As U.S.-China trade tensions escalated earlier this year, President Trump demanded U.S. companies “immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.” There is growing evidence that only half of his order is being heeded.
To avoid U.S. tariffs of up to 25% on most imports from China, many producers are indeed moving production out of China. Yet rather than shifting manufacturing to the U.S., most are instead opting for low-cost options elsewhere in Asia to maintain profit levels.
“Definitely we are seeing many of our BCO (beneficial cargo owners) customers — especially those in the 25% tariff category — changing strategy to ramp down China and ramp up Southeast Asia production,” said Vivien Cheong, regional sales manager APAC at Ticontract & Tim Consult.
According to Japanese financial services group Nomura, unless the U.S. and China strike a trade deal, this is a trend that will accelerate once the effects of front-loading to avoid U.S. tariffs declines and China’s exports to the U.S. drop away.
“Multinational corporations (MNC) are driven by the profit motive,” said the analyst firm in a note. “To escape the brunt of the trade war, MNCs with operations in China will more likely locate to other low-cost production centers instead of to the U.S..
“There will be some relative winners that benefit from trade diversion, and this looks set to intensify.
“Exports to the U.S. are booming in Vietnam and picked up strongly in Taiwan and the Philippines, followed by Malaysia, Japan, India and Singapore,” Nomura said.
All of this is boosting container and air cargo volumes at non-China hubs. However, handling the extra cargo is proving difficult. Indonesia’s lead gateway port, Tanjung Priok, and Manila’s container terminals are all desperately short of capacity and suffer from awful hinterland congestion. Bangladesh, another major beneficiary of production shifts, also suffers regular port and airport delays due to a lack of modern infrastructure.
Vietnam has been the recipient of huge investments by manufacturers, with cargo volumes at its ports up 20% last year and container traffic rising 26%. However, congestion is also a growing problem at its ports and airports.
Moreover, as Neel Jones Shah, executive vice president and head of airfreight at Flexport notes, while shippers are moving production to Southeast Asia to escape tariffs, driving up air cargo volumes from Vietnam, “yields are still a challenge and many freighter carriers are still having a hard time making direct Vietnam flights work without stopping in another city before continuing on to a transfer hub.”
Kelvin Leung, CEO of DHL Global Forwarding Asia Pacific, said the shift of manufacturing out of China to other parts of Asia started before the U.S.-China trade war.
“Some years back prior to the current trade environment, we had already seen a number of companies begin to move their sourcing and production to other Southeast Asian markets as well as to South and North Asia — simply for the expansion and diversification of their manufacturing bases, to capitalize on lower labor cost or prompted by labor shortage in their areas of operation,” he told FreightWaves.
Leung believes there is a limit to the shift, not least because moving supply chains is an intensive undertaking and not one that all companies will take on unless the economics make compelling sense.
”While a number of customers are exploring opportunities to move their manufacturing production and assembly lines or sourcing to other markets, some are still shipping their components and parts supplies out of China,” he added.
“We have also observed some customers increasing their overall inventory levels to ensure that they have enough materials on hand and others who have taken a different approach by reducing their overall inventory levels to keep costs down fearing uncertainties in the market.”
Nomura doubts whether the tariff war and the production shift away from China will even help President Trump achieve his aims. “The escalating trade war may narrow the U.S. bilateral trade deficit with China but, due to a surge in trade diversion, it is unlikely to narrow the total U.S. trade deficit,” said the analyst.
FreightWaves articles by Mike