Trade Wars Recent Effect on Supply Chain

Thursday, February 21, 2019Categories: Apparel/Fashion, Blog

In the wake of the Trump administration’s recent tariffs on Chinese goods, manufacturers are looking to move their production plants to other countries to avoid sustaining more severe economic losses. However, the change in production location requires many new developments.

To start, the acquisition of a new chain of suppliers of raw materials presents a significant challenge to manufacturers. This task is potentially more difficult to fulfill than one may expect, as the sophisticated and developed supply chains in China will be difficult to replace in other countries, and will take time. Even if Trump does reverse the crippling tariffs on Chinese goods, manufacturers in the region are not keen on taking chances on contingent U.S. behavior.

While it is possible that Trump and Chinese President Xi Jinping will come to an agreement that reduces the trade imbalance between the two countries, manufacturers have to plan for the long-term to minimize inconveniences to their production or threats to their pricing structures. They have already been finding and securing new suppliers to support their new production locations, meaning that there may be a long-lasting exit of manufacturing from China.

As if manufacturers did not have enough to consider regarding the supply chains, they must also compete with other companies for space and suppliers in these other countries. Not every country has the infrastructure and workforce to support manufacturing the way China does, and the rush to establish roots in other countries have left manufacturers nervous about the future of manufacturing in Asia.

To add to the constraints of compressed timelines and scarce resources, the legal and regulatory restrictions on new companies in countries neighboring China presents a potential impediment to a smooth relocation process.

This exodus of manufacturers from China is an attempt by companies to shield themselves from having to raise prices on their goods in the event of higher tariffs. Countries including Thailand and Vietnam are benefitting from the scramble, as they have so many companies interested in taking up residence that they can’t accommodate them all. However, the influx of manufacturing jobs is not all beneficial to these countries.

While some countries have experienced a modest bump in export sales to the U.S., their exports to China have dropped substantially. Furthermore, the cost of production in these countries outside China may rise as billions of dollars are invested in building national and private infrastructure to support manufacturers. With developments including airports and railways, in addition to plant upgrades and construction, manufacturing in the region is not facing a quick or small shift.

Also, labor available in these other countries is not currently ready to meet the increased demand by the incoming companies. Vietnam and Thailand have extremely low unemployment rates, to combat this issue, companies are exploring ways to add automation into their production processes as a way to increase production even with a lower amount of incoming employees. Unless new programs are created to address this issue, manufacturing in Asia will require more time to adjust to the changing needs of the global manufacturing market.

With industries including electronics and clothing relocating elsewhere, China will be losing a lot of revenue in the face of the tariff controversy. Anyone who wants to maintain or grow their presence in U.S. markets must minimize the risks associated with strained trade relations between China and the U.S. if they're going to protect the financial health of their companies. For goods that have already been manufactured, companies are rushing to ship their products from China to the U.S. before the average tariff rates jump to 25% in February 2019.

However, the relocation to countries neighboring China is not an entirely unwelcome development. As China’s economy diverges from manufacturing goods and starts focusing on providing services and increasing consumption, manufacturers are doing what they likely would have had to do years down the line. While the process will not happen overnight, the disruption caused by the relocation will restructure the way global manufacturing proceeds in the coming decades.

Goods requiring less technically advanced production will more easily move to nearby countries, but higher-tech products, including machinery and information technology, will require more company investment before they can be feasibly produced in their new countries. Even with the extremely unattractive risk associated with tariffs on Chinese goods, manufacturers will have a difficult time finding alternative locations which can provide inexpensive labor and advanced technology.

Regardless of the challenges related to moving, the shakeup of manufacturing in the region presents the most significant disruption the world has seen in recent memory, and this fourth industrial revolution is sure to have lasting and demonstrable effects on global trade.