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US supply chains under pressure from global and domestic trends and trade policies

The world is shaped by increasingly protectionist trade policies, causing a notable decrease in world trade growth. We saw global value chain-based trade grow rapidly in the 1990s, but it stagnated after the 2008 global financial crisis. The decade long decrease in global trade growth that followed, has been propelled by increasing protectionism through import tariffs and other limiting trade policies.

The US has been a key player in the global protectionist trend, with the US-China trade conflict as a key trigger to the reversal of trade liberalisation that begun in mid-2018. The current administration has also walked away from the TTIP and TPA free trade discussions, threatened to apply tariffs to EU automotive and steel, undermined the role of the WTO, and reversed decades long government policy by extending the regulations around federal government purchases of foreign and domestic products through the Buy America Act.

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The repercussions of the US swing towards protectionism, disproportionately affecting many of their largest trade partners including Canada, China, Germany, Japan, Korea, Italy and Mexico, are reverberating across all industries making it increasingly difficult to trade while also creating a climate of uncertainty with the fear of retaliation through government policies a constant concern.

RAPID REALIGNMENT OF SUPPLY CHAINS

Growing protectionism have also forced a rapid realignment of global supply chains, especially for companies aiming to stay competitive in the US. Uncertainty about the direction of ongoing trade conflicts, upcoming US elections, the longer term Covid-19-impact and the risk of new disruptive events have all played a role in this rapid realignment – but also the increased attractiveness of the US manufacturing industry.

In parallel with trade policies with the primary goal to bring manufacturing and jobs back to the US, actions have also been taken to strengthen the US manufacturing industry. This appeal is driven by increased productivity, lower energy costs, increased protection of intellectual property, and a growing awareness of Made in America. Coupled with the recent reduction of the corporate tax rate from 35 percent to 21 percent, in a bid to be more competitive with China’s 16.6 percent, these factors are further prompting companies to take advantages of US opportunities.

Since 2019, reshoring, nearshoring and a China +1 strategy with an aim of diversification from China towards other Asian low-cost countries (LCCs) have all increased. In the same year, domestic US manufacturing import ratio increased for the first time since 2011, almost exclusively driven by the collapse in imports from China which declined by 17 percent. This correlated with US companies choosing to source more goods domestically than offshore by a substantially increased margin.

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