint already.” At the time, the regional president stated that the company would not make any “significant decisions” until Trump takes office to see what actually happens.
Where localization is feasible, companies do so. A Fortune 500 manufacturer in the automotive industry has reportedly stated that the company is more “underexposed than the rest of the automotive industry or [its] competitors” because of its ongoing effort to localize production in each region where it operates to serve nearby customers. The company is talking to its suppliers in North America: “Wherever we can further localize, and it makes sense, we will do it.”
Companies are looking to alternative markets that are less likely to be heavily impacted by Trump tariffs and where the location may provide an economic advantage. For instance, a well-known motorcycle manufacturer and retailer has reportedly relocated some of its production in China to other regions. Notably, it expanded its manufacturing operations in Thailand to better position itself to capitalize on the growing demand for motorcycles in Southeast Asia.
Back to top of pageOther Examples
A Fortune 100 company, known for its products and services across several major industries including energy and healthcare, has divested from certain operations in China and Mexico and acquired interests in alternative markets, Forbes reports. The company’s approach involves a combination of M&A and strategic partnership.
Additionally, a Fortune 100 Japanese company in the energy sector has told Reuters that the company is accelerating plans to eliminate all Chinese content from its US-made batteries. While the Chinese materials only makes up a small portion of this company’s supply chain, the spokesperson stated that the aim is “not to have the supply chain dedicated from China.”
A major shoe manufacturer and retailer has told Bloomberg that the company aims to reduce goods manufactured in China by 40% within 2025, which would result in around 25% of its business being subject to tariffs on Chinese imports if successful, while just under half of its business as was would be subject to heavy tariffs. CEO of the company had “worked hard over a multiyear period to develop [its] factory base and sourcing capability in alternative countries, like Cambodia, Vietnam, Mexico, Brazil, etc..” The company has no plans to bring production back into the US domestically.
The type of target consumer base also plays a role in companies’ decisions. A discount clothing company and retailer has expressed the company’s sensitivity to price increases as it caters to naturally cautious spenders. In anticipation of potential tariff impacts, the company president told NPR that it is stock-piling warehouses ahead in order to avoid price increases, risking the chances of the inventory going out of style and not sold.
It is worth mentioning that the European Court of Justice issued a ruling in November 2024 confirming that if a company’s “principal or dominant purpose” to relocate its production is to avoid retaliatory tariffs, the ordinary Rule of Origin shall not apply and instead, the origin of the product shall be where the majority of the components originate. This ruling may have a significant impact on relocation of manufacturing, at least with regards to imports into the European Union.
Back to top of pageOngoing Efforts
Baker McKenzie has experience with a wide variety of clients in respect of operation migrations to navigating geopolitical issues and mitigating negative economic impacts. Particularly with respect to tariff policies, client reports show the following:
- An increase in movement away from operations in China and Mexico, specifically with mid-size companies;
- An acceleration of China +1 / China +N strategy by global companies to diversify their supply chain by adding one additional source of manufacturing to China;
- A decrease in average purchase price for acquisition deals in China, and longer time to close a deal as buyers and/or buyers’ shareholders are wary of purchasing assets and operating in China;
- An increase in Singapore investments, in particular with a significant rise in the number of family offices and investment funds into Singapore;
- An increase in US companies moving their Asia headquarters from China and Hong Kong to Singapore;
- An increase in Malaysia’s exports to the US and an increasing trade surplus;
- China-US dumping going both ways with products that are more expensive and high-tech than before, such as Chinese EVs and potentially US integrated circuits investigated by China;
- More leading MNCs involved in dumping investigations;
- Clients’ increased attention to other companies’ strategic moves out of Mexico.
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Conclusion
The imposition of tariffs by President Trump has undeniably reshaped the landscape of global business. Companies are increasingly turning to a variety of strategies, including M&A transactions, as a means of de-risking their operations in China and Mexico.
As businesses continue to navigate the complexities of the global trade environment, M&A will remain a vital tool in their strategic arsenal. The volume of exit transactions from China and Mexico is expected to grow, reflecting the ongoing efforts of companies to adapt and thrive in an ever-changing geopolitical landscape.
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