The tariffs that President Donald Trump has slapped on Chinese imports haven't sparked the widespread return of manufacturers to the U.S. that Trump envisioned, according to A.T. Kearney's latest Reshoring Index.
The United States has made significant changes to its trade policy with the specific intent of bringing manufacturing home. However, imports from 14 traditional low-cost offshore countries (LCCs) have grown at historic rates. In its sixth annual reshoring report, A.T. Kearney found America’s gross manufacturing output grew 6 percent year-over-year in 2018; growth in goods imported from the 14 largest LCCs in Asia rose by 9 percent, or $66 billion.
Data from the American Chamber of Commerce in China supports A.T. Kearney’s findings. About 41 percent of American companies are considering moving factories from China because of the trade war, but fewer than 6 percent are heading to the U.S., a recent Chamber survey found.
Rather than incentivizing reshoring, the U.S.-China trade dispute has accelerated the already ongoing shift toward manufacturing in low-cost regions, said Patrick Van den Bossche, A.T. Kearney partner and co-author of the study. The fundamental economic advantage of manufacturing in low-cost countries remains unchanged, he said in the report.
The electronics industry has already been caught in the crossfire of the trade war, Johan Gott, principal in the consumer and retail practice of global management for A.T. Kearney, told EPSNews. “It is also highly exposed -- most American electronics companies have large manufacturing operations in China. The industry will need to find new operating procedures as it orients itself to this new normal.”
One U.S. design and manufacturing services provider said tariffs have made U.S. electronics companies less competitive. "Our components cost more," said George Whittier, president and COO of Morey Corp. On the other hand, some of the finished good devices wholly made in China (iPhones, for example) come in tariff-free. “If the final round of proposed tariffs had gone into place -- that would have been a big competitive shift for U.S. manufacturers,” he said.
China continues to hold close to two-thirds of the total $816 billion of U.S. imports from the 14 LCCs tracked, according to A.T. Kearney. However, the past five quarters show a dramatic drop in China's status.
China's share of total imports to the U.S. from the 14 largest LCCs decreased from 69 percent in Q4 2013 to 60 percent in Q1 2019. That’s equivalent to a loss of $72 billion in import value -- more than the total 2018 value of imports from India ($51 billion), which holds the second largest share of imports to America.
China’s losses are Vietnam’s and Mexico’s gains. Vietnam captured approximately half of the $72 billion in import value, or $36 billion, lost by China. Imports from Mexico to the U.S. grew by $28 billion in 2018, a growth rate of 10 percent over 2017, A.T. Kearney said. That’s the fastest growth that Mexico has seen in the past seven years.
Labor hinders U.S. expansion
Labor shortages, in addition to trade disputes, have been hindering U.S. manufacturing’s expansion. Manufacturers need a robust labor force available at an attractive cost and composed of the right percentage of skilled workers, according to the reshoring report. Both the 2017 and 2018 Reshoring Indexes noted the lack of skilled labor as a top constraint to expansion.
The vacancy rate in manufacturing jobs grew for a fifth consecutive year in 2018. On average, there were nearly half a million (466,000) vacant positions, according to A.T. Kearney. The vacancy rate increased by 48 basis points — a rate twice as high as the average for the preceding four years—from an average of 3.1 percent in 2017 to 3.6 percent in 2018. The labor shortage is most acute in high-skilled machine operator positions as well as in management.
The Institute for Supply Management has also cited a lack of skilled labor as a hinderance to U.S. factory expansion.
The Reshoring Initiative has a more optimistic view of U.S. manufacturing employment. The number of companies reporting new reshoring and foreign direct investment (FDI) in the U.S. was up 38 percent from 2017, the organization said. The combined reshoring and related FDI announcements totaled over 145,000 jobs in 2018, the second highest annual rate in history.
Cumulative announcements since 2010 have driven 31 percent of the total increase in U.S. manufacturing jobs between 2010 and 2018, the Reshoring Initiative said. The increase can be attributed to stronger U.S. competitiveness due to tax and regulatory cuts. FDI continued to exceed reshoring in terms of total jobs added, but reshoring has closed most of the gap since 2015.
While it may be too early to judge whether large-scale reshoring will ever result from recent policy changes, U.S. manufacturing has already started feeling negative effects, A.T. Kearney reported. Steel and aluminum tariffs have increased input costs and decreased profits. Retaliatory tariffs imposed by China and other leading trade partners have many executives evaluating opportunities to shift production out of the U.S. to avoid the impact of tariffs.
“The risks of U.S. – China conflict have risen dramatically, and they go far beyond the Trump administration,” said A.T. Kearney’s Gott. “Political actors across the political spectrum in Washington are preparing for long term conflict with China.” Whether this trend will continue in 2019 will be largely dependent on the state of America’s multi-front trade war, A.T. Kearney concluded.
(Editor’s note: The A.T. Kearney Reshoring Index, launched in 2014, aggregates actual U.S. manufacturing and import data. The consultancy describes it as a "simple but powerful indicator of where manufacturing for the U.S. market is going." The 2018 report can be found at US Trade Policy and Reshoring: The Real Impact of America's New Trade Policies. The Reshoring Initiative's 2018 jobs report can be found here.)