The latest figures show U.S. imports from China declined in 2023.
So, all those plans to decouple and diversify supply chains from China must be working, right?
Not so fast. Imports from other countries often have their genesis in China. And bilateral trade between the world’s largest two economies is still substantial, according to the U.S. Census Bureau.
China has exported $393 billion worth of goods to the U.S. in the first 11 months of 2023. The United States has exported $135 billion worth of goods to China in that same time frame.
To match 2022’s record of $690 billion, total bilateral trade in December would need to reach $135 billion. I’m pretty confident that won’t happen.
China and the United States have been intertwined in global supply chains for decades. Recent years have seen a push for U.S. companies to diversify their supply chains away from China. Tariffs, trade wars, shooting wars and political and consumer pressure are all playing their part.
However, reorienting production and supply away from China and other political hot spots is not easy. Leaders in supply chain operations face three issues:
- The dependency dilemma
- The tariff workaround
- The supply chain challenge
Still, you have no choice but to redesign your supply chain networks. In a world of perpetual disruption, nearshoring, friendshoring and reshoring are necessary to achieve supply chain resilience.
The Dependency Dilemma
Despite a decline in total trade between the U.S. and China in 2023, the dependency is far from over.
Many products that originate from other countries still use parts and raw materials that come from China. China has established itself as a global manufacturing hub, offering skilled labor, infrastructure and relatively low costs.
China mines two-thirds of the 30 critical raw materials identified by the European Union, including antimony, baryte and rare earth elements, according to Deutsche Welle. Nineteen of those 30 are predominantly imported from China. China has a virtual monopoly on magnesium, rare earths and bismuth.
China even processes most of the materials mined elsewhere.
As an example, China only ranks third in global lithium production. However, Australia exports virtually all its lithium to China. Lithium and rare earth elements are critical for building wind turbines, solar panels and batteries. Without them, there will be no transition to green energy.
China also produces 98% of the world’s gallium, critical for cutting-edge military technology. After the United States restricted exports of high-end, military grade semiconductors to China in 2022, China restricted exports of gallium and germanium.
More mundane examples include air conditioners and washing machines.
That air conditioner made in the United States? The coils and compressors likely come from China. The washing machine made in Brazil? That compressor also came from China.
In fact, as The Wall Street Journal reported, “China is a ‘critical supplier’ for 276 types of goods for the U.S., from consumer electronics to household equipment to chemicals.”
The Tariff Workaround
However, buying from factories in Vietnam, Mexico, Indonesia and other nations does not necessarily avoid Chinese-made products.
Ever since the United States levied billions of dollars of tariffs on Chinese goods, supply chains have been looking for other sources. Concurrently, Chinese manufacturers expanded their operations overseas to avoid said tariffs. For both sides, it’s all about mitigating supply chain risks, whether that risk comes from tariffs or other disruptions.
China invested nearly $19 billion in Southeast Asia in 2022, up from $7 billion in 2013. Much of that investment targeted manufacturing, according to The Wall Street Journal.
The jump was more dramatic in Mexico – from $42 million to $232 million in 10 years.
The newspaper cited examples that include Zhejiang Haers Vacuum Containers and Jason Furniture of Hangzhou.
Zhejiang built a new factory in Thailand to produce thermos cups. Jason Furniture, aiming to offset tariffs, opened a second factory in Vietnam.
Although tariff avoidance means U.S. consumers likely pay less in the end, these moves add supply chain complexity.
The Supply Chain Challenge
Moving an entire supply chain is a monumental task. It involves finding new suppliers, setting up new factories, training new workers and navigating different regulations and cultural practices.
Moreover, other countries may not match China’s scale of infrastructure or labor force, making the transition even more challenging.
The task is doable. But it likely will not happen overnight.
You’re going to have to identify new suppliers and assess their capabilities. In my mind, India is the best bet to replace a good portion of Chinese manufacturing. Vietnam, Mexico, even the U.S. and Europe have robust manufacturing sectors.
It’s likely, particularly in the early going, that at least some overseas manufacturing outside of China will source from China. Chinese companies will own others, particularly in Southeast Asia. But over time, those manufacturing hubs could develop local suppliers.
And there’s an entire globe out there. Africa, South and Central America, and Canada have their strengths.
Nearshoring and friendshoring to your own hemisphere can reduce transportation costs. It also can make for timelier site visits, quicker lead times and faster delivery schedules.
You’re going to have to establish new logistics and distribution networks. This will involve freight forwarders, shipping companies and customs brokers to make sure your company’s products reach the right destination. Consider both sea and air freight options based on cost, time and product characteristics.
You’re going to have to build new relationships with different local authorities. This involves understanding their regulations and integrating your operations into diverse cultures.
And you’re going to have to plan for contingencies. Optionality will involve identifying alternate suppliers to protect against supply chain disruption.
The Road to Supply Chain Diversification
Reducing dependency on China is a strategic move for U.S. and other Western companies. But it’s a long and complex process. It requires not just the will to change, but also significant investments in time, money and resources.
In other words, deglobalization is hard – it really requires you to globalize in other geographies.
Using optionality for supply chain diversification can also make it more resilient and reduce dependence on a single source. It will require an initial investment but can pay off overall by ensuring a steady supply of products to your customers in the United States.
Tompkins Ventures has the resources, ecosystem and partners to help you on this journey. Contact me, and let’s start the road to supply chain diversification.
- From 1 Factory for the World to the World Is Your Factory
- Adam Smith Wants You to Redesign Your Supply Chains
- Raw Materials: The Start of Your End-to-End Supply Chain
- The China Decoupling Might Hit Before You Are Ready
Jim Tompkins, Chairman of Tompkins Ventures, is an international authority on designing and implementing end-to-end supply chains. Over five decades, he has designed countless industrial facilities and supply chain solutions, enhancing the growth of numerous companies. He previously built Tompkins International from a backyard startup into an international consulting and implementation firm. Jim earned his B.S., M.S. and Ph.D. in Industrial Engineering from Purdue University.