China has been the manufacturing hub of the world since 2010. Their low cost of labor and lax regulations originally benefited the bottom line of many advanced economies, but ongoing major global conflicts over the past four years have highlighted the vulnerabilities of companies that have come to rely on long and lean supply chains for manufacturing, transportation, and raw materials.
From the US-China trade war to the global pandemic, and now the Russia-Ukraine conflict, supply chains have faced massive disruptions. Labor shortages, shipping delays, resource constraints, and countries’ priorities have limited (or in some cases completely prevented) the movement of goods across the global supply chain. Pair that with lean manufacturing strategies and it’s no surprise several companies in the solar, semiconductor, and biotech industries have already begun to integrate regional designs in their global supply chain network.
The US-China trade war that began in 2018, with more than 97% of tariffs still in effect, has significantly affected U.S. trade levels. Importers have been forced to shift away from China and subsequently reorganize their supply chains. Even more, tariffs have decreased trade altogether – both imports and exports – which raises prices and reduces options for both consumers and businesses in the United States. Interestingly enough, in a recent poll of more than 3,000 companies, 90% of respondents stated it's automation, not tariffs, driving executives to shift their supply chains.
The ongoing pandemic-related shutdowns continue to disrupt transportation and cause widespread shortages of raw materials. A recent survey by McKinsey & Company found that supply chain leaders plan to focus on resilience, with 40% of 60 respondents actively looking for nearshoring solutions to buffer the pandemic's impact and aid in business recovery.
Adding fuel to the fire, the invasion of Ukraine has only accelerated companies’ focus to diversify their supply chains and reduce their dependence on any single country. In an article published yesterday, the Harvard Business Review points out:
“The Ukraine war and closer alignment of China and Russia will modify profoundly the exchange of energy, raw materials, industrial parts, and goods between the Western world, China, and Russia and promise to accelerate the reshoring trend. What is less obvious but equally important is the war-imposed constraints on the ability to use Russian transportation infrastructure to support manufacturing in Asia."
Global trade is on its way to becoming much more regional than before. While many companies rely on China as a low-cost manufacturing base, and that’s unlikely to change, there is an expectation of “intraregional” trade flows to become stronger as companies realize the risk of exclusively sourcing from specific countries or regions.