For years, offshoring to China, for operations, supply chain, or otherwise, was routine, seen by businesses as a means to cut costs and increase profits.
However, foreign businesses operating in China, or whose supply chains involve China, are experiencing increased costs, whether in the form of regulatory compliance costs, increased dues and tariffs on imports from China, or increased costs of goods in China itself, all of which have eroded profit margins for some businesses. Recent supply chain shortages and delays, even after the COVID-19 pandemic, have undermined normally efficient and timely processes, and further cut into profits. The changing state of diplomatic affairs between the United States and China alone gives rise to uncertainty for businesses.
Imports from China have been declining steadily since last year and, in 2023, the U.S., once China’s largest export market, became only its third largest, behind the Association of Southeast Asian Nations and the E.U. China’s share of U.S. imports in the furniture, textile, and machine industries is at its lowest level since 2015. This decline in imports is partly attributable to the recent acceleration of supply chain reshoring, or domestication, among U.S. businesses, and rising imports from other countries, including Malaysia, Vietnam, India and Mexico.
Indeed, businesses big and small, from Adidas, Apple, Nike, and Samsung on down, have been reevaluating their operations and supply chains involving China, and are either pivoting from China completely, via a clean break, or partially, adopting what is called the “China plus” strategy. They have found that adopting a “China plus” strategy, for example by engaging additional manufacturers or suppliers in other countries, prevents reliance on any one source, providing a buffer against supply chain shortages and delays, or unexpected changes in cost or regulation. In any case, businesses that are considering shifting their operations and supply chains, or at least parts of them, elsewhere should do so responsibly.
As with any relationship, the parties and countries with which businesses are newly associating ought to be appropriately vetted, to ensure that what they have to offer works practically and in accordance with law. Businesses should consider:
- Industry
For some industries, if sufficient alternatives in other countries are available, it may make sense to clean break from China; for others, where alternatives are sparser, it may make sense to adopt a “China plus” strategy. For example, some businesses in the electric vehicle, lithium battery, semiconductor, and rare earth industries have found success completely reshoring their operations, manufacturing, and production, because of increased domestic investment in those areas. Businesses in the solar panel industry have found success completely outsourcing to countries like Bangladesh, Cambodia, Malaysia, the Philippines, and Thailand. The furniture and textile industries have found success paring back in China while expanding parallel operations and supply chains in different locales familiar with the processing components from China, such as Mexico and Vietnam.
2. Resources
The capital at a business’ disposal is always a consideration; a “China plus” strategy, in integrating more players, is likely to add costs in some aspects, but may save costs that would be associated with a clean break. Additionally, a business will need to have adequate human resources at its disposal, not the least of which is personnel competent and experienced in managing complexities across different jurisdictions and involving various parties, and in handling increased responsibilities in inventory and transit.
3. Logistics
Logistics will need to be considered as well. With the “China plus” strategy, adding more sources, as opposed to replacing sources in China in their entirety, may involve more handlers and transit throughout a business’ process. This requires that businesses consider their internal procedures and their obligations to their customers, and whether the time required by adding more sources aligns with the same. Will cultural issues and holidays (formal and informal) present any issue regarding timely manufacture and delivery?
4. Payment
Additionally, when engaging any foreign parties, businesses should consider the applicable foreign currency controls, and payment logistics. Establishing foreign bank accounts and know-your-customer requirements can be burdensome and time-consuming. A business should check to see if its bank is able to timely issue payment to, and receive payment from, the foreign party or foreign jurisdiction, and also whether the foreign party is affiliated with a domestic affiliate or subsidiary for payment purposes.
5. Due Diligence
Whether breaking cleanly from China, or bringing other players into the mix, a business ought to properly vet the parties and the jurisdictions with which it is dealing. Physically visiting and inspecting the parties and their operations, if reasonable, is preferred. One cause for concern, for instance, may be where a party has a physical office location, but no manufacturing presence, creating risks of product origin misclassification for U.S. tariff purposes, which can lead to fines and penalties. A business at the very least should have been referred to the parties by a trusted and reputable source, or know that the parties are dealt with and respected by others in the industry.
A business should audit the parties and their processes, and ensure alignment with its own and with the processes of any other parties involved. Such should include a review of contractual arrangements between a party and its subcontractors or suppliers, to ensure that any one party is not overly reliant on another’s performance.
For compliance with U.S. Customs regulations, parties exporting goods to the U.S. should be able to provide businesses with bills of lading demonstrating the movement of the goods for each shipment, invoices and proofs of payment (where appropriate) for any components of such goods, and exporter certifications describing the origin of the goods and any components thereof.
Depending on the countries and goods involved, it may be helpful to engage a qualified attorney for a review of U.S. Customs regulations and other applicable domestic laws (such as export controls on certain goods, including sensitive industries [advanced computing and semi-conductor, AI, encryption, geo-location, etc.] and military goods), and the applicable laws of the foreign jurisdiction, to ensure businesses are (or would be) compliant and that they understand any resulting changes in duties or tariffs, processes, responsibilities, and risks involved. Customs, for example, determines the “country of origin” of a particular good based upon the extent to which it is manufactured or transformed in any particular country, and the “country of origin” determination affects the applicable duties (including anti-dumping and countervailing duties) and tariffs.
The Bureau of Industry and Security of the U.S. Department of Commerce maintains lists of countries, goods, entities, and individuals subject to controls, bans and other sanctions. The lists, including a Consolidated List, can be located under the “Policy Guidance” tab at bis.doc.gov/index.php. Banks, too, will often flag certain entities and individuals. Before considering engaging additional or new parties, especially in other jurisdictions, a business ought to check against the Bureau’s lists and consult their bank.
A business that is pivoting from China—or anyone considering business abroad—would do well to assess carefully the alternatives and associate with proven parties, with strong track records, and in reliable locations. One should do so only after assessing and accommodating for the landed costs of goods (including duties and tariffs), risks and responsibilities involved, with the consultation of the appropriate professionals.
Author Bio
Charles Baldwin is a partner and Mousa Alshanteer is an associate with the North Carolina law firm Brooks, Pierce, McLendon, Humphrey & Leonard, LLP (“Brooks Pierce”). Both have significant experience in helping companies pursue business overseas. This article expresses the views of the authors, is for educational purposes only, does not constitute legal, tax, or other professional advice or express the views of Brooks Pierce. You are advised to seek independent legal advice regarding any international transaction.
