striver44
BANNED
- Joined
- Jul 25, 2016
- Messages
- 4,832
- Reaction score
- -16
- Country
- Location
Kenneth RapozaSenior Contributor
Markets
I write about business and investing in emerging markets.
Markets
I write about business and investing in emerging markets.
- Markets
"Three decades ago, U.S. producers began manufacturing and sourcing in China for one reason: costs. The 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," says Patrick Van den Bossche, Kearney partner and co-author of the 19-page report.
The main beneficiaries of this are the smaller southeast Asian nations, led by Vietnam. And thanks to the passing of the U.S. Mexico Canada Agreement, Mexico, for all its problems with drug cartels, has become a favorite spot for sourcing.
PROMOTED
(I told a million of you this last month...)
MORE FROM FORBESCoronavirus Could Be The End Of China As A Global Manufacturing HubBy Kenneth Rapoza
In 2020, the trade war seemed to be on pause. Sadly, it gave way to a global pandemic that emanated from the Hubei province in China. The new SARS coronavirus has literally closed the economies of the Western world and created a public relations nightmare for China.
Not only that, companies were unable to get supply online in February and early March due to factory closures there, stalling business in the U.S.
Once China got up and running, the U.S. was hit between the eyes with the deadly COVID-19 disease caused by the rapidly spreading new SARS. Even if China was fully healed, the U.S was stuck in sick bay.
The full extent of the societal and economic trauma the coronavirus pandemic may cause is unknown still, the Kearney report’s authors wrote. But whatever the outcome, a return to status quo China trade pre-pandemic is unlikely.
Kearney predicts companies “will be compelled to go much further in rethinking their sourcing strategies, (and) their entire supply chains.”
(That sounds about right...)
MORE FROM FORBESCoronavirus Pandemic Changes Forever The U.S.-China RelationshipBy Kenneth Rapoza
Specifically, the Kearney report’s authors wrote that they expect companies will be increasingly inclined to spread their risks, as opposed to relying solely on China as this pandemic has exposed them.
China is the go-to source for ibuprofen, hazmat suits, rubber gloves, surgical masks, ventilators. Probably toilet paper, for all we know. How this is not a national security issue is something being raised by senators including Josh Hawley (R-MO) and Tom Cotton (R-AR).
The threat going forward of political anger toward China, not to mention future pandemics stemming from China (the first SARS came from there in 2002-03), means that companies will want to hedge their supply chain strategy by spreading their risks.
That doesn’t mean a full abandonment of China. It does mean China’s days as the go-to manufacturing hub for the Western world are over.
MORE FROM FORBESThe Post-Coronavirus World May Be The End Of GlobalizationBy Kenneth Rapoza
The Index Explained
The Reshoring Index compares U.S. manufacturing gross output to import data from 14 Asian low-cost countries.
To gauge the U.S. Reshoring Index, Kearney first looks at the import of manufactured goods from China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia; and secondly looks at U.S. domestic gross output of manufactured goods.
They then calculate the manufacturing import ratio (MIR) — the result of dividing the first number by the second. The U.S. Reshoring Index is the year-over-year change in the MIR, expressed in basis points (1 percent change = 100 basis points).
The numerator of the MIR is the sum of the value of all manufactured imports from those 14 Asian countries— which decreased from $816 billion in 2018 to $757 billion in 2019, a contraction of 7% at a time of solid American economic growth.
According to Kearney, the contraction is almost exclusively driven by the decline in imports from China, which fell the most at 17% due to tariff costs.
The only way for the U.S. to make itself attractive to corporate investment is to get its costs on par with China. While it cannot compete with China on labor costs, the U.S. can compete on corporate taxes, an abundant and qualified blue collar labor force, and by implementing environmental regulations that don’t force companies to overspend on technologies and consultants that just end up eating into their bottom line.
President Trump likes to say that his tariffs are being paid for by the Chinese. It is U.S. importers, of course, that pay the duties at the ports. But the Chinese partners of the U.S. company suffers because the U.S. importer is now paying more for Made in China. That reduces the cost benefit of using China as an export hub.
The resulting 98-basis-point jump in the Kearney Reshoring Index is by far the biggest annualized change in favor of U.S. companies in five years.
MORE FROM FORBESThe Coronavirus Is Becoming A Public Relations Disaster For ChinaBy Kenneth Rapoza
Vietnam Wins Asia. Mexico Winning Americas.
The Kearney China Diversification Index (CDI) tracks the shift in U.S. manufacturing imports away from China and to other Asian countries on the list.
China is still the leader, but she is increasingly losing share in the Trump years.
In 2013, the base year for the CDI, China held 67% of all U.S.-bound Asian-sourced manufactured goods. By the second quarter 2019, its share collapsed 56%, a decrease of more than 1,000 basis points.
Of the $31 billion in U.S. imports that shifted away from China, some 46% was absorbed by Vietnam, sometimes by the same Chinese suppliers who left the mainland. Vietnam exported an additional $14 billion worth of manufactured goods to the U.S. in 2019 versus 2018 as a result of that shift.
Mexico is the China of the Americas.
Kearney introduced its Near-to-Far Trade Ratio (NTFR) this year. It tracks the movement of U.S. imports toward nearshore production in Mexico. The NTFR is calculated as a ratio of the annual total dollar value of Mexican manufactured goods to the U.S., divided by the dollar value of manufactured imports from the Asian 14, including China.
Since 2013, the NTFR has hovered steadily between 36% and 38% —meaning for every dollar of U.S. manufacturing goods from Asia, there were approximately 37 cents worth of manufacturing imports coming from Mexico.
That changed with the USMCA.
Mexico has gone from 38% to 42%. On a dollar-value basis, total manufacturing imports from Mexico to the U.S. increased 10% between 2017 and 2018, from $278 billion to $307 billion, and by another 4% between 2018 and 2019, to a total import value of $320 billion, based on the Kearney report.
"The door for these insurgents was clearly opened by ongoing U.S.–China trade disputes, as their gains were mainly in product categories impacted by tariffs," says Yuri Castano, Kearney manager and co-author of the study. "Apparently, the trade war jolted U.S. companies to start rethinking and reshaping their supply networks."
(Full report
SEE, fresh from today news
