What does it take for US trading partners to wean themselves from US markets?

President Donald Trump's trade war has compelled US trading partners to diversify their exports to non-US markets. Most prominently, President Xi Jinping of China, the principal target of US tariffs, is using loans and tariff concessions to boost exports to countries in Asia, Latin America, and Africa. Prime Minister Mark Carney has promised to double non-US exports over the next decade.[1] And both Prime Minister Narendra Modi of India and President Luiz Inácio Lula da Silva of Brazil have endorsed trade deals with Europe.

The motivation of these countries is clear and understandable. But can such diversification occur quickly? The evidence suggests that it will take some time for them to find markets outside the United States. However, only 2025 trade data are examined in this blog post, and it remains to be seen whether this trend will continue in 2026.

The United States is not the only target of efforts to diversity exports. Other political leaders, including the prime ministers or presidents of Malaysia, Indonesia, Turkey, and Germany have announced diversification missions to reduce reliance not only on the US market but also on the Chinese market.

An earlier essay showed that, as of late 2025, US tariffs have had a very limited impact on shares of national exports destined for the US market, apart from Canada and China. For those two countries, their shares of exports headed for the United States declined by around 3 to 4 percentage points.[2] For other countries the impact was much smaller or non-existent.

One reason why US tariffs are not motivating companies to diversify away from US markets is that foreign companies' profit margins do not appear to have been much affected by the trade war. That is because to a very large extent, US tariffs are paid by US consumers. According to econometric analysis by the Kiel Institute, US household and business consumers paid 96 percent of the US tariffs imposed in 2025. The Federal Reserve Bank of New York estimated that US consumers paid 94 percent of tariffs between January and August 2025, falling to 92 percent between September and October 2025.

These estimates imply that foreign producers are less motivated to seek alternative markets than if they had to absorb, say, a 15 percent US tariff in their own profit margins. Instead, foreign producers are absorbing a small fraction of headline tariffs, while 92 to 96 percent of tariffs are passed on in higher prices to US household and business consumers.

This carries a lesson for foreign leaders. New trade agreements, such as the EU trade agreement with Argentina, Brazil, Paraguay, and Uruguay, i.e. the EU-Mercosur accord, as well as EU-India and possibly Canada-Mercosur, will, over time, open new markets and may diversity exports away from the United States and possibly China. But since liberalization is usually phased in slowly to avoid disrupting domestic constituencies, trade agreements do not instantly inspire a wave of diversification.

Apart from the "natural" impact of diversification forced by US market closure and the slow process of negotiating and implementing new trade agreements, what can foreign leaders do to accelerate export diversification? In reality, not much. They can take road shows to declare mutual friendship. Yet, in the absence of serious financial incentives, the motivation of their own producers to seek alternative markets may be weak.

To illustrate this reality, the table below shows the top 11 export destinations for merchandise goods from China in 2024 and 2025, based on Chinese customs data, along with a basket category for all other destinations. The United States remained China's largest single export market, but the share declined to 11.1 percent ($420.0 billion) in 2025. However, this figure may understate imports coming indirectly from China through third countries.

EU members are another key market for China, and exports reached $560 billion in 2025, but the EU share of Chinese exports only rose from 14.4 percent to 14.8 percent between 2024 and 2025. Chinese diversification was likewise spread in small increments across other individual markets. Hong Kong was the largest reported alternative in share terms, but most Chinese exports to Hong Kong are in turn shipped to other destinations.[3] However, the basket category for Chinese exports, "rest of the world," showed a share increase from 35.5 percent to 37.7 percent between 2024 and 2025. This gain reflects Chinese success in penetrating many small markets in Africa, Latin America, and elsewhere.

The trade war with China is compelling producers in China and elsewhere to take US actions into account and explore alternative markets where their goods might fetch better returns. But Chinese experience suggests that, even for intrepid Chinese merchants, export diversification is not an easy goal. However, as the US-China trade war grinds on in 2026 and beyond, Chinese merchants may have more success in finding alternative markets.

While US effective tariffs on imports from China increased by about 20 percent in 2025, less than 5 percent of Chinese merchandise exports were "diversified" from the US market to other destinations. In other words, Chinese exports headed for the United States were reduced from around $525 billion in 2024 to $420 billion in 2025, a drop of $105 billion. The lost exports to the US market were "diversified" to other countries.[4]

According to an average of estimates by the Kiel Institute and the New York Federal Reserve, US consumers paid roughly 95 percent of tariffs imposed during most of 2025, leaving about 5 percent to be paid by foreign exporters.[5] If US imports from China had remained at the 2024 level, additional US tariffs would have amounted to $105 billion (20 percent times $525 billion). Based on the average of Kiel and Fed estimates, Chinese exporters faced revenue losses of $5.3 billion (5 percent times $105 billion) from continuing the 2024 level of exports to the US market. Instead, $105 billion of those exports were "diversified" to other markets (the difference between $525 billion Chinese exports to the United States in 2024 and $420 billion in 2025).

Arithmetic thus suggests that financial incentives of at least 5 percent were required to spark this diversification ($5.3 billion divided by $105 billion). Given their global reach and the wide range of products they can offer, Chinese exporters are probably more adept at finding new markets, often for a different product mix, than firms based in most countries. Yet financial incentives of at least 5 percent of their 2024 exports to the US market were needed to prompt substantial diversification. To achieve a comparable degree of export diversification, other countries might have to offer larger financial incentives.

Few countries are likely to provide the necessary incentives to achieve significant diversification. Incentives can entail controversial budget outlays, and outlays that equate to export subsidies would violate the World Trade Organization (WTO) code on subsidies and countervailing measures and attract countervailing duties. Moreover, the United States offers the world's largest and richest consumer market, with no value added taxes (VAT). These considerations indicate that diversification from the US market will be a slow process, despite the erratic and punitive nature of US trade policy.

Notes

1. For Canada, this is a long quest. The country established a federal Minister of Trade Diversification in 2018.

2. We updated the calculations using full-year data in 2025. Exports from Canada to the United States, as a percentage of total Canadian exports, decreased roughly 3.6 percentage points between 2024 and 2025. The same shares with China decreased 4.3 percentage points.

3. The top five destinations for Hong Kong merchandise exports in 2025 were the Chinese mainland, the United States, Vietnam, Taiwan, and India.

4. It seems likely that China shipped different products to alternative markets than might have been shipped to the United States. However, this blog post does not investigate product mix.

5. The Kiel report finds that the coefficient on log tariffs in the unit value regression is -0.039, statistically significant at the 10 percent level, with a standard error of 0.024. This interval suggests that a 10 percent increase in tariffs is associated with 0.39 percent decrease in foreign exporters' unit values. So as the study notes, this implies that foreign exporters absorb less than 4 percent of the tariff burden. However, the 90 percent confidence interval for the estimate is (0.0785, 0.0005). Hence, foreign exporters might have absorbed as much as 8 percent of the tariff burden according to the Kiel estimates.