Should U.S. Companies Pull the Plug on China?

By Sergio Retamal

Nine years ago, China surpassed the U.S. to become the largest producer of manufactured goods in the world. China’s dominance is under siege, however, and COVID-19 could prove to be the tipping point.

According to Kearney’s latest Reshoring Index, U.S. companies sourced significantly less manufactured goods from China and 13 other traditional Asian low-cost countries in 2019, with China experiencing a 17 percent drop in U.S. imports of its manufactured goods.

On the other hand, Vietnam and Mexico are among a handful of countries that saw a rise in U.S. imports of manufactured goods.

“Much of China’s loss was Vietnam’s gain,” remarked Patrick Van den Bossche, Kearney partner and co-author of the study. “Of the $31 billion in U.S. imports that shifted from China to other Asian low-cost countries, almost half (46 percent) was absorbed by Vietnam, which exported $14 billion more manufactured goods to the U.S. in 2019 than it did in 2018.”

While the U.S.-China trade war is clearly influencing a shift away from China as a source of low-cost manufacturing, the current pandemic is giving companies another reason to reevaluate their supply chain strategy.

“Three decades ago, U.S. producers began manufacturing and sourcing in China for one reason: costs. The U.S.-China trade war brought a second dimension more fully into the equation—risk—as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs. COVID-19 brings a third dimension more fully into the mix, and arguably to the fore: resilience—the ability to foresee and adapt to unforeseen systemic shocks,” said Van den Bossche.

Therefore, should U.S. companies abandon China as a source of low-cost manufacturing once and for all?

Proponents argue that the U.S. has become too dependent on China. They cite the shortage of facemasks and other PPE manufactured in China as one example of U.S. vulnerability. Of course, the U.S. has accused China of inaccurate reporting and lack of transparency for years, while inadequate protection of intellectual property rights is an ongoing issue in U.S.-China bilateral trade talks. With viable options in Vietnam and elsewhere, now is the time to move out of China entirely, they claim.

Nonetheless, there’s more to the story. China’s middle class has grown substantially over the last decade with more buying power and a taste for Western goods, from luxury items and cars to brand name apparel and products, including food (more meat and dairy, for example) and wine. China is a huge market for U.S. exports of goods and services.

In order to fully realize the benefits of trading with China, we have to address the longstanding issues. There’s no disputing that China’s disregard for IPR protections is serious and needs to be tackled satisfactorily. In addition, China is a frequent offender when it comes to flaunting global trade rules, including production and trade in counterfeit goods, weak and inconsistent protection for the environment and workers, and massive state-sponsored subsidies, to name a few. 

What’s the best path forward? For starters, supply chain executives must continue to adhere to the fundamentals and reconfigure their supply chains accordingly to mitigate risk and take advantage of emerging opportunities in China.

Not surprisingly, risk mitigation is a key topic right now with regard to China. For high-tech supply chains, essential products, and drugs and raw materials that are vital to supporting national security and the health of our country, it would be prudent to look for alternatives outside of China, including reshoring to the U.S. The U.S. government should help companies identified as essential to the national security and economic future to extricate their supply chains from China and bring those companies back to the U.S.

COVID-19 is not a reason to pull the plug on China. It’s a wake-up call to fix what’s broken, re-balance the power, reimagine something better, and repatriate supply chains that are truly essential to the health and welfare of the U.S.