No. 4 Manufacturing News Story of 2022: A China Exodus?

Massive state support and a whole host of bad practices has allowed China to serve as the world’s factory for two decades. That started to shift in 2022. Will it last?

Editor’s note: The Alliance for American Manufacturing team is counting down the top manufacturing news stories of 2022 all this week. Read No. 5 here.

In 2001, China was admitted to the World Trade Organization (WTO). During the subsequent 20 years, the Communist Party of China (CCP) failed to follow the rules of international trade, enjoying what was basically free reign in matters of trade and state-sponsored manufacturing.

And American corporations loved it. Tens of thousands of U.S. factories closed, with production sent to China, where wages were low and environmental regulations were lax. American workers paid the price; 3.7 million U.S. jobs were lost from 2001 to 2018 due to the trade deficit with China, according to the Economic Policy Institute.

For years, it seemed like nothing would break China’s hold on manufacturing. But then came COVID-19, supply chain difficulties, increased geopolitical tensions, and a generational shift in U.S.-China relations. And now something that was somewhat unimaginable just a few years ago is happening: Factories are beginning to leave China.

CNBC reported earlier this month that U.S. manufacturing orders in China are down 40%, thanks to “a collapse in demand.” It doesn’t appear to be a blip, as CNBC reported back in October that “China is losing more manufacturing and export market share in key sectors to Asian neighbors.” Meanwhile, the Financial Times reported in November that factory managers in South China were reporting a fall in orders of as much as 50%; Reuters noted in late November that China’s manufacturing sector had hit a seven-month low.

But what may be more telling that big-picture number is the specific cases of major corporations who had long depended on China for manufacturing moving their production. Many are shifting to nearby countries such as Vietnam, Indonesia and Malaysia, while a select few have decided to return operations to the United States to eliminate the supply chain and quality control problems.

Here are a few examples:

• Apple, which has long made its best-selling iPhone at Foxconn in China, has begun to move some production to India and Vietnam and has indicated it will make more of its tech-industry leading products in the United States. Google’s newest Pixel phone will be manufactured in Vietnam instead of China.
• Internet giants like Yahoo and LinkedIn have withdrawn their services from China, citing the difficult operating environment and higher regulatory requirements in the world’s most populous country.
• Samsung has moved its Chinese manufacturing to Vietnam and toymaker Hasbro has left China for production facilities in India and Vietnam. Many apparel and footwear companies, including Adidas, have also moved at least some production out of China.
• Automobile maker Stellantis, which owns Chrysler, Peugeot, Maserati and other other brands, closed its manufacturing plant in China after meddling by People’s Republic of China (PRC) government officials. Many other manufacturers have either cut back or are pulling production completely out of China.

There are a number of reasons for the current manufacturing exodus, some of which couldn’t have been predicted just a few years ago.

COVID is perhaps the biggest factor. The pandemic led to a global supply chain crisis that made it harder to get goods into the United States from overseas, leading some corporations to consider reshoring or near-shoring production.

China’s zero-COVID strategy also has disrupted manufacturing and logistics and has increased many companies’ anxiety about doing continuous business in China. While the strict COVID policy has been lifted in recent weeks, China is now experiencing a widespread breakout of the pandemic that it had been able to contain with strict autocratic guidelines. This will, no doubt, further dampen its manufacturing capabilities and does not bode well for its manufacturing industry in 2023.

But there also have been U.S. policy choices made that have almost certainly contributed to American corporations exiting China.

It starts with the Trump administration, which imposed a series of steep tariffs on imports from China in response to the two decades of the CCP’s unfair trade practices. Many observers predicted that the Biden administration would remove the tariffs, but that hasn’t happened – and indeed, Team Biden has looked to find new ways to hold China accountable for its bad actions.

Politico reported this week that the Biden administration is “quietly reshaping the American economic relationship with the world’s second-largest economic power, enacting a strategy to limit China’s technological development that breaks with decades of federal policy and represents the most aggressive American action yet to curtail Beijing’s economic and military rise.”

Much of this is centered on technology, from looking to stop China from manufacturing advanced computer chips to banning commercial exports of advanced technology to China. The administration is even beginning to crackdown on the popular social media app TikTok, which is owned by China.

There also are new laws in effect to tackle some of China’s most egregious practices.

Another such example is the Uyghur Forced Labor Prevention Act (UFLPA), which prohibits any imports from Xinjiang province into the United States due to the ongoing genocide of the Uyghurs and other minority groups in the region. Passed with overwhelming support by a bipartisan Congress, the UFLPA addresses human rights abuses by the CCP, which has used what amounts to slave labor by a mostly Muslim community in Xinjiang to increase its manufacturing capabilities.

Thanks to the law, some corporations have begun to examine their production in China, with some moving their manufacturing out of China or working to cutting back on Chinese-produced products. Other countries around the world have also taken notice; the European Union has also begun to put restrictions on products manufactured in the region.

To be fair, there’s still plenty of manufacturing happening in China, and it’s unclear whether all of this change will last. The CCP has long shown a willingness to spend whatever it takes – and do whatever it takes – to dominate industry and achieve its goals.

That is why the United States must hold steadfast, from a continued support for tariffs on Chinese goods to following through on a strategic decoupling from China to a willingness to fully enforce laws like the UFLPA. China is still in the game, and the U.S. must do whatever we can to level the manufacturing playing field.