The Trade War is Giving the Rest of the World an Advantage in China

There’s no shortage of winners in the U.S.-China trade war—except, perhaps, the U.S. and China.

While apparel and textile manufacturers sort out the level at which they intend to withdraw operations from China, companies producing in China and shipping to areas outside the U.S. are reaping the benefits of increased capacities and lower costs.

“U.S. companies that make product in China for non-U.S. markets have extra leverage to negotiate concessions with suppliers to reduce product costs and thereby counter tariff impacts for U.S.-destined production volume,” said Apratim Sarkar, managing director for sourcing and purchasing transformation at AlixPartners, a global, multi-industry consulting firm. Some factories are trying to rebalance their manufacturing by dedicating China-based sites for export to non-U.S. markets and non-China-based options, such as Vietnam and Indonesia, for the U.S. market, he said.

Joseph Cohen, CEO of Guotai USA, which ships up to 15 percent of its apparel business to Canada, confirmed that it’s been receiving better prices from factories in China thanks to vacancies. While Vietnam had previously offered his company better prices, as more companies have moved operations there, this shift in capacities has led to better prices emerging from China.

Vietnam has been one of the biggest beneficiaries of the trade war, but it’s far from the only one. There has been a massive outflow of production from China to Cambodia, Myanmar and Bangladesh, said Guido Schlossmann, president and CEO of Synergies, an apparel and sourcing global supply chain manager. Skill sets and infrastructure are dictating just where production is moving, he said, noting that bags, shoes and lingerie in particular are difficult to move from China because of the integrated infrastructure and skill set. Schlossmann said he’s observed a lot of outerwear moving into Myanmar and Vietnam, and sportswear and bottoms moving into Cambodia.

There has also been increased general outflow into Bangladesh, he added, although some U.S. companies remain hesitant to move to Bangladesh because of its unfamiliarity.

Data from QIMA, a provider of supply chain compliance solutions, supports these trends. The company shared that inspection and audit demand in Vietnam, Indonesia and Cambodia grew 21 percent, 25 percent and 15 percent year-over-year in the first half of 2019, respectively. “Nearly every other sourcing country is benefiting from the trade war,” said Sebastien Breteau, QIMA CEO. “Rather than move manufacturing back to the U.S., many U.S. brands are fleeing from the crossfire.”

Beyond Vietnam and Myanmar, Murali Gokki, AlixPartners managing director for retail, said some emerging lower-cost African nations have witnessed slow, but significant, production volume gain; however, these areas still face trade uncertainty as the U.S.Department of Commerce continues to evaluate countries all over the world, particularly in South Asia, he noted. “One result of that is that countries with favorable trade agreements with the U.S. may become more attractive as companies in the U.S. start to explore safe havens.”

But all of this doesn’t mean one should count out China. While it may have been weakened in the battle, the country is still holding strong. In fact, QIMA said, demand for inspections and audits in China from businesses elsewhere in Asia grew 33 percent year-over-year while demand from Eastern Europe and Russia and the Middle East grew 22 percent and 14 percent, respectively.

Although China manufacturing has lost ground for developed countries, Breteau said, “its reign as a manufacturing powerhouse is far from over.”

E-commerce sellers, in particular, remain very dependent upon China manufacturing because of its ability to offer flexible minimum quantities and shorter lead times, said Schlossmann.

All of the people Sourcing Journal spoke with agreed that the tariff disputes were really just throwing gasoline to a fire that had started years ago. But in keeping with the “horse is out of the barn” theme, some changes can’t be undone. Even if China and the U.S. came to an agreement tomorrow, many companies have forged new relationships they may not have otherwise realized.

“Shifting your supply chain is like moving an oil tanker—it takes time,” said Breteau. “It’s a costly and time-consuming endeavor, which is unlikely to be undone if the U.S. and China call a truce unless there are significant benefits for businesses. A reversal or halt to new tariffs is simply not enough.”

With that said, although many companies aren’t likely to put all of their eggs back in China’s basket, others just might. Although retailers have been strategic in developing their sourcing strategies by entering Vietnam, Cambodia and elsewhere, Schlossmann said, transaction-driven importers and wholesalers would likely return if it offered an immediate advantage. 
–  By Lisa Johnston