China’s piece of the offshoring pie is shrinking

This is an excerpt of the original article. It was written for the September-October 2019 edition of Supply Chain Management Review. The full article is available to current subscribers.

September-October 2019

It’s that time of year again, when we feature the Top 25 supply chains from Gartner. What I enjoy most about this research is the window it provides into where supply chains are going next: After all, while some lead, the rest of us follow.

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Despite significant changes to U.S. trade and tax policies, manufacturing is not returning to U.S. shores quite yet. In fact, A.T. Kearney’s 2019 Reshoring Index reveals that imports from the 14 largest low-cost countries (LCCs) in Asia have risen $66 billion—the largest annual increase since the beginning of the economic recovery in 2011. However, China is not exactly winning the war. Amid a variety of overlapping trends, the country’s share of offshoring is dwindling.

Yes, tariffs are making manufacturing in China more expensive, but the reality is that manufacturers have spent the past decade gradually shifting their operations to other LCCs, partly because of China’s escalating labor costs. Rather than incentivizing manufacturers to bring production back to the United States, the U.S. trade war with China is just accelerating the shift toward those countries.

Now in its sixth annual edition, this year’s Reshoring Index report includes a new China Diversification Index, which examines the trend of manufacturers leaning away from China. What it reveals is that although China has held on to nearly two-thirds of U.S. imports, the country’s slice of the import pie has been shrinking (see Figure 1).

If the United States and China aren’t winning, who is?

Five years ago, China had the largest share with 69% of total imports to the United States from low-cost trading partners. But by the end of 2018, its share had dropped to 65%. Add in data from 2019, and this trend is now even more pronounced as China’s share of total imports dropped to 60% during the first quarter. The rapid decline is partly the result of U.S. firms stockpiling Chinese imports last year in anticipation of planned tariff hikes, and partly because of structural shifts in manufacturers’ sourcing strategies.

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