This article is the second in a series that looks at how suppliers can successfully navigate these uncertain economic times in the age of coronavirus.
A major component of then candidate Donald Trump’s presidential campaign was the need for toughness with China. In campaign speeches, interviews and debates, the candidate continually stressed how China less of an ally and more of a competitor. Competitors typically do what’s right for them, not for you. While there is nothing inherently wrong with this notion, it’s imperative to recognize competitors and behave accordingly. Once in office, President Trump proceeded to compel China to deal fairly in trade negotiations, the ultimate goal being more outcomes that benefit the U.S.
- The trade war with China
As tariffs were first implemented in 2018 and continue to this day, U.S. companies sought ways to avoid them by diversifying their supply chains. In light of today’s fight with the coronavirus and China’s near complete manufacturing shutdown, the call to diversify supply chains now looks downright clairvoyant.
Although China did help their manufacturers by offsetting increased cost when exporting to the U.S., the tariffs still had the desired effect on the communist country’s leadership during negotiations. The impact on U.S. consumers may have been negligible but the writing was on the wall for companies: look for other manufacturing resources outside China. With no clear end in sight regarding the trade war, American and European companies began finding alternative manufacturing sources. This was not lost on China and likely led to their desire to finally agree to a trade deal. While this was good news for all parties involved, the damage was done and the move to diversification was begun.
While no one is suggesting that China will cease being a primary manufacturing resource for many countries, we could begin to see serious competition from countries such as India, Vietnam, Malaysia and even Mexico. With Mexico, increased manufacturing opportunities will positively impact its economy, standard of living and have some influence on various forms of immigration on its northern border.
Suppliers in the United States, Mexico and Canada have opportunities to better compete with other trading regions now that the USMCA has been signed into law. This long-needed replacement of NAFTA does not solve every issue regarding North American Trade, but it does help position the three countries more competitively when dealing with other global competitors. In addition, manufacturing within North America received a much-needed boost with mutually beneficial trade and reduced regulations and taxes.
- Reduction of regulations and taxes
It’s true that, as a first-world economy, the U.S. is not the low-cost leader when it comes to manufacturing. It’s understandable that high salaries and our overall cost of living play a part in manufacturing costs, but high taxes and the number of regulations also play significant roles when understanding why things cost so much to manufacture in the U.S. The U.S. does remain a world leader in terms of manufacturing quality. Japan and Germany definitely dominate the quality discussion when it comes to sectors such as cars and electronics, but the U.S. remains the clear leader in terms of innovation.
With the reduction of regulations and lower taxes, the Trump Administration has made it easier to manufacture here at home. We will likely see further reductions in both regulations and taxes, but the start of these changes has resulted a manufacturing resurgence in the U.S. With lower manufacturing costs, and a more attractive – and fair – North American trading environment, some organizations are looking to manufacture products closer to home.
We see COVID-19 wreaking havoc on people’s lives as well as the global economy. As China still struggles to reopen manufacturing centers, the call to diversify supply chains remains strong. But this move began two years ago with the trade war with China and the lowering of regulations and taxes in the U.S. The coronavirus simply put a spotlight on the need to diversify. It’s too early to suggest that the virus will be the nail in the coffin for Chinese manufacturing, but a transformation is certainly underway.
This bodes well for the U.S. in general and individual businesses specifically. When the economy begins to recover, and I believe it will recover relatively quickly, we will see the move to manufacturing diversification continue and positively impact U.S. businesses. This will be an ideal environment for supplier organizations to maximize opportunities in North American as well as other countries that are not China.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. He previously chaired the Vendor Forum of the Federal Reserve Bank of Minneapolis and his resume includes time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific, as well as a number of years as an independent consultant.