A recent report commissioned by The Business Roundtable finds that diversification of production away from China, which the U.S. and other countries have been promoting in recent years as a way to lower supply chain and national security risks, has been limited so far.
The report states that diversification (also referred to as derisking or decoupling) is already taking place. Shocks from the U.S.-China trade war, the COVID pandemic, Russia’s war on Ukraine, and other events have made the risks of “hyperglobalized” value chains clear, and tensions with China continue to rise even as political authorities seek stabilization. As a result, about a quarter of U.S. and European Union firms are considering or actively moving parts of their manufacturing and sourcing activities out of China, a wide majority are deciding how to reduce supply chain risks from overreliance on China, and China has seen a decreasing share of U.S. imports and foreign direct investment over the past seven years.
At the same time, the report notes, China’s market size, four-decade manufacturing investment boom, and geopolitical clout present major hurdles to diversification. As a result, diversification so far has centered on just a few countries, Mexico and Vietnam in particular, with Canada, Taiwan, Germany, and South Korea also picking up trade and FDI shares. Diversification has also been concentrated in a few sectors – namely, textiles, electronics, and autos – and in the assembly segment rather than upstream supply chains.
According to the report, the gap between diversification potential and outcomes has many causes but two factors stand out: the availability of workforces with basic-to-advanced skills and the role of high-quality, cross-border economic agreements. For instance, the U.S.-Mexico-Canada Agreement is key to why Mexico is picking up so much diversification, while China’s agreements within members of the Association of Southeast Asian Nations are central to the rise of its neighbors, particularly Vietnam, as U.S. trading partners.
The report concludes that driving diversification to other U.S. partners will require active commercial diplomacy and engagement. Reducing over-reliance on China is not impossible, but the economic costs and risks are real and broader migration will only happen in stages over a longer period. The report identifies Germany, Japan, India, Singapore, Australia, and Canada as currently ranking highest for “diversification attractiveness” based on factors like business environment (e.g., openness to trade, policy predictability, and logistics), national security considerations, and market size and growth.
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