COVID-19 Could End China’s Dominance Over Global Supply Chain

The U.S.-China trade war has urged hundreds of manufacturers to leave China and return to the United States. Now, the pandemic is giving companies even more of an incentive to reshore.

Last month, Kearney released their annual Reshoring Index, which showed a dramatic reversal in the five-year offshoring trend. In 2019, domestic U.S. manufacturing had a greater share of manufacturers than 14 Asian low-cost countries. Manufacturing imports from China registered at a distinctly sharp decline due to U.S. efforts against Chinese imports. The index also shows notably higher Vietnamese imports, likely on account of Chinese manufacturers reshoring.

Manufacturers leaving China is due in part to the trade war, which has motivated American companies to completely reimagine their supply chains–from reshoring production away from China, to increasing manufacturing imports from other Asian countries and Mexico to avoid costly tariffs. However, 2020 brought on new major supply chain issues. Experts forecast that the COVID-19 pandemic will force companies to rethink their entire supply chain–likely compelling American manufacturers to find local suppliers.

Moving Production Away From China

The Trump administration is working on reducing U.S. dependence on Chinese manufacturing even more due to notable disruptions caused by COVID-19. They are working on possibly giving incentives in the form of tax benefits and subsidies to companies that shift to an American supply chain or even that of other more friendly nations.

“We’ve been working on [reducing U.S. reliance on the supply chain in China] over the last few years but we are now turbocharging that initiative,” Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the U.S. State Department, told Reuters.

The U.S. is currently pushing to create an alliance of “trusted partners” dubbed the “Economic Prosperity Network” according to officials. It would include companies and groups that operate under the same set of standards on everything from digital business, energy and infrastructure to research, trade, education and commerce. According to Secretary of State Mike Pompeo, this may include countries like Australia, Vietnam, India, Japan, New Zealand, South Korea, and possibly Latin America.

Pompeo says the countries plan to work together to “move the global economy forward,” by figuring out how to “restructure … supply chains to prevent something like this from ever happening again.”

“This moment is a perfect storm;” said another senior U.S. official. “The pandemic has crystallized all the worries that people have had about doing business with China.”

Local Supply Chain

Especially today, when China has over 20 percent of global GDP, global supply chain disruptions are all too common. The shock of the pandemic and the many interruptions that companies are experiencing within their supply chain will likely cause companies to rethink their foreign suppliers in the near future.

While localized supply chains would most likely increase costs for manufacturers and consumers, it would also boost multiple areas of the U.S. economy. They would lead to more local jobs and tax revenue for the government, as well as a lower carbon footprint from less overseas shipments. Most of all, they would provide security for American companies and the U.S. government in times of global unpredictability.

The Coronavirus is a wake-up call for supply chain management–localizing our supply chain could potentially save our economy.

3 Comments

Leave a Reply