Despite significant financial and political pressures, many companies are still not moving their production and manufacturing out of China. Why not?
With the current geopolitical challenges between China and the United States, as well as the ongoing supply chain issues affecting manufacturers and consumers, there’s been much talk about moving global manufacturing out of China.
This move reinforced China’s growing role in global trade. Since then, much of the world’s manufacturing base has migrated to China, attracted by low-cost labour and favourable policies from the Chinese government. These policies include massive investments in infrastructure and trade capacity. After the COVID-19 pandemic caused chaos in global supply chains, there were calls to bring manufacturing back closer to home either by “nearshoring” — building factories in Mexico for the U.S. market, for example — or reshoring back to home countries.
Chinese labourers are both more expensive and more productive than labour in other emerging economies in Asia. Both of these factors must be taken into account when making the decision to relocate production out of China. But this is only part of the story. China’s manufacturing industry has access to a high level of agglomeration economies — or ecosystem. Take the example of producing a hoodie. It’s not just about the textiles needed to cut and sew into a hoodie. It is also about the trims, dyes, zippers, cords and other necessary pieces that are required for assembling the product, Eiger explained.
If a retailer in the U.S. or Canada wants to move the production of the textiles it sells out of China, it would have to move the entire ecosystem with it. Either that, or they would need to source the inputs needed from China into other countries like Bangladesh, where final production would take place.
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