Instead of bringing manufacturing back to the United States, the ongoing trade spat with China appears to have accelerated the shift in production to countries like Vietnam and India as companies gear up to protect their businesses.
The sixth annual Reshoring Index from AT Kearney reveals that growth in manufactured goods imported into the United States from the 14 largest low-cost country (LCC) trading partners in Asia rose by $66bn or 9% for the year – the largest annual increase since the beginning of the economic recovery. US gross manufacturing output, by comparison, grew only 6% year-on-year in 2018.
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There are several standout issues why the US’s new trade policies have not resulted in an uptick in reshoring – especially as they were designed with the intent of boosting Made-in-USA production. These include that the fundamental economic benefits of manufacturing in low-cost countries versus the US have not significantly changed, and the Foreign-Derived Intangible Income (FDII) tax benefits have not outweighed the still significantly lower unit costs to manufacture offshored products. Additionally, the report suggests the workforce in the US is not ready for reshoring.
The Reshoring Index fell for the third year in a row in 2018, by 32 basis points (bps), indicating that manufacturers continue to view LCCs as more desirable locations than the US to produce or purchase a wide variety of goods, notwithstanding the trade measures emanating from Washington.
Why is reshoring not happening?
Manufacturing costs in China have been creeping up as a direct result of additional tariffs on some goods (not yet textiles or clothing), but they were already on the rise due to increasing labour costs in the country. This has led to companies looking to shift operations and sourcing to other nearby locations, such as Vietnam or India.
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By GlobalDataThe trade spat has only served to accelerate this shift, say the report’s authors Johan Gott and Patrick Van den Bossche.
The fallout for China from the trade tensions with the US have seen its share of total US imports fall to 60% in Q1 2019, a 900 bps decrease from the previous quarter. China’s lost share is equivalent to a loss of $72bn in import value – more than the total 2018 value of imports from India ($51bn), which holds the second-largest share of imports to the US within the LCC group.
“The precipitous decline in China’s share of imports in Q1 2019 is due partly to US firms’ stockpiling of Chinese imports in Q3 2018 in anticipation of planned tariff hikes, and partly to structural shifts in manufacturers’ sourcing strategies,” says the report.
Vietnam growth story
Manufacturers are diversifying away from China and toward lower-cost countries, such as Vietnam, which has captured an additional $36bn of import value, half of the $72bn lost by China. Examples of these are sportswear brands Nike and Adidas who, according to the report, have increased the share of their production in Vietnam – from about 30% to about 45% over the past 10 years – at the expense of China.
Over the five-year period between 2013 and 2018, Vietnam’s imports to the US more than doubled from $21.7bn to $47.7bn. This growth (a 17% compound annual growth rate, or CAGR, for 2013-2018) far surpassed the growth levels of all other Asian LCCs, which grew at an average CAGR of just 5%.
Between the first quarter of 2018 and the first quarter of 2019, Vietnam’s imports to the US grew 36% while China’s imports fell 13% over the same period. Attributing to its growth story are lower labour costs than China’s, proximity to Southeast Asian supply chains, and a government whose policies are highly favourable to foreign direct investment (FDI). The maturation of Vietnam’s strategic infrastructure investments has also contributed to the recent spike in its imports as well.
“Should Vietnam continue to grow at this tremendous pace for the rest of 2019, it would translate into an additional gain of $17bn in import value.”
According to exclusive data from sourcing strategy tool re:source by just-style, when it comes to sourcing apparel, Vietnam is proving a serious competitor for China. The below data is a comparison for the production of a single white t-shirt.
Will US reshoring happen?
The report suggests another factor standing in the way of reshoring is the lack of readiness of a robust US labour force.
In 2018, the vacancy rate in manufacturing jobs grew for a fifth consecutive year. On average throughout the year, there were nearly half a million (466,000) vacant positions. The vacancy rate increased by 48 bps – a rate twice as high as the average for the preceding four years – from an average of 3.1% in 2017 to 3.6% in 2018. The shortage was most acute for high-skilled machine operator positions, as well as for managers, the report suggests.
“Addressing workforce shortages is essential if reshoring is to pick up momentum. As the nature of the situation remains unchanged from 2017, the path forward remains the same: manufacturers should undertake private-public partnerships to build talent pipelines and invest in up-skilling and re-training.”
Going forward the report suggests that should the trade war with China continue or worsen – Trump last month said he would hold off on imposing additional tariffs on an extra US$300bn in Chinese goods while negotiations resumed between the two countries – US manufacturing gross output could continue its recent downward trend to the point of bringing the US into conditions most closely resembling the manufacturing contraction of 2016.
Conversely, a climb-down from the new tariff regimes would reverse recent declines in US exports for impacted goods, and alleviate inflationary pressure on US consumer products. Manufacturing gross output would recover from the Q1 slump and grow year-on-year in 2019 – likely in the low single digits.
“We can predict that 2019’s Reshoring Index will be profoundly shaped by the maturation of the trade conflicts that have sprung up in all corners of the world over the past three quarters. In the worst-case scenario, trade wars will escalate, and the administration will fail to make the required investments to bolster US competitiveness and attractiveness. We may see some reshoring in this case, but this benefit will come at the expense of a contracting domestic and global economy.”
Last month just-style took a detailed look at China’s changing role in the apparel supply chain amid the escalating tariff war with the US.
