Diversification Away from China Varies by Industry

Tweet

Aug. 14, 2024
By: Chaney A. Finn

It is no secret that the United States and China have experienced increasing trade tensions. The countries have imposed billions of dollars in tariffs on each other’s goods. One clear, if unspoken goal of the U.S. tariffs has been to create incentive for importers to shift operations to countries other than China.

As we have discussed in the past, there are numerous policies and partnerships domestically and around the globe through free trade agreements and trade frameworks to complement the incentives to diversify. They generally target U.S. dependency on China for specific industries and commodities, such as semiconductors and critical minerals which pose economic and national security threats to the U.S. Forced and prison labor in China have also been a point of focus where goods are effectively prohibited from being imported from the Xinjiang Uyghur Autonomous Region of China under the Uyghur Forced Labor Prevention Act (UFLPA).

In light of the above, the China-focused independent research firm, Rhodium Group recently published a report which highlights the effectiveness of the tariffs, UFLPA, and other efforts for industry to move out of China. The report found that operations are moving away from China, however it varies across industries, mostly pertaining to textiles, electronics, furniture and autos sectors. The report was commissioned by an association of chief executives of U.S. companies, Business Roundtable.

Most diversification the report cites pertains to the final assembly, where most manufacturing still relies on Chinese operations for the inputs. It is speculated that this diversification is ‘just enough’ processing that occurs to be able to qualify the finished product as ‘originating’ for lower import tariffs into the U.S.

The report cites difficulties of diversification, including China’s market size, four-decade manufacturing investment boom, and geopolitical clout. Despite being a slow process, reshoring to other nations, primarily Mexico and Vietnam, have resulted in a marginal market share decrease of Chinese imports and U.S. foreign direct investment (FDI). Notably, the U.S. FDI that shifted from China has been directed to other advanced economies with large domestic markets and more high-tech manufacturing capabilities, specifically Canada, Ireland, Germany and South Korea.

The authors of the report also provided commentary on the matter, pointing to trade agreements and other trade frameworks are vital to the continued diversification away from China. The new era of trade frameworks incorporates a more holistic approach, investing in initiatives such as environmentally friendly manufacturing practices, working conditions, and upskilling workers which will reduce dependence on China in the long run. The authors note that these policies do, in fact, take time to take effect and to see significant changes.

Should you have any questions regarding international trade compliance, do not hesitate to contact any attorney at Barnes, Richardson & Colburn, LLP.