What is preventing companies from pulling supply chains out of China?
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About the author: Christopher S. Tang is the University Distinguished Professor and the Edward W. Carter chair of business administration at UCLA’s Anderson School of Management. Richard S. Paegelow is the executive director of Inline Translation Services in Glendale, California.
President Biden and Chinese President Xi shook hands for the first time on November 14 since Biden became US president. This face-to-face meeting on the sidelines of the G20 Summit has reduced tensions and can prevent a new cold war between both countries. At least for now.
Some may criticize Biden for not declare a clear trade policy with China at this meeting. But there are advantages in not acting hastily. In effect, Biden is buying time for American companies to build resilient supply chains.
Indeed, Biden is paving the way to to separate are from China. However, he needs to remove some of the barriers that are hindering efforts to bring workers back abroad.
Despite the political rhetoric, American companies are still heavily dependent on China’s manufacturing capabilities. Container imports from China fell 5.5% in October due to the ongoing trade war and China’s Covid-19 pandemic blockade. But China continues to grasp 35% of total U.S. containerized imports.
The Biden administration is working on two strategies aimed at allowing US companies to reduce their supply chain reliance on China.
The first strategy is to encourage companies to diversify their supply bases globally beyond China. In May, Biden launched Indo-Pacific Economic Framework for Prosperity strengthen trade relations with 12 original partners including India, Japan, Korea and account for 40% of world GDP. The aim of this initiative is to improve supply chain resilience by make friend from countries with common values. This initiative fills the void created by the administration denial at the end of 2021 on the US plan to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
The second strategy is to encourage companies to move their production back to the United States for critical products such as semiconductors and electric vehicles. Biden maintain the 25% tariffs on $250 billion of Chinese imports imposed by former President Donald Trump. In August, Biden also signed the Inflation Reduction Act and the CHIPS and Science Act. The law provides subsidies and tax incentives to strengthen the United States’ competitiveness in the production of electric vehicles and semiconductors, while creating more domestic jobs in the clean energy economy.
These strategies hold promise, but there are four main factors preventing companies from moving their supply chains out of China and back into the United States and its allies.
First, the reshoring strategy needs to deal with higher labor costs in the US than in other markets. To reduce costs, American manufacturers must take advantage of automation and information technology. Advanced robotics and artificial intelligence can streamline workflow and improve efficiency. By increasing labor productivity and paying higher wages to fewer workers, companies can effectively reduce labor costs. However, some labor unions remain adamant against automation, especially at ports. As a case in point, although US ports are ranked among least efficient port around the world by 2021, unions representing workers at 29 West Coast ports continue anti-automation during ongoing contract negotiations with terminal operators. The Biden administration needs to strike a balance between union interests and business needs to modernize production. Doing so will help create jobs in the union countries.
Second, complex environmental regulations discourage U.S. companies from relocating their manufacturing operations back to the United States. Environmental Protection Agency regulations need to be simplified to strike a balance between environmental protection and supply chain security. The EPA removed unnecessary and inappropriate burdens on the US energy industry in August 2020 after Trump requested a thorough investigation. review. Biden should ask the EPA to review the burdens and streamline its review process in the semiconductor and electric vehicle sectors.
Third, better metrics help. There should be a specific, universal measure of “supply chain resilience” as much as a simple measure of “return on assets.” Some companies will be reluctant to repatriate because of Wall Street embrace the company’s light assets has intellectual property and brands that offer potentially spectacular returns on minimal capital. To combat this mispricing of companies, Biden could ask the Securities and Exchange Commission to consider including supply chain resilience as an additional risk factor that companies may not be aware of. The manufacturing company must disclose it publicly. Doing so will encourage more companies to commit to reshoring by investing in tangible assets such as plant and equipment.
Fourth, better tax incentives can encourage reshoring, or at least discourage offshoring. In 2022, companies that have invested heavily in the foreign model do not have an immediate need to move operations back abroad. The Tax Cuts and Jobs Act approved in 2017 that allows companies to move profits overseas for tax breaks. By law, the United States does not impose taxes on profits abroad that do not exceed 10% of the tangible assets the company holds abroad. a proposal global minimum tax of at least 15% will discourage offshoring. It will cut corporations’ ability to reduce taxes by moving part of their business overseas at a lower tax rate. Implementation of this 135-country tax deal has been slow, but Biden can help propel it.
By adopting measures like these, Biden can help ensure that the next handshake takes place under very different economic conditions.
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