Trade War Update: U.S. Companies Not Coming Home, But Many Are Leaving China
Date: Tuesday, January 14, 2020
So, ex-president Barack Obama was right after all. Manufacturers who left to make their goods in cheaper countries aren’t coming back, at least not in any significant number.
However, even though the trade war is showing no signs of bringing U.S. manufacturing firms home, it is taking its toll on Chinese manufacturing with an increasing number of them losing out to other Asian countries.
As any American blue collar worker might tell their Chinese counterpart, “Welcome to my world, Li Shang.”
Supply chain monitor, QIMA, said Monday that requests for audits by U.S. firms in China fell 14% while requests rose nearly 10% in southeast Asia.
Audit inspections are a good gauge of where U.S. multinational manufacturers and their partners are making their widgets. If the number of audits is in decline, it means the number of contracts to manufacturers in China is also in decline, QIMA says in their Q1 2020 Barometer published today.
Bangladesh was the surprising winner so far, it seems, even besting Vietnam thanks to stitch and sew factories, with factory inspection requests up 37% in 2019 versus 2018.
Overall, China requests for audits fell 3.4% year-over year, which includes factory inspection requests from non-U.S. firms.
Re-shoring of manufacturing remains a pipe dream, but the trade war is making China a bit less of a go-to manufacturing hub.
It may also be keeping some U.S. manufacturers home instead of sourcing elsewhere in fear that tariffs could upend that decision. Regulatory rollback and tax cuts have also helped keep companies from looking abroad for their supply chain.
For QIMA, both tariffs and non-tariff factors like increasing output costs, the search for adequate manufacturing capacities, and the ever-growing need for supply chain diversification out of China all drove companies from the U.S. and Europe to move “significant portions” of their sourcing closer to home in 2019.
For U.S. companies, the near-shoring trend saw companies turning primarily to a handful of countries in Latin America. Inspection and audit demand from U.S. companies there doubled last year with Mexico, Peru and Guatemala being the top three destinations.
European companies stayed closer to home and remapped part of their supply chain to north Africa and the Middle East in 2019 to the detriment of China. Audit and inspection volumes rose three-fold, QIMA says. Most of the business went to Turkey, Morocco, Tunisia and Egypt.
Talks of a U.S.-China trade deal — with phase one getting inked on Wednesday officially — brought some optimism to Wall Street to close out the year. But the changes wrought on global trade by the trade war will linger this year as companies continue to rethink their supply chain map.
Geographical diversification is a headwind for China at a time when it is trying to be more compliant with World Trade Organization (WTO) rules on the environment and labor, items corporations got away with for much of the 2000s. China is no longer cheap, and polluters are on Beijing’s radar more than ever. The price of building an export business in China is not as attractive as it once was, with margins shrinking due to improvements in labor and environmental care. But China’s domestic market is also not what it was in 2001 when it joined the WTO, so many companies are attracted to China for that reason now instead of looking to sell someplace else.
Global supply chains will continue towards a more localized paradigm, QIMA report authors wrote, with pockets of production defined by national and political interests.
As a result, new manufacturing regions are being built in frontier markets in southeast Asia and in Latin America, a move that may also serve the current U.S. administration’s immigration policy interests providing it keeps foreign blue collar labor at bay.