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July 21, 2020

New Supply Chain Strategies Arise As Effects of Trade War and Pandemic Linger

New Supply Chain Strategies Arise As Effects of Trade War and Pandemic Linger

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The US-China trade war during 2019 provoked a shift in countries of origin. COVID-19 emergencies from 2020 forced attention on the logistics of transport. Such events have led to supply chain havoc, causing a worldwide reckoning of how, when, and where businesses source goods. As a result, a new question reframes the bigger picture: Which points of the supply chain are most vulnerable to future crises or change?

The answers vary by company. But by evaluating adversity, leaders can develop new strategic approaches to strengthen business. In a recent webinar, Flexport founder and CEO Ryan Petersen and Chief Economist Phil Levy discussed points to consider with US Chamber of Commerce SVP for International Policy John Murphy.

Tariff Advantages

Companies are responding to the pressures of global events, with supply chain restructuring slowly taking place.

Based on Flexport data, in 2018, only about 3%-4% of product value of US imports from China was from tariffs. By the height of the trade war in early 2020, that percentage rose to more than 14%. The purpose of tariffs was to incentivize companies to move supply chains out of China, but the US has seen very few actually move. A webinar poll shows approximately 45% of respondents relocated or diversified production—but still outside their home countries.

It turns out that the greatest beneficiary in the US-China trade war has been neither the US nor China. Instead, Vietnam has grown its manufacturing exports 40% year-over-year, particularly in electronics, textiles, and garments. More favorable tariff scenarios, along with other factors like cheaper labor, seem to have given it an edge.

But Flexport has observed that many factories in Vietnam are owned by Chinese companies. Additionally, some products may be labeled “Made in Vietnam,” but produced elsewhere.

Similarly, with the USMCA, in force as of July 1, certain textile and apparel inputs originating in North America will qualify for preferential tariff treatment. Depending on the product, the new tariffs will go into effect across the next one to three years.

These inputs, also known as intermediate products, comprise the bulk of global trade across all verticals today. By using parts from all over the world, companies are able to produce goods at a lower cost.

Diversifying Suppliers

Following months of supply shortages, shipping capacity crunches, and rate volatility, companies are steering away from just-in-time manufacturing and singular reliance on far-off points of origin. Instead, some are considering reshoring or nearshoring as a response to COVID-19.

The consensus is that no single country is likely to replace China in manufacturing, although there will be many emerging pools. The pandemic has proven that all countries can be disrupted, which makes constant shifting of the supply chain an unworthy response over time.

Diversification helps create an alternate network in different geographies for when supply or transportation hurdles occur. And with the rise of e-commerce, including price and delivery pressures from consumers, companies will need to start distributing from many sites around the world.

In addition, some businesses will look to stockpile, allowing for lean operations, while protecting against hard times. Redundancy in sourcing helps companies maintain inventory when demand is high.

As current events unfold, global supply chain shifts are bound to continue. Learn more about factors to track by watching July’s webinar, Were Global Supply Chains a Mistake?

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