Recently, I received an e-mail from a U.S. electrical products company warning me that, on Oct. 15, the tariff on power supplies and power cords imported to the U.S. from China would increase from 25 percent to 30 percent. Not to worry, the company assured me, it was mitigating the effect of the tariff by moving assembly of its products from China to a new factory in the Philippines.
Somehow, I don’t think that’s what the Trump administration had in mind when it launched its trade war with China two years ago. According to a survey conducted by the U.S.-China Business Council, 18 percent of U.S. companies either have moved or plan to move operations out of China this year, compared with 10 percent in 2018. Unfortunately, they’re not necessarily moving it back to the U.S.
That’s the problem with tariffs: There’s always someplace cheaper.
Consider Malaysia. In 1972, Intel built its first international factory in Penang. Other U.S. tech giants soon followed, including Broadcom, Dell and Motorola. Then, in 2005, foreign direct investment in the country tailed off as companies focused their energies on China. Now, thanks to the trade war, production is moving back to Malaysia. Foreign direct investment in the country has increased 11-fold to about $2 billion in just the first half of this year, much more than it has attracted in any other full year. Micron and Jabil are among the U.S. companies that have recently announced plans to build massive new factories there.
Nor is Malaysia the only country in Southeast Asia to benefit from the trade war. For example, Vietnam posted a record $39.5 billion trade surplus with the U.S. last year, and exports to the U.S. from Vietnam are up 21 percent in just the first eight months of 2019. Similarly, WHA Corp., the top commercial real estate firm in Thailand, states that Chinese manufacturers will account for half the company’s land sale contracts this year, up from about 12 percent in 2018.
When Southeast Asia no longer becomes viable as a low-cost manufacturing center, perhaps OEMs will shift production to Africa. It’s not so far-fetched. Mara Group, a pan-African technology and financial services company, has launched the first fully “made in Africa” smartphones in Rwanda. The company opened a new manufacturing facility in the country’s capital, Kigali, in October. Mara isn’t just assembling phones in Africa; it’s handling the entire manufacturing process, from making the motherboards to packaging the phones for sale.
Rather than play tariff whack-a-mole, let’s adopt strategies that improve our skilled workforce, encourage investment in productivity-enhancing technology, and enable U.S. manufacturers to better compete with low-cost overseas labor.