The New Wave of Manufacturing
Despite the increasing appeal of nearshoring from countries like Mexico and Bangladesh to the United States, due to the rise in US on-shoring, these countries faces inherent limitations like poor infrastructure, a lack of skilled labour, and security uncertainties that prevent them from fully replacing the deeply interwoven relationship China has in manufacturing exports to the United States. Therefore, the United States is still reliant on China for importing a majority of its goods, particularly those with deeply established supply chains and specialized manufacturing capabilities.
Amidst escalating geopolitical dynamics between China and the United States and economic realignments, the United States manufacturing landscape has gone through a discernible shift. These two countries have a deeply interwoven trading relationship, with the United States importing machinery, mechanical appliances, furniture, et cetera. Offshoring is “the practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs”. The appeal of off-shoring from China specifically stems from historically low labour costs, technologically advanced manufacturing equipment, and well-developed infrastructure. However, with the list of growing downsides to working with China, such as the imposition of tariffs, tension between political figures, and more, the United States has begun to attempt to shift away from a reliance on Chinese manufacturing.
This movement has brought ideas of either the United States beginning on-shoring a majority of their manufacturing to reduce reliance on other countries like China, or looking to off-shore and near-shore from promising developing countries. Onshoring is “the practice of sourcing or relocating a business' production operations within domestic national borders”. Similarly, nearshoring is “a practice in which a company moves all or part of its production closer to the final consumer, reducing costs and avoiding logistical setbacks”. These practices allow for cost-saving practices, strengthen relationships with other countries, and create more reliable supply chains. Therefore, with the growing allure of nearshoring and on-shoring gaining popularity through government support, countries like Mexico and Bangladesh have emerged as potential contenders for the coveted role as primary manufacturing partners with the United States. This sounds like promising opportunities for both the United States and these countries, but this article will look at the reasons why off-shoring from these countries will not be able to replace China.
The relationship between China and the United States:
The shift towards on-shoring is substantiated by several reasons like the aforementioned trade war between China and the United States, geopolitical issues, supply chain constraints due to the after-effects of COVID-19, and supply inflation.
To begin, China and the United States have always had a strong dependence on each other as trade partners, but a contentious relationship as political powers. According to a 2023 report from Statista, the total value of the U.S. trade in goods with China amounted to around 575 billion U.S. dollars, with 147.8 billion U.S. dollars export value and a 427.2 billion U.S. dollars import value. This resulting trade deficit further emphasizes the issue of dependency that the United States has on Chinese manufacturing, relying on many of their imports like electronics, machinery, and other technological devices.
Heavy imposition of tariffs have been set under the Trump administration back in 2019 to try and combat this over reliance. As of now, approximately $250 billion imports from China are grossly taxed at 25%, while $112 billion Chinese imports are taxed at 7.5%. This has necessitated a strategic reconsideration of manufacturing practices among global manufacturing businesses, prompting the United States to explore alternatives in response to the financial strains induced by these tariffs.
Moreover, the disruptions arising from the COVID-19 pandemic have highlighted the vulnerabilities in global supply chains, provoking businesses to prioritise reliability of their manufacturing processes. One of the main disruptions that arose during the time was factory closures and reduced capacity. Many manufacturing facilities around the world were forced to close temporarily due to lockdown measures or reduced operational capacity to maintain social distancing. China is often referred to as the "world's factory" due to its dominant role in global manufacturing. Factory closures and reduced capacity in China had widespread repercussions on global supply chains, affecting industries worldwide. The pandemic exposed the U.S.'s reliance on global supply chains, particularly those centered in China. Dependency on overseas manufacturing for essential goods highlighted vulnerabilities and prompted discussions about reshoring and diversifying supply chains, which is why the United States decided to explore on-shoring.
Additionally, the structure dynamics associated with overseas production, including transportation and labour, are steering the on-shoring trend, with businesses recognizing the potential for enhanced efficiency by bringing manufacturing operations closer to home. In summation, the convergence of factors—encompassing trade tensions, global disruptions, geopolitical uncertainties, and cost considerations—unambiguously propels the strategic imperative of on-shoring for businesses.
A Push for On-Shoring:
In recent years, there has been a bush for onshoring within the United States which has limited the countries the United States imports from. The United States has pursued strategies to encourage onshoring and nearshoring, aiming to support domestic manufacturing capabilities and reduce reliance on overseas production.
One significant initiative in this regard is the CHIPS and the Science Act, which allocated $52.7 billion in federal subsidies for chip manufacturing. This legislation seeks to address disruptions in the semiconductor supply chain and enhance the country's competitiveness in the industry. With US semiconductor manufacturing capacity declining from nearly 40% of global supply in 1990 to just 12% today, the CHIPS Act aims to reverse this trend. However, The CHIPS Act prohibits funding recipients from expanding semiconductor manufacturing in China and countries deemed national security threats to the US. It is important that companies carefully weigh the potential benefits of federal funding against the constraints imposed by these geographical limitations, especially given geopolitical uncertainties and recent market shifts.
Why others can’t replace China?
Offshoring from the U.S. to China and other Asian countries has been a significant trend in the global economy for several decades, driven by factors such as cost advantages, market access, and supply chain efficiency. However, China stands out as the primary destination for offshoring due to its unique combination of factors that have propelled its dominance across multiple industries.
China's superior capabilities in supply chain management and manufacturing are reflected in various statistics, including turnaround time and container processing. Firstly, China boasts some of the busiest and most efficient ports in the world. For instance, Shanghai Port, the world's busiest container port, has an average turnaround time of around 24 hours for container vessels. When compared to one of its biggest competitors, the port of Rotterdam in the Netherlands, it has a turnaround time of around 6 days. Hence, the efficiency in the Shanghai Port allows for faster processing and shipping of goods, contributing to China's competitiveness in global trade. In addition, China excels in the time it takes to process containers at its ports. According to data from the World Bank, China's average time to export and import containers is relatively low compared to many other countries. For example, the average time to export a container from China is around 15 days, while the average time to import a container is around 11 days. These relatively short processing times contribute to the efficiency of China's manufacturing and export processes.
One of the biggest countries competing with replacing China to export to the United States is Bangladesh. Bangladesh, while emerging as a significant player in the global textile industry due to its low labour costs, faces structural challenges that limit its ability to compete with China in terms of manufacturing and supply chain capabilities. One of the key infrastructure-related problems in Bangladesh is its limited transportation infrastructure. Bangladesh's transportation infrastructure, including roads, ports, and railways, is often inadequate and inefficient. Poor road conditions and congestion can lead to delays in transporting goods to and from manufacturing facilities, impacting supply chain reliability and increasing costs. Hence, despite Bangladesh’s efforts to increase imports to the United States, it has a long way to go before threatening a powerful giant like China.
In recent years, a prominent contender aiming to replace China as an exporter to the United States is Mexico. Despite its strategic geographical proximity and established trade relationships, Mexico faces its own set of challenges that hinders its full potential as an alternative to China. While Mexico has emerged as a significant manufacturing hub, particularly in industries like automotive and electronics, it grapples with a critical issue of security concerns. In recent years, security challenges, including crime, violence, and organized crime activities, have posed significant obstacles to Mexico's export competitiveness. These security issues can disrupt supply chains, decrease investments in manufacturing, and affect the overall business environment. Manufacturers and exporters may face risks such as theft, extortion, and vandalism, impacting operations and increasing costs. Despite efforts by the Mexican government to address security issues through law enforcement measures and initiatives to improve public safety, persistent challenges remain. The ongoing struggle with security concerns underscores the complexity of Mexico's export landscape, hindering it from replacing China in exporting.
Taking a focus on the semiconductor industry, despite tensions, both the US and China benefit from mutual dependence in the semiconductor sector; Chinese tech giants rely on U.S. chips, while American companies profit from Chinese markets and innovations. Collaboration between American and Chinese semiconductor firms is widespread, marked by joint technology development efforts. However, the Biden administration faces the challenge of balancing economic interests with national security considerations in its semiconductor policy. Furthermore, as Chinese companies increasingly prioritize building a semiconductor ecosystem centered on domestic capabilities, there's potential for a shift in influence and market share away from U.S. companies in the Chinese technology sector.
The difficulty of replacing China in this industry lies in several factors. Firstly, both countries recognize the importance of advanced packaging in semiconductor innovation, an area less restricted than chip manufacturing. China has focused on semiconductor packaging technologies, leveraging its significant share of the assembly, testing, and packaging market to catch up with leading players. The semiconductor industry's reliance on skilled labour and large investments in machinery further compound the challenge of replacing China's position in the semiconductor race. Despite efforts to help supply chains through increased investment in packaging technology, the fundamental barriers in chip manufacturing persist, underscoring the dynamics shaping the global semiconductor landscape.
Conclusion
In conclusion, while the United States is undergoing a significant shift in its manufacturing landscape, aiming to reduce reliance on countries like China through near-shoring initiatives, replacing China's role in exporting goods, presents inherent challenges. These challenges include a lack of infrastructure, skilled labour, lack of advancements and security uncertainties. Despite efforts by countries such as Mexico and Bangladesh to emerge as viable alternatives to China, these limitations hinder their ability to fully replace China. As a result, the United States will inevitably rely on China for importing a multitude of goods, particularly those with deeply established supply chains and specialized manufacturing capabilities, even as it intensifies efforts to shift manufacturing back home. Ultimately, the journey toward reshoring and reducing reliance on China is complicated and requires careful navigation of economic, and technological factors to foster a sustainable and resilient manufacturing ecosystem.
