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Reshoring' Report Finds Factory Work Not Returning to U.S. --Update

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07/12/2019 | 12:22pm EDT

By Jennifer Smith

American trade policies aimed in part at returning factory work to the U.S. appear instead to be accelerating a shift in production from China to Vietnam and other low-cost nations, according to a report released Wednesday.

Despite escalating tariffs between the U.S. and China, American imports of manufactured goods from China and 13 other Asian countries rose 9% in 2018 to $816 billion, the largest annual increase in nearly a decade and outpacing a 6% increase in domestic manufacturing gross output, according to consulting firm A.T. Kearney Inc.

The firm said its annual index measuring the ratio of U.S. imports of Asian-made goods as a percentage of domestic manufacturing output reached 13.1% in 2018, up from 12.7% in 2017 and the highest A.T. Kearney has found in the past 10 years.

"The trade war has not supported reshoring," said Johan Gott, a principal at A.T. Kearney and a co-author of the report.

"What we do see is a sort of China diversification," he said, as companies look to reduce their exposure to trade tensions, rising Chinese labor costs and other risks.

Some American companies have halted or delayed plans to expand domestic plants as tariffs on Chinese imports increase the cost of products from bicycle parts to the components used to assemble loudspeakers.

Others are reshaping their supply chains, moving some production to Vietnam, the Philippines, Cambodia and India. Such shifts can take months and sometimes lead to logistics bottlenecks and other complications. Although labor tends to be cheaper in other parts of Southeast Asia, logistics infrastructure and factory capacity often aren't as well-developed as in China.

The report said China remains the largest source of U.S. imports among Asian countries, accounting for nearly two thirds of the $816 billion total. But its share has been falling in recent quarters as U.S. companies stockpiled Chinese imports late last year ahead of anticipated levies and as some businesses sped up the movement of manufacturing to lower-cost Asian countries such as Vietnam.

Five years ago, China accounted for 69% of U.S. imports from those countries, Mr. Gott said.

In the first quarter of 2019, that share dipped to 60% from 65% in the prior quarter. The long-term decrease, from the fourth quarter of 2013 to the first quarter of 2019, is equivalent to a loss of $72 billion in import value, the report said, more than the total value of 2018 imports from India, which at $51 billion had the second largest share of imports to the U.S.

Mexico also has benefited from the U.S.-China trade fight, increasing its exports to the U.S. by $28 billion last year, a 10% jump from 2017, according to the report.

"More companies are getting smart and they are moving production to Mexico," said Joel Sutherland, managing director of the Supply Chain Management Institute at the University of San Diego School of Business and a director of the Reshoring Institute, a nonprofit that supports expansion of U.S. manufacturing.

Although some companies are looking at bringing manufacturing back to the U.S., Mr. Sutherland said those efforts tend to focus on precision manufacturing and operations, where automation and technology help reduce the higher cost of domestic labor.

Write to Jennifer Smith at jennifer.smith@wsj.com

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