Dive Brief:

• American business aren't moving manufacturing operations back to the U.S., instead opting to diversify across other low-cost manufacturing countries, despite the Trump administration's efforts to encourage reshoring with China tariffs or tax credits for companies, according to A.T. Kearney's Reshoring Index released this week.
• Imports from Asia increased by 9%, or $66 billion in 2018. The Reshoring Index, which measures the proportion of imports to domestic manufacturing output, decreased by 32 basis points, declining for the third year in a row.
• While overall imports from Asia have increased, the report notes imports from China have dropped significantly as firms look to diversify. "Companies are starting to realize that China is not a risk-free alternative anymore," Johan Gott, senior principal at A.T. Kearney, told Supply Chain Dive. "Even if the U.S. and China will come to an agreement around the current trade negotiations, I think all companies have started to realize that this is a much riskier relationship going forward than we thought."

Dive Insight:

"I think still there is a lot of hype around reshoring as a trend," Gott said. "What we have seen year after year is that reshoring on an aggregate scale ...is not happening. In fact, the proportion of manufactured goods that are coming into the U.S. from offshore has been increasing every single year. We have the highest reading now that the index has seen for the last 10 years."

In addition to the declining import ratio, the report indicates total U.S. manufacturing output declined by 150 basis points since December 2018, which the authors believe could indicate "a broader trade downturn that threatens both the U.S. and its partners."

A.T. Kearney also produces a China Diversification Index (CDI), which measures the volume of imports being diverted to other low-cost manufacturing countries. The latest CDI indicates there has been a deterioration of China’s role as "the factory of the world," according to Gott. However, this decline is coming faster than anticipated, with a sharp drop in import share over the past year as firms have diversified their manufacturing and sourcing. The CDI estimates China lost $72 billion in import value last year as a result.

"It used to be five years ago that China was sort of a no-brainer, a default option," Gott said, "but at this point, all clients are asking us 'what are the alternatives?', 'Should we be reviewing our footprint in China?', 'Where can we find alternative suppliers in the region?'" He continued to say some of these conversations and concerns have been coming up over the years as wages have risen in China and it becomes more expensive to manufacture there. However, the trigger point for the dramatic shift in the past year has been the trade war between the U.S. and China.

Multiple Southeast Asian countries stand to gain from this trade diversion including Bangladesh, India and Indonesia. The value of U.S. imports from Vietnam has increased the most in the last year, capturing $36 billion of the $72 billion in trade China lost last year. Vietnam's proximity to China's industrial infrastructure, and new manufacturing investments of its own, have made it the predominant alternative for U.S. firms looking to diversify in Asia, Gott said.

Given this shift, and long term trends that show an uptick in reshoring is unlikely to occur, the report says companies could focus on investing in R&D and creating jobs for higher skilled workers as factory automation continues to take hold and reduces the number of low-skilled jobs. But the majority of companies will continue to look offshore as the U.S. labor market is just not able to support the manufacturing capacity needed compared to other low-cost countries, Gott said.