Tariffs Shake Up the Supply Chain

December 9, 2018
Tariffs Shake Up the Supply Chain

U.S. tariffs on $200 billion of Chinese goods may lead to a permanent relocation of manufacturing companies from China to other Southeast Asian countries.

Some American businesses are looking at relocating manufacturing facilities to places like Thailand or the Philippines.  Some Chinese companies are also considering opening up operations outside their homeland.  One such business may build a massive tire factory in the Philippines to avoid U.S. tariffs.

Some speculate that the tariffs may lead to significant and permanent changes in the global supply chain.  Interestingly, however, Chinese exports were up by almost 16% in October, the first full month of tariff implementation, with companies rushing to send goods to the U.S. before the tariffs rise from 10 percent to 25 percent at the end of the year.

Video Spotlight: China’s exports are still soaring despite the trade war

This post is based on the Industry Week post, Manufacturing exit from China to dodge U.S. duties gains pace, by Angus Whitley, November 7, 2018, and the CNN article and video, China’s exports are still soaring despite the trade war, by Daniel Shane, November 8, 2018. Image source: Shutterstock / Nerthuz.

Discussion Questions:

1. How are increasing U.S. tariffs affecting location planning for companies that have manufacturing operations in China?

Guidance: When considering location planning at the global or regional level, a country’s policies, including taxes and tariffs, can heavily influence a location decision.  These legal-political issues, coupled with economic issues such as the value of a country’s currency, can play a major role.

So far, Chinese exports have not declined, but companies are already looking ahead at higher tariffs in 2019 and strained relations between the U.S. and Chinese government, considering whether it is worth the risk to keep Chinese manufacturers in their supply chain.  One thing in China’s favor is its downward currency slide against the dollar, which makes its prices more competitive versus those of some other countries.

2.  What factors have shifted over the years to make sourcing from China less desirable for some U.S. companies than it was in the past?

Guidance: Longer lead times for goods from China used to be offset by relatively lower transportation and labor costs.  However, rising transportation costs and rising wages for Chinese workers have eroded some of the cost savings.  Companies are re-evaluating whether it is really worth it to extend their supply chain into China.  Newer issues related to tariffs and the uncertainty of relations between the U.S. and China in the future may cause more U.S. companies to source domestically or to find other, less volatile places from which to purchase their supplies.


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