Two major geopolitical factors in the past five years jolted businesses all over the world, especially US companies, into diversifying their supply chains to minimize previous reliance on one single-source — i.e., China — for their manufacturing operations: the pandemic and its follow-on disruptions caused by the cascading lockdowns throughout the entire supply chain; and the trade war started by the Trump Administration that has resulted in an additional 25% tariffs on most goods imported from China, which have continued in the Biden administration because there is no political constituency in an election year for appearing to “go easy” on China.
Most importantly, however, diversification out of China was driven not just by the financial benefit of avoiding the dreaded “Section 301” China tariffs, but because Congress enacted the Uyghur Forced Labor Prevention Act in 2021 to combat the massive human rights violations the Chinese government has been promoting in the Xinjiang region, but also spreading to other manufacturing centers in China. US Customs and Border Protection has been rigorously enforcing this law with opaque policies and targeting measures that have challenged even the most compliance-oriented companies that have not been able to completely disengage from China-based sourcing.
This trend began in 2020 with the pandemic but has escalated dramatically since. Sourcing is no longer driven so much by “just-in-time” inventory management to reduce costs as the need for “resilience,” 2023’s word of the year, defined by the World Economic Forum as “the ability of a global supply chain to reorganize and deliver its core function continually, despite the impact of external or internal shocks to the system.” Whether it be diversifying parts suppliers among several in a region, leveraging new technologies like AI and data analytics, revisiting shipping contracts or shifting production to regions closer to where companies expect to sell their goods, we can expect this focus on “resilience” and adaptability to continue to shape trade flows in 2024 and beyond.