KTEP - El Paso, Texas

What It Would Take For U.S. Companies To Switch Supply Chains Away From China

May 14, 2019
Originally published on May 14, 2019 5:25 pm
Copyright 2019 NPR. To see more, visit https://www.npr.org.

ARI SHAPIRO, HOST:

If you dig into how a smartphone or bicycle or a pair of shoes is put together, you will eventually reach China. Even companies that make products in the U.S. often get their parts from China. This week, President Trump suggested that to avoid tariffs, those companies should buy parts domestically or from a different country like Vietnam.

To get a sense of what it takes to move a global supply chain, we're joined now by Mary Lovely, an economist with Syracuse University. Welcome to ALL THINGS CONSIDERED.

MARY LOVELY: Thank you, Ari.

SHAPIRO: Have you already started to see manufacturers move their supply chains out of China as a reaction to these tariffs?

LOVELY: Well, there certainly have been a lot of reports, and we've seen some. But on a scale that would move China's exports here very much - no, not yet.

SHAPIRO: Why do you think that is?

LOVELY: Well, the adjustment is going to be costly. You have to either find a new supplier or build a new factory. And so far, the tariffs have been conditional. You know, we might get a deal. The president might roll them back. So if firms believe the tariffs are temporary and there's a lot of uncertainty, then they won't go ahead and make that investment.

SHAPIRO: Is it harder to move production of a high-end product like a smartphone than something like a pair of shoes?

LOVELY: Definitely. It's not only just the production process itself. There's a whole host of other things. So for example, in shoes, say an American company may have a set of representatives who go out and find subcontractors. These subcontractors may change from season to season. Some subcontractors go out of business. Some of them don't provide the level of quality that was wanted. So there's a lot of fluidity in this process. And they can switch suppliers pretty quickly.

When we look at something like an iPhone, you're seeing a process where at each point along the way, Apple has a role to play with very specific technology that's done in a very specific way to very high standards. And moving that kind of supply chain from the people you know and trust and have had relationships with for a long time is going to be costly and much more difficult.

SHAPIRO: Do you think there could come a point when the trade war stretches on for so long or the tariffs get so high that companies decide they're just going to suck up the costs and relocate?

LOVELY: Yes, and I think we're approaching that point. Businesses aren't seeing the trade conflict calm down. They're actually probably seeing it escalate. So this may be the time that firms actually say, hey, this is going to be around for quite a while, and maybe it's the time for us to start making the investments that we need.

SHAPIRO: China is so large. If American manufacturers did decide to move their supply chains out of China, is there capacity in other countries to pick up all of this business?

LOVELY: Short answer is really no, not in the short run. Longer-term, countries like India which have a large, untapped population that would like to be more deeply embedded into global value chains - they will be able to come online and gradually get the capacity to replicate what China had done. That's not just building factories. It's also developing the skills within the population, within the managers to get things like failure rates very low.

You know, we kind of take for granted if we buy a television set that's made in Asia that it's going to work. This wasn't always the case. Products have gotten to be very good. And as we shift supply chains, you know, we'll see those types of costs going up where you get a piece of equipment, and it's what we might call a lemon, and you take it back to the store. That's going to raise the costs for the companies that are involved in that business.

SHAPIRO: Mary Lovely is an economics professor at Syracuse University. Thanks for joining us.

LOVELY: Thanks, Ari. Transcript provided by NPR, Copyright NPR.