The headache of rising freight costs and difficulty achieving on-time delivery during the pandemic was enough to create momentum around the topic of nearshoring. Diversifying away from China is now further bolstering the case to bring production closer to home.
Central to the conversation is the Biden administration’s push to create more resilient supply chains after what happened during the COVID pandemic.
Between 2020 and 2022, there has been movement away from trade with China, and that trade is now being spread out to other parts of the world, according to Jennifer Knight, deputy assistant secretary for textiles, consumer goods, materials, critical minerals, and metals at the U.S. Department of Commerce’s International Trade Administration.
“This is not a partisan issue. I think that on both sides of the aisle, people are ready to serve the supply chain with regionalizing,” Knight said during the panel. “We’re trying to de-risk from China. So this is a movement I think everybody’s concerned about and this administration has also taken a slightly different approach to trade.”
That is, the emphasis is not on working out traditional free trade agreements. Instead, Knight said, the focus has been on “dialogues” related to “worker-centered” trade policy that ensures better conditions for labor.
For companies, the decision to diversify sourcing or re-tool where production occurs doesn’t come down to a single factor, as mentioned by executives from Keen and Black Diamond Equipment during the OR panel.
“The recommendation here is to know the specifics of the target you’re looking to source,” said Fabian Garza, vice president of operations at Black Diamond. “You want to know what materials, what technologies, and what the labor content requirements are. And that’s really going to help guide where you can make (product).”
Sara Bowersox, senior manager of global trade compliance at footwear brand Keen, offered a similar take when she suggested companies look at their product or idea as their North Star when it comes to sourcing and production decision-making.
“It’s interesting to think about supply chains because it’s really doing it backwards,” Bowersox said. “In this industry, and in any industry, we design a product or you come up with a concept, and then you have to figure out where you’re going to make this product. Nobody, and I mean nobody, builds the perfect supply chain and then comes up with the product to fit in that supply chain.”
Keen made the decision to bring production in-house, opening a factory in the Dominican Republic in 2021. The facility today continues to produce Keen-only product.
“The original seed of the concept as to why we wanted to nearshore as opposed to continue making things farther from location for us was primarily driven by cost,” Bowersox said.
In Keen’s case, it faced a 37.5% duty on its footwear coming into the U.S. Keen Dominican Republic allows it to avoid some of those costs.
“Trade agreements are complicated, hairy monsters,” she said. “They are not amenable for everything. So we couldn’t make, for example, every type of Keen shoe at our factory there and have it come into the U.S. duty-free. Not everything would qualify. So, we’re very strategic about the product that’s made there.”
The Dominican Republic facility, from a logistics standpoint, is beneficial because it reduces transit time from the factory floor to Keen’s Kentucky distribution center, which services wholesale and e-commerce orders.
Politicians are looking to craft legislation that would further the diversification trend.
Draft legislation, led by Senator Bill Cassidy (R-La.) and Senator Michael Bennet (D-Colo.), called the Americas Trade and Investment Act, looks to expand trade among Western Hemisphere countries in a bid to counter dependence on China.
Ron Sorini, co-founder of Sorini, Samet & Associates, guessed the legislation is likely to pass through Congress in 2024 and could include, among other things, tax breaks and investment that would address factors such as skill deficits in some Central American countries.
Sorini’s firm advises companies on matters related to trade agreements, supply chain management, and foreign trade zone approval, in addition to doing trade-related lobbying.
“We’re going to have to rely on Congress … to create incentives for companies to move out of China and the general area because it’s not easy,” Sorini said. “The supply chains are so entrenched there.”
Knight’s focused on attracting investment in Central America and said in the first 18 months of the Biden administration, they’ve managed to attract $1.4 billion in textile and apparel investment. Target recently committed to purchase $2.5 billion in textiles and apparel over the next decade in the region.
Key to all this will be bolstering countries’ infrastructure, whether that be in the labor pool or how freight moves within and out of regions.
Knight said for smaller businesses considering Central America, Guatemala is a good place to start. Honduras, which is known for its ability to produce large quantities of T-shirts and underwear, is likely to see more diversification moving forward, Knight said. Meanwhile, El Salvador, she said, offers a range of core competencies, including a synthetics hub that produces high-end activewear.
“Clearly, whether it’s major brands, other companies – people are trying to figure out how to diversify,” Knight said. “As I’m sure many of you know here it’s challenging because there are not many other parts of the world that are really set up to service the trade like China has been for the last 40 years.”
Kari Hamanaka can be reached at email@example.com.