The Wall Street Journal reports that there’s good news and bad news in the early results of President Trump’s tariffs against Chinese imports. Good news first. Supply chains are moving out of China:
U.S. manufacturers are shifting production to countries outside of China as trade tensions between the world’s two biggest economies stretch into a second year.
Companies that make Crocs shoes, Yeti beer coolers, Roomba vacuums and GoPro GPRO -1.62% cameras are producing goods in other countries to avoid U.S. tariffs of up to 25% on some $250 billion worth of imports from China. Apple Inc. also is considering shifting final assembly of some of its devices out of China to avoid U.S. tariffs.
Furniture-maker Lovesac Co. is making about 60% of its furniture in China, down from 75% at the start of the year. “We have been shifting production to Vietnam very aggressively,†said Shawn Nelson, chief executive of the Stamford, Conn., company. Mr. Nelson said he plans to have no production in China by the end of next year.
The moves by U.S. companies add up to a reordering of global manufacturing supply chains as they prepare for an extended period of uneven trade relations. Executives at companies that are moving operations outside China said they expect to keep them that way because of the time and money invested in setting up new facilities and shifting shipping arrangements. Companies said the shifts accelerated after the tariff on many Chinese imports rose to 25% from 10% in May.
“Once you move, you don’t go back,†Mr. Nelson said.
That last passage is the most important. The changes are likely to be lasting. Now the bad news. American companies are not onshoring their production:
There is little evidence, though, of U.S. manufacturers bringing production from China back to the U.S., a move the Trump administration hoped the tariffs would encourage.
While imports from other Asian countries have climbed, U.S. manufacturing output has declined 1.5% through May from a recent peak reached in December, according to the Federal Reserve. The Institute for Supply Management said earlier this month that its manufacturing index slipped again in June to the lowest level since 2016.
“If we were to try to do a factory in the U.S., it would be enormously expensive,†said John Hoge, co-owner of Sea Eagle Boats Inc., which makes 85% of its inflatable kayaks, canoes and fishing boats through contract manufacturers in China. Mr. Hoge said the network of manufacturers and suppliers in China that makes boats for Sea Eagle and many of its competitors isn’t as comprehensive in any other country.
“It took us 20 years to build up the supply chain in China,†he said. Mr. Hoge estimated the 25% duty on his products that took effect in May would double the Port Jefferson, N.Y., company’s tariff expenses to about $500,000 a year.
I don’t believe that either Asian or American companies understand the implications of that last paragraph. Supply chain management is much more agile than it was 20 years ago and will become more so. What took 20 years then will proceed much more quickly now. In the future companies will change suppliers much more rapidly than they have been predisposed to do. There’s a simple reason for that. To maintain production companies need second sources and a different nameplate doth not a second source make.
While I suspect that some manufacturing will be onshored (also known as “reshored”) I think the broader pattern will be diversification of sources and that’s a good thing. For one thing we should be much more cautious in how we do business with a country that is engaging in industrial and military espionage against us at the scale at which China has done so.
Update
A. T. Kearney’s remarks on its reshoring index casts more light on the subject:
Vietnam is not the only beneficiary of changes in US trade policies. As the US and China escalated tensions, Mexican imports to the US picked up considerable steam. In 2018, Mexico increased its exports to the US by $28 billion, a growth rate of 10 percent over 2017—the fastest growth Mexico has seen in the past seven years.
While Mexico and the US have had their fair share of trade-related conflicts this past year, the magnitude of these disputes resembles a sibling quarrel compared to the brawl with China. US–Mexico tensions are calming; the US threat in June 2019 to place tariffs on 100 percent of Mexican goods until Mexico acted to reduce the flow of immigrants crossing the border was quickly resolved, with minimum sacrifice by either Mexico or the US. Renegotiation of USMCA is nearly complete, and the new agreement—which largely keeps intact the overall NAFTA framework—is likely to be ratified by all three countries’ legislatures by the end of 2019, especially given the administration’s recent lifting of Section 232 steel and aluminum tariffs on Mexico.
“Nearshoring” will become more important, something I think is an unmixed good. They go on by expanding on what would be necessary for reshoring:
One of the conditions that needs to be in place to incentivize reshoring is the presence of a stable and predictable business environment that enables companies to deliver their products freely to the end-markets of their choice. The US has taken a step backward on this front, as the discussion above indicates. But leaving trade wars aside for a moment, what else is needed for manufacturers to start bringing jobs home at a significant rate?
Chief among manufacturers’ needs is a robust labor force available at an attractive cost and composed of the right percentage of skilled workers. Last year’s 2017 Reshoring Index report commented on the continued lack of skilled labor as one of the top constraints on the growth of US-based manufacturing. In this year’s report we revisited the numbers, and the story did not change.
I agree with the first point and am skeptical of the second. I don’t think we should be too determined to match China’s or Vietnam’s price. A better strategy is to start encouraging manufacturing techniques that don’t depend on labor costs as much as those of the past have.
Ricardo’s comparative advantage theory doesn’t take into account distance, and to the extent that an advantage comes from cheap labor costs, transportation costs are an important factor. And if transportation costs become low, so too become the advantages of global supply chains, and countries like China and India that impose localization rules that require internal supplies make foreign investment far less attractive.
Wasn’t this predictable? So we (the current administration) is going to play Wack-a-mole chasing one poor Asian/African/South American country after another. Could go on forever, meanwhile no effort to make it more likely companies do reshore. (If Mexico picks up a lot of this that should help with immigration, but I think we should expect this administration to throw new tariffs on Mexico in this case. They only have one trick so thats all they know how to do.)
Steve
I certainly think it was completely predictable. Increasing the propensity towards onshoring would have required a more carefully and deliberately crafted policy.
That doesn’t mean that this readjustment is not something we shouldn’t be doing anyway. We can’t have our economy as dependent as it already is on a country that is as hostile non-belligerent as China is.
However, any notion that Vietnam could ever figure as large in the supply chain of American companies as China presently does is far-fetched to say the least. What is far more likely is that we would spread our sources among various East and South Asian countries which is all to the good as far as I’m concerned. I’d prefer nearshoring for multiple reasons but I’ll accept just not doing as much business with China.
“A better strategy is to start encouraging manufacturing techniques that don’t depend on labor costs as much as those of the past have.”
I don’t know if this is a better strategy, but it is already happening – US manufacturing output continues to rise while manufacturing employment declines – and continued technology development, plus demographic trends in developing countries, will only reinforce this trend long-term.
What I do know is that re-shoring to highly automated factories (where the few workers running the place tend to require considerably more than a high school education) is not what the working class in the rust belt believe MAGA means.
Higher wages requires increased productivity and increased productivity requires capital investment. I don’t know what blue collar workers expect.
College educations can have that result, too, as long as they result in labor assets being transferred from where they are less productive to where they are more productive. That is no longer happening.