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US-China Trade Relations are the Big Driver of Supply Chain Change

Aug. 21, 2020
A new report looks at global supply chain movement, including shifting manufacturing patterns and the impact of government intervention/

As the global supply chain continues to transform,  BakerMcKenzie performed an analysis of global export market share data from Silk Road Associates collated across 350 product categories and 150 countries. 

This report covers industry-specific global supply chain movement, including challenges, opportunities, shifting manufacturing patterns and the impact of government intervention. “All of these factors need to be considered when reimagining supply chains for a post COVID world,” said Anne Petterd Head of International Commercial & Trade, Asia Pacific at Baker McKenzie and author of the report.

From the report here are the five key trends:

US-China trade relations are the big driver of supply chain change

  • Based on trade data, China has lost global export market share at an accelerated pace in 2019.
  • Companies have managed to negotiate tariff exclusions with the US Department of Commerce. 
  • The prospect of winning exclusions may delay the shift in production for companies that are either unable to find easy alternatives to China or those who are capital-constrained in today’s economy.

Companies will increasingly adopt supply chain diversification strategies

  •  In Southeast Asia, manufacturing capacity, including land, labor and logistics, will determine potential growth as a supply chain hub.
  •  Latin America is another alternative for fast-moving buyers. In particular, Mexico has been capturing global export market share, buffeted in part by the United States-
  • Mexico-Canada Agreement (USMCA),  which provides legal certainty of access to the US market for Canada and Mexico.

China’s large domestic market and strength in emerging markets are pivotal

  •  China has a growing importance to key sectors, especially the Industrials, Manufacturing and Transport and Energy, Mining and Infrastructure industries. Research interviews show that American, European and Japanese firms cite China’s large and growing market as a reason to retain manufacturing in China. A European Chamber of Commerce’s Business Confidence Survey in June 2020 showed that 65% of members still rank China among their top 3 destinations for new investment.
  • China’s global market share of exports to the emerging markets has risen across almost all categories.
  • Foreign multinationals are also using China as a manufacturing base to sell into the emerging markets.

Digitalization and sustainability will impact supply chain operations

  • Across all sectors, digitalization will impact how firms facilitate and manage supplier relationships as well as logistics and shipping processes. Automation and the Internet of Things (IoT) are now also front and center in supply chain shock-proofing against disruption.
  • Healthcare and Life Sciences (HLS) companies are undertaking Power Purchase Agreements (PPAs) using clean energy sources.
  • COVID-19 has meanwhile accelerated the adoption of 3D design technologies, as teams are forced to collaborate remotely and share digital assets with manufacturers. 3D design technologies are not new, but adoption rates are now expected to rise sharply.

Government intervention and strategic priorities will affect the future

Governments will reshore critical medical production, especially Personal Protective Equipment (PPE) products, such as masks, protective goggles and protective gowns.

  •  Raw materials are the key constraint on domestic production and advanced economies will move quickly.
  •  Governments will use low-cost loans, financial subsidies and long-term contracts, to spur domestic production. Production relocation of critical medical products is likely to be rapid.
  •  Governments will also use a range of tax and investment incentive packages to encourage new job-creation supply chain activity, such as in advanced manufacturing.

Here are the key sector takeaways:

As Consumer Goods & Retail companies plan for supply chain renewal, it will be key to consider the strengths of China's scale and vertical supply chains, balanced against other emerging market opportunities. Any rapid shifts to supply chains can only be sustained after investments are made to increase manufacturing capacity in the new country.

The global Energy, Mining and Infrastructure supply chain is among the least impacted as compared with other industries. Three key current trends will continue to be played out: the emergence of competitors to China; competition for emerging markets and US EMI investment in Chinese manufacturing.

For the Healthcare and Life Sciences sector, COVID-19 related mandates will affect the PPE supply chain. Governments will seek to build confidence and resiliency in pharmaceutical supply chains post-COVID-19. A greater focus on localization of supply chains may also spur smart manufacturing, such as the use of data analytics to manage inventories and drug distribution, especially during virus spikes, or the use of AI for quality control during production.

 Industrial Manufacturing and Transportation companies will seek financing to rebuild and re-strategize their supply chains to reduce their exposure to single-source suppliers especially to provide added protection against significant supply chain disruption like that experienced due to the pandemic and trade wars.

Technology, Media, and Telecommunications production has been moving toward Vietnam and Mexico prior to the rise of US-China trade tensions and in response to two main influences: rising labor costs in China and a desire to diversify production. This trend is set to continue in the next few years even as manufacturers add to their list of production destinations.