The U.S. Expects Manufacturing to Leave China and Return to U.S. Production
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The U.S. Expects Manufacturing to Leave China and Return to U.S. Production

The U.S. government intends to impose taxes on American companies producing overseas, which should be moved back to the U.S. for domestic manufacturing.
Published: Jul 31, 2020
The U.S. Expects Manufacturing to Leave China and Return to U.S. Production

U.S. Manufacturing Market Trends

With the recent US policy of encouraging domestic enterprises in the mainland to return to their home countries, the issue of manufacturing repatriation has once again raised concerns. Both the United States and Japan have introduced policies to encourage domestic companies in mainland China to return to their home countries, and the issue of manufacturing repatriation has once again raised concerns. In fact, in the Obama era, the United States already proposed policies such as "re-industrialization," and Trump has also been asking Apple and other American companies that produce in the mainland to return to the United States for production, but the effect is not significant.

However, in the second year after the implementation of the trade war, some changes have begun. The manufacturing industry has indeed moved away from mainland China, but it has not returned directly to the United States. The new crown virus incident that occurred this year will also affect the layout of foreign companies in the mainland, and the follow-up is worth watching.

Globalization has led to the outflow of American manufacturing. Since the 1980s, with the advancement of science and technology and the evolution of high-efficiency freight, leading to industrial globalization, industrialized countries have begun to move their production bases to East Asia, Central and South America, and this has resulted in manufacturing in Europe and the United States. The continuous outflow, the hollowing out of the industry, the disappearance of manufacturing job opportunities, and the rapid decline of related employment population.

The overall employment figures in the United States before the COVID-19 pandemic were very beautiful. The employment-population in the United States increased significantly and the unemployment rate was extremely low, but the manufacturing employment-population fell sharply. In 1980, the manufacturing employment-population was approximately 19 million, and so far, only 12.84 million remains. , A substantial flow to the service industry. According to a report by Bloomberg, the average weekly wage in the catering industry is US$373, while the weekly wage in the manufacturing industry is US$922. High-quality jobs in the United States are gradually being replaced by low-quality jobs.

Therefore, from Obama’s presidency, he began to chant the "reindustrialization" policy, calling on the US manufacturing industry to return, hoping that US companies would move overseas factories back to the United States to increase employment in the country’s manufacturing industry and promote economic transformation.

U.S. Manufacturing Return Index

A.T. Kearney, a well-known American consulting company, has compiled the "US Reshoring Index" (US Reshoring Index) for seven consecutive years. This index studies the manufacturing output value of 14 low-cost countries (LCC) in the United States and Asia, including China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, the Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia.

The study shows that the manufacturing import ratio (MIR, which means the ratio of imports from LCC to the gross domestic product of the United States) has been rising steadily over the past ten years. In 2008, it was only 9.2%, and it has been positive almost every year. Growth, reaching a peak of 13.1% in 2018. For the first time in 2019, it fell by 12.1%. The main reason is that the U.S. GDP reached US$6.271 billion in 2019, and imports of manufactured goods from trading partners of 14 low-cost Asian countries dropped from US$816 billion in 2018 to US$757 billion in 2019, a decrease of 7.2%. The decline in MIR made the U.S. Manufacturing Return Index hit a record of 98.

China-US trade war triggers exodus

The increase in the U.S. manufacturing return index is related to the sudden change in the number of China's exports to the United States. In 2019, the mainland's exports fell by about US$90 billion, and the annual growth rate fell sharply by 17%, which was much higher than the 14 LCC countries-7.2%. It can be inferred that, because the United States launched a trade war and substantially increased import tariffs on mainland goods, the amount of exports to the United States has fallen sharply. It is worth noting that mainland China has always been a major exporter to the U.S., but the proportion of 14 LCC countries’ exports to the U.S. has continued to decline for six years, reaching 67% in 2013, remaining 56% in 2019, and dropping 10 in six years. The percentage points are not small.

Mainland China’s exports to the United States were frustrated, while other countries benefited. In addition to the other 13 LCC countries, the value of exports to the United States increased by 31 billion U.S. dollars in 2019. The country that benefited most was Vietnam, with about half of them (46 %) Contributed by Vietnam, the value of exports to the U.S. surged by US$14 billion. Mexico was also the beneficiary. In the same year, the value of exports to the US surged by US$13 billion.

However, these manufacturers who moved from the mainland to Vietnam and other places are due to the punitive tariffs imposed by the United States. If China and the United States reach a trade agreement and remove the high tariffs, will they continue to stay in Vietnam and other places, or will they be transferred back? Mainland production? It needs to be studied in the future.

U.S. manufacturing has not yet benefited

The sharp decline in exports of mainland manufacturing products to the U.S. in 2019 caused a significant rebound in the U.S. manufacturing return index. However, the U.S. manufacturing industry did not directly benefit. The output value of the U.S. domestic manufacturing industry did not grow last year. From the labor productivity index of the U.S. Bureau of Labor Statistics, it was 98.55 in 2018 and 98.58 in 2019, which shows no obvious effect.

In other words, from the data point of view, it seems that the overseas manufacturing industry of the United States has not returned to the United States by a large margin, or the return to the United States is not good. The Foxconn investment case in Wisconsin can be seen. In November 2017, an investment contract of up to 10 billion U.S. dollars was signed. The US state government provided up to 3 billion U.S. dollars in incentives and subsidies, but the LCD factory has not yet implemented it.

At the moment of the COVID-19 epidemic, the supply chain is excessively restricted by the mainland and the difficulties of medical supplies have caused advanced countries to rethink the global division of labor. Both the United States and Japan offer rich conditions to attract companies to return. The return is expected to accelerate, but a full return to the country is impossible. However, a decentralized supply chain is a direction that multinational companies must take. Taiwanese businessmen should start to think about and layout the new industrial situation in the post-epidemic era.

The U.S.-China decoupling continues to ferment. Trump threatened to impose new taxes on U.S. companies producing overseas and threatened to bring important supplies and equipment manufacturing back to the U.S. This may further decouple the U.S. and China supply chains and establish new trade barriers. Trump said: Taxation is an "incentive" to return manufacturing to the United States. The goal is to produce everything the United States needs on its own and then export it to the world. The current corporate-friendly tax relief and deregulation policies implemented by the US government have attracted companies to return to the United States.

Growth Momentum in the U.S. Market

American companies are beginning to move to manufacture back to the United States. Although this does not mean that American companies will be swarming back to China, the rate of relocation, or the "return" of American companies, is gradually increasing.

There are several reasons for this positive trend, some of which are even surprising.

  • Trump effect:
    Regardless of his political inclinations, President Trump’s corporate-friendly tax relief and deregulation policies have attracted companies back to the United States. Trump's trade war with the CCP, including the high tariffs on CCP goods, is also part of the reason for the company's relocation.
  • Not just a cost issue:
    China is far away from the US and European markets. As China's economy grows, its manufacturing costs are also rising. But for many years, for most American companies, setting up factories in China is still a priority. But also because of The COVID-19 pandemic and the Sino-US trade war, there are concerns that the supply chain and manufacturing will be disrupted.
    Concerns about interruption also include the loss of US intellectual property theft, loss of production technology, and loss of market share caused by the CCP’s copycat products due to the theft of intellectual property and production technology. Also, in the telecommunications and Internet routing industries, the use and use of spyware by the CCP through equipment from Huawei and other vendors has highlighted the commercial and cyber threats that rely on the CCP’s technology. Now it has rapidly developed into a corporate threat. Predatory threats. And not only that. The distance of the commodity supply chain from the sales market also has its shortcomings. For example, customer satisfaction and the agility of product feedback will be affected. Companies far away are slow to respond to customer needs or make adjustments to market needs very slowly.
  • Environmental issues:
    Recently, the pollution and sustainability issues of China's domestic production facilities have become increasingly concerned, not only for companies but also for their customer base. China is the most polluted country in the world. One of the environmental pollution issues, which are non-economic factors, has now become a factor that has prompted some American manufacturers to return to the United States.
  • Automated manufacturing:
    The concept of "local-to-local", the idea that products are produced in or near their main sales markets, has become increasingly popular among many American companies. "Local to local" means that the product is produced in or near the main sales market in the United States. Therefore, they are moving their production facilities back to the United States.
    However, despite the decline in China's attractiveness, manufacturing costs are still a key factor in plant location. For companies in labor-intensive industries such as footwear and clothing, if they cannot obtain the required profit margins, it will be difficult to return to the United States, where labor costs are high. The advancement of automated manufacturing technology will help realize the possibility of "local to local".
  • Is the single source of procurement obsolete?
    The US-China trade war has not only exposed the inequality of trade agreements between the two countries but also importantly, it is dangerous to rely on geopolitical opponents for 80% of strategic key materials. The United States is almost entirely dependent on China for more than rare earth minerals. China is also a single source of procurement for the United States to provide common over-the-counter drugs such as antibiotics and other key drugs, as well as some high-quality medical technologies and supplies.
    The "Wuhan Pneumonia" COVID-19 virus epidemic in China also highlights the high risk and lack of foresight of this trade policy.
  • Regional localism_How large or sustainable is the back flow trend we are seeing?
    Some companies plan to only relocate part but not all of their production back to the United States while relocating their factories in China to neighboring Asian countries such as Vietnam and Malaysia. Other companies plan to open new factories in China after the COVID-19 epidemic is over.
    As the situation on the ground changes, the plan will also change. Political stability is also an important factor in the decision-making process of enterprises. With the spread of infectious diseases in China, the turmoil in Chinese society has intensified. This may be another factor that needs to be considered. To reasonably evaluate the trend of manufacturing relocation, it may also be necessary to consider the global trend of regional local-ism. In some places, factories will not necessarily move back to the United States but will move to or near the main sales market areas as much as possible.
Published by Jul 31, 2020 Source :ctee, Source :epochtimes

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