Navigating Global Supply Disruption
Geopolitical events continue to disrupt international commerce, posing challenges for businesses seeking revenue stability.
However, there are solutions available
for importers and exporters.
But which is the right fit?
1. Ensuing trade and diplomatic war between the U.S., Taiwan, and China
The problem
2. Conflict in Ukraine and the resulting sanctions imposed on aggressor actors and their affiliates
3. Energy market volatility and the transition to renewable energy
4. Natural disasters caused by climate change
5. Risk of production delays during global pandemics (e.g., China’s zero-COVID policy)
Five key events currently affecting global trade:
But the solution isn’t so simple
Choosing an approach based solely on cost and transit time is easy yet risky, as businesses tend to disregard critical factors, such as:
Weighing all the options
An optimal solution for one business may result in supply chain delays and significant administrative burdens for another. The best course of action is to understand and evaluate all the options.
Low labor costs: Vietnam's $300/month versus China’s $1,000/month
China Plus One
Case study: Vietnam
Shifting production to a neighboring country
Pros:
Trans-Pacific Partnership (CPTPP) advantage: Provides duty-free access to goods imported into Canada from Vietnam.
Close geographic proximity to China:
Reduces time in transit for product inputs from China while maintaining comparable time in transit for final product exports.
Labor dynamics: Though some high-tech firms flourish, most laborers remain low to medium-skilled and there are frequent strikes.
Bureaucratic hurdles: Complex regulatory frameworks demand adaptability, adding administrative costs to businesses.
Infrastructure gap: Limited paved roads (20% of the network) and inadequate port infrastructure (ranked 80 out of 139 countries by the World Economic Forum) hinder seamless operations.
Customs scrutiny: Rapid growth brings Vietnam under the U.S. Trade Representative (USTR) radar. As a result, mislabeling and transshipment can often lead to higher tariffs on goods.
Nearshoring
Case study: Mexico
Relocating production closer to end markets
Mitigating Options
The three most common approaches to mitigating risk:
Keep the majority of production in China while shifting some to neighboring countries, such as Vietnam, Thailand, Malaysia, or India.
China Plus One
Relocate most or all production from Asia to countries closer to end markets, like Mexico, for U.S. and Canadian businesses.
Nearshoring
Shift production to politically-aligned countries and tariff regimes, such as those offered by Canada or Europe, for U.S. businesses.
Friend-shoring
Competitive labor costs: Cost-effective wages ($3.90/hr) compared to China’s ($5.58/hr) and the U.S.’s ($30/hr) attract industries seeking affordable production lines.
Favorable trade policies: Participation in regional trade programs, such as the United States-Mexico-Canada Agreement (USMCA) and its IMMEX program, aids in cost savings on labor and duties.
Shift towards sophisticated products: There has been a movement away from low-wage goods to instead produce rubber, plastics, transportation equipment, and primary metal manufacturing.
Political instability: Industrial policies hinder foreign investment, particularly in energy and renewable sectors.
Labor practices: Although the USMCA raises labor standards, it offsets business cost savings by increasing wages in the long term.
Infrastructure gap: Current improvement projects target only southern regions with minimal manufacturing.
Security concerns: Increased cargo hijackings (from 7,500 in 2012 to 35,000 by 2018) pose risks for high-value goods industries.
Brain drains: The pool of skilled labor is expanding, but certain high-tech industries may face limitations with talent, opting to emigrate to Europe or Canada.
Friend-shoring
Case study: Canada
Migrating production to a more politically aligned country
Reduced supply disruption risk: Created by harmonized regulations and robust infrastructure.
The USMCA advantage: Trade agreement membership offers preferential duty and a favorable investment climate.
Geo-proximity: Proximity to the U.S. reduces time in transit for the movement of goods.
Playing favorites: Friend-shoring is often seen as trade protectionism that favors industrialized nations with less competitive labor rates and limited market competition.
Cost burden: Higher wages offset cost savings from reduced spending on transportation and duties.
Impact of freight rates: Concentrated trade within North America affects freight rates and competitiveness globally.
Target market focus: Only benefits businesses with limited market goals (e.g., within North America).
Government policies: Recent government measures draw investments.
Example: The Government of Canada has put in place controls on mineral mines to ensure that minerals used for electric vehicles are used in North American factories instead of factories in China.
How to course correct
Navigating geopolitical challenges requires a nuanced approach.
Consider unique product characteristics and potential alternative supply sources
Evaluate existing supply chains to identify opportunities for efficiency and optimization
Instead of adopting band-aid solutions, businesses can make more informed decisions by partnering with experts who:
Helping you to make long-term decisions based on real-time data
Building more resilient supply chains that are better prepared to tackle unexpected challenges
An expert trade consultant can assist your business by:
Charting a stable growth trajectory backed by reliable supply and supplier relationships
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Quality of port and transportation infrastructure
Availability and skill of labor
Industrial policies, security, trade regulations, and tariff regimes
Free trade agreements
Regulatory requirements and political stability
Cons:
Pros:
Cons:
Pros:
Cons:
Copyright 2023, Livingston International Inc. Use of site subject to Livingston's Terms of Use policy
%
0
1.2
3.5
5.4
6.9
8.7
9.5
12.4
13.5
Increase in Vietnam's Foreign Direct Investment (FDI) in 2022, which attracted $22.4 billion in investments.
%+
0
122
148
153
164
170
195
200
250
Increase in imports into the U.S. from Vietnam in 2022, reaching $129 billion.
Example: The Government of Canada has put in place controls on mineral mines to ensure that minerals used for electric vehicles are used in North American factories instead of factories in China.
Reduced supply disruption risk: Created by harmonized regulations and robust infrastructure.
The USMCA advantage: Trade agreement membership offers preferential duty and a favorable investment climate.
Geo-proximity: Proximity to the U.S. reduces time in transit for the movement of goods.
Example: The Government of Canada has put in place controls on mineral mines to ensure that minerals used for electric vehicles are used in North American factories instead of factories in China.
Government policies: Recent government measures draw investments.
Playing favorites: Friend-shoring is often seen as trade protectionism that favors industrialized nations with less competitive labor rates and limited market competition.
Cost burden: Higher wages offset cost savings from reduced spending on transportation and duties.
Impact of freight rates: Concentrated trade within North America affects freight rates and competitiveness globally.
Target market focus: Only benefits businesses with limited market goals (e.g., within North America).
Pros:
Cons:
Friend-shoring
Case study: Canada
Migrating production to a more politically aligned country
Skilled labor: Highly skilled labor force enhances quality and allows for the production of more sophisticated goods.
Skilled labor: Highly skilled labor force enhances quality and allows for the production of more sophisticated goods.