FORTUNE: Manufacturers Are Considering Leaving China. But It Isn’t All Because of the Trade War

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An interesting piece from Fortune, with a few notes from yours truly…

The U.S. has levied 25% fees on up to $250 billion worth of goods imported from China, forcing manufacturers to either swallow the additional costs or pass the difference onto consumers. But reports suggest that some companies are choosing a third option: shifting production outside of China.

In a poll released by the American Chamber of Commerce (AmCham) and its counterpart in Shanghai last month, roughly 40% of 250 surveyed firms said they were “considering or have relocated manufacturing facilities outside of China.” In a similar AmCham survey last September, only 30% said they were considering partial relocation. However, the exit can’t all be chalked up to the trade war.

“Businesses moving supply chains out of China long predates the current trade dispute,” says Hannah Anderson, global market strategist at J.P. Morgan Asset Management. “Higher tariffs might have accelerated some of those plans that were already in place, which is certainly something that I’m seeing and hearing when I talk to CEOs, but very few companies hadn’t thought that far ahead already.”

Rising labor costs have been driving factory emigration from China since long before Washington’s tariffs were a factor. Minimum hourly wages in the major factory hubs of Guangdong province rose from Rmb4.12 in 2008 to Rmb14.4 ($2.00) last year. Manufacturers, particularly low value-added ones like textile factories, (TODARO: Note that often the word 'textiles' means fabric AND apparel) have sought even cheaper labor in Southeast Asian countries, like Vietnam and Malaysia.

The exodus of low-end manufacturing, however, could be an advantage for China in the long term, says Li Keaobo, the executive secretary general of the Center for China in World Economics (CCWE) at Tsinghua University’s School of Economics and Management. Li says the loss of low-cost manufacturing will force local factories to make advances in high value-added production, which is a transition Beijing approves of. (TODARO: Two things. Apparel is historically an entry level manufacturing industry. Secondly, the journalist ended the sentence with a preposition?)

Beijing established its desire for China to become a center for high-end manufacturing in 2015 when the State Council released the Made in China 2025 policy. The policy, akin to Germany’s Industry 4.0, deployed billions of dollars in funds to upgrade China’s manufacturing capabilities. However, whether China can achieve that goal without the help of subcontracts from Western companies is the very issue that precipitated the trade war. Read More