In Light of Tariffs, Companies Moving Supply Chains From China

Shipping containers, one with U.S. flag and one with Chinese flag, colliding midair to represent trade war

What are companies doing to cope with the United States current trade war with China? Leaving. At least that’s the case for a lot of large American companies, and even some several smaller companies that rely on supply lines in China for low-priced goods but are looking for a way out of paying the new tariffs.

How the Trade War Is Sparking Moves

These supply chain shifts have been precipitated by a series of tariffs imposed on Chinese goods by President Donald Trump, and others issued in kind from China’s government on American products like food and electronics. It began with tariffs on approximately $50 billion in Chinese goods, imposed in July of 2018, to which China responded with tariffs on an approximately equal value of goods.

Then, tariffs on an additional $200 billion in goods were imposed in September by the United States, to which China responded with tariffs on $60 billion worth of U.S. products. China has shifted their focus to the country’s domestic economy, and the Chinese government has taken action to stimulate the economy through various measures, such as tax cuts.

President Trump insists that new trade measures will bring supply chains back to the United States. Though it appears that neither side has plans to back down any time soon, the Trump administration has stated that they’re hopeful the talks at the G20 Summit this month will lead to a resolution. If this doesn’t occur, some experts say it’s likely that the Trump administration will announce yet another round of tariffs as early as December of this year.

In response, companies are pulling production out of China. The tariffs already imposed have cost some U.S. businesses a bundle, and an unstable future has forced many companies to act. This means moving production either temporarily or making more permanent arrangements.

Where Are They Going?

American corporations are taking their business elsewhere, but where exactly? For many companies, the answer is Southeast Asia. This is because the manufacturing prices in several countries in this region are even lower than they were in China. Due to lower labor costs, the move to Southeast Asia is particularly profitable for products that require less skill than time.

But because workforces in this region are often less skilled and require more training, compliance is more difficult to achieve. In some companies, production and sourcing are being shifted to facilities already in use. As for companies that have built up a diverse supplier base, there is little trouble in meeting demand, even after they’ve ditched their Chinese contractors. These companies simply spread out production suppliers so that none is taxed to the point of breaking.

Regionalization timelines are also being ramped up in some companies, bringing the entirety of the supply chain into a manageable geographical area. These companies already had intentions of pulling out of China to do this; the tariffs have simply made it more cost-effective to make moves now.

The Options Available for Large Companies

A lot of big U.S. companies were already on the way out of China. Rising labor costs meant that Chinese production wasn’t as cost effective as it was when companies began to move operations over there a couple of decades ago. These tariffs have only encouraged a ramped-up exodus.

Typically, large companies have already built enough flexibility into their supply chains to roll out of China in a relatively orderly fashion, avoiding major disruption to supply lines. This flexibility and diversity have become standard best practices in building strong supply chains, and the effects of the current political climate are no different than those of other events that would spur changes in the supply chain, like natural disasters or war.

For smaller companies that have a less nimble supply chain, it often isn’t as easy as pulling the supply chain from China to avoid tariffs. Small companies are likely to lack the safety net of a well-established, diverse supplier network that big companies usually have. Therefore, these smaller businesses may find it more cost effective to deal with the tariffs than to move operations elsewhere.

 

Image credit: rawf8/Shutterstock.com

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