On Monday, August 5th, China responded to the most recent tariffs imposed by the United States by allowing the yuan (“Rmb”) to depreciate against the dollar and cutting off purchases of American soybeans. The escalation of the negotiations has caused uncertainty in global markets, and a shifting global manufacturing supply chain. Many American companies with supply chains based in China are weighing their options of extending relations with Chinese manufacturers. But have the trade negotiations initiated by the current Administration been the main reason for companies’ considerations for moving supply chains out of China?
Shifting Supply Chains.
A deeper dive into the data suggests the root of the shift in supply chains is due to rising wages in China and the recent trade negotiations between the U.S. and China has only accelerated the shift. Minimum factory hourly wages in manufacturing provinces such as Guangdong have risen from 4.12Rmb in 2008 to 14Rmb in 2018, as reported by the China Labor Bulletin, causing companies to shift or consider shifting low value-add manufacturing to Southeast Asian countries like Vietnam or Malaysia which currently have lower factory wage rates. Further, the combination of rising factory wages and production partnerships with U.S. based companies has caused Chinese manufacturing to move “up the supply chain,” supporting higher value-add production. The result, companies with high value-add supply chains have incentive to keep these supply chains based in China and move low value-add supply chains to other markets.
Country of Origin.
In a June 7, 2019 article with Fortune magazine (Manufacturers are Considering Leaving China. But it Isn’t All Because of the Trade War), John Cowely, a trade law expert and partner at Hong Kong based Baker McKenzie, noted that most manufacturers aren’t simply going to abandon China. Many companies are exploring shifting “origin conferring manufacturing” operations outside of China, rather than removing their entire manufacturing operation. That means components would be manufactured in China and then shipped to another country to undergo “substantial transformation,” earning the finished product a new country of origin. It’s a tactic that helps manufacturers skirt tariffs by extending, rather than abandoning, current supply chains. Additionally, companies have incentives to keep portions of supply chains in China as China continues to be the second largest consumer economy in the world.