1. China is no longer the cheaper option.
- China used to be the cheapest option, but with worker strikes and a changing economic picture, Chinese manufacturing workers made $12.47 an hour in 2015 (link). As cited in the article, this is almost half as much as U.S. workers, but still not the cheapest in the region. Vietnam and Thailand offer cheaper wages, land and potentially a cheaper tax rate for companies looking to escape the trade war (link).
2. Uncertainty
- Because of the ongoing Trade War with China and tariff escalation, companies are finding it harder to continue manufacturing operations in China. However, there are many other political issues that could affect trade in the future, such as;
a) The ongoing protests in Hong Kong (link)
b) Atrocious human rights violations (link)
c) Environmental issues (link)
d) Censorship of American companies (link)
3. Europe is leaving also.
- Now, some of this is due to the current Trade War, but as mentioned before China is no longer the cheapest option. As noted by a recent CNBC article, more than 50 companies have pulled out of China because of the recent trade war (link). However, the long-term effects for China will be disastrous. The chances of a company coming back if the Trade War ends will be dependent on their investments in other countries such as Thailand and Vietnam and the political and economic climate of China. The problem for China is further compounded by the fact that European companies, who are not necessarily affected by the Trade War are also moving out of China (link).
4. Better Options.
- As previously mentioned, Thailand and Vietnam are wooing businesses that are fleeing China, but Mexico and the United States are also becoming a potential destination for many fleeing businesses (link). In addition to the countries previously mentioned, India is becoming intriguing destination for manufacturing jobs due to the size of their emerging market.
Conclusion:
While China historically has offered cheaper labor, it has come at a cost. The current Trade War seeks to change many of the negative one-sided aspects such as forced technology transfer and protections for Intellectual Property. These new terms would detrimentally change how China does business and are unlikely to occur. If China did agree to the new terms, the United States would rely on China to enforce terms that they feel inhibit their growth. Because of this and the current political climate, we advise our clients to seek alternative channels for their supply chain. #TradeWar
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