The retail supply chain awaits 2025’s disruption

Rosemary Coates, the executive director of the Reshoring Institute, has had a front-row seat to manufacturing in China and the current reshoring/nearshoring trend. Speaking at the 2023 ISM World Reimagine conference in Las Vegas, she spoke about the history of outsourcing production to China.

“I’ve been in the supply chain business for nearly 40 years, and during that time, the growth in manufacturing and sourcing from China was tremendous,” Coates said. “During the late 1990s and the early 2000s, this was the strategy of most companies … Most of my clients were interested in going to China.”

Why China?

Why were so many companies interested in China? The answer was simple: cost. At the time, manufacturing costs were significantly cheaper in China, particularly labor. Coates said a facility in China at the time was paying its employees $3.63 per hour compared to a similar job in the U.S. that paid $26 per hour and one in Europe paying $32 per hour at the time.

But times have changed. In recent years, tariffs have become the word of the day. President-elect Donald Trump has proposed a wide swath of tariffs of 10% on everything coming into the U.S., regardless of country of origin, and up to 60% on goods from China.

Retailers are not welcoming this development. Speaking on Bloomberg in November, National Retail Federation CEO Matt Shay, citing a recent NRF study, said consumers could lose up to $80 billion in annual spending power if the tariffs are enacted.

“There have been other studies out there that this would cost between $2,500 and as much as $7,000 per household per year,” Shay added. “So very, very significant consequences if the President-elect goes through with the kinds of things he said about increasing mandatory tariffs on all imported goods.”

Regardless of the tariffs, Shay said retailers have been exploring alternative sourcing locations for the last several years.

“As the economy in China has evolved over the last 15 years to 25 years, their consumers have moved into the middle class. Labor costs have increased. Retailers and other importers were already working dramatically to move their supply chains out of China because of increased labor costs and find other markets to produce those goods for import into other countries like the U.S.,” he said.

Where do retailers go?

Going back to 2012, Coates noted that a shift in supply chains was beginning to happen. It started, to Coates, when Barack Obama and Mitt Romney were battling for the White House. Both candidates were “China bashing like crazy” and saying China was “stealing our jobs,” Coates said.

“It really sparked some conversations with a lot of my clients who started to say, is it even possible to bring manufacturing back to the U.S.? Is it even possible because of the cost structures and so forth?” she said.

The initial fuse in reshoring and nearshoring had been lit, but it was the first Trump presidency that expanded it. Under President Donald Trump, tariffs of 25% were instituted on many Chinese goods, including steel and aluminum, and quality of goods started to slip. In addition, counterfeiting exploded and long supply chains were adding cost.

Then came Covid, and lean manufacturing proved problematic, as did sourcing goods from a single location. So, companies started looking elsewhere to diversify supply chains.

What has followed is a cascading series of events—Russia’s invasion of Ukraine, renewed emphasis on forced labor laws, Panama Canal water levels dropping, and Red Sea attacks to name a few. “The mood of America has certainly changed,” Coates said.

Some goods, such as labor-intensive clothing, will continue to be made overseas, Coates noted, but other items that are more reliant on technology, such as semiconductors, could be made competitively in the United States.

“These caused this rethinking of what’s happening in the global economy,” Coates said. “So, most of the companies, most of our clients are doing a few things. Reshoring, nearshoring, a China plus one strategy. We usually advise our clients not to pull everything out of China, but to at least keep some manufacturing there to serve the Asian marketplace or to keep some sort of lower-end products being manufactured in China.”

Retailers have been moving to other Asian countries, such as Vietnam and Malaysia. India is also seeing an increase in manufacturing facilities, and Mexico has been perhaps the biggest individual winner since the shift away from China began. But all those countries would also be subject to the Trump tariff plan.

“Retailers rely heavily on imported products and manufacturing components so they can offer their customers a variety of products at affordable prices,” NRF Vice President of Supply Chain and Customs Policy Jonathan Gold said. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”

Supply chain impact

The nearshoring/reshoring trend is likely to accelerate, and cost of goods aside, the trend continues to have a significant impact on supply chains.

There were approximately 20,900 monthly cross-border freight movements between the U.S. and Mexico in 2023. “When you look at Mexico-U.S. trade, it’s accelerating at a growth rate that we’ve never seen before. It’s now the largest freight lane in the world,” said Luis Erana, CEO of ProTrans, in a previous LM article looking at cross-border freight.

As more companies move manufacturing into Mexico, it is shifting goods movement from ocean to rail and truck. It’s also changing the costing dynamics. Retailers are working the numbers on this change, but for some products, such as labor-intensive clothing, they will continue to be made overseas, Coates noted.

“Most of the companies, most of our clients are doing a few things,” Coates said. “Reshoring, nearshoring, a China plus one strategy. We usually advise our clients not to pull everything out of China, but to at least keep some manufacturing there to serve the Asian marketplace or to keep some sort of lower-end products being manufactured in China.”

Shay is concerned that tariffs may slow what has been a steadily improving economy.

“A tariff is a tax on the importer, which gets passed on to the end users, the consumers, or the price of the input good that’s being produced here in the United States,” he told Bloomberg. “We know in this environment with high inflation, with consumers focused on value and price, retailers and others won’t have any choice but to pass on those cost increases and raise prices; that’s going to be inflationary. It’s going to be regressive. It’s going to hurt families making under $50,000 a year, and it’ll make us less competitive. And it’ll slow our economy’s growth.”

And that will make the economics of the supply chain even more challenging as companies look for lower-cost countries not subject to high tariffs. Once again causing a shift in supply chains and the need to redesign product flow.

First it was COVID. Then it was a drought in the Panama Canal. Then the Red Sea attacks. And now, maybe a shift in sourcing. The supply chain manager’s job, it seems, is never done.