Analyst Insight: In the coming year, global manufacturing and supply chains will face uncertainty and change as they grapple with new protectionist trade policies, growing constraints around critical minerals, and the need to diversify beyond China, reshaping their supply chains. They must ensure uninterrupted supplies while attempting to increase profitability and run their teams on fixed resources.

Protectionist Trade Policies

President-elect Trump has proposed broad-based tariffs of 10-20% across imports, with Chinese goods potentially facing up to 60% tariffs. While some exemptions may emerge, given the President’s preference for one-on-one negotiations, the overall direction suggests higher costs for global sourcing. Organizations will also need to prepare for “Buy American” provisions that could require reshaping of their sourcing.

These new policies all point to increased costs, particularly for organizations relying on Chinese materials and manufacturing capacity. The pressure to manage these increased costs will be immense. Simply squeezing suppliers isn’t a viable long-term strategy, as that could jeopardize crucial relationships. Chinese suppliers may have some room to absorb margin erosion from the tariffs, but for the most part, procurement teams will face tremendous pressure to find other ways to offset increased costs from tariffs or new supply sources.

“Asia Plus One” Strategies 

As tariffs make China a less attractive low-cost option, Southeast Asian countries offer an alternative that still provides the benefit of a regional manufacturing hub and low labor costs. Companies that had previously followed a “China plus one” approach — relying on China for low-cost needs while maintaining another source not exposed to the same geopolitical risks — will adopt "Asia plus one" strategies, spreading their operations across multiple regions while maintaining some presence in China. 

Diversifying their supply chains by sourcing from low-cost Asian countries such as Vietnam and Thailand will help insulate organizations from the tariffs and geopolitical tensions that will likely continue to impact trade with China. This approach helps buffer against unexpected shocks, while preserving access to established supply networks. 

Some organizations will also explore nearshoring options in Mexico, Eastern Europe or elsewhere, though the feasibility varies by industry. Many industries cannot easily relocate their operations, due to established manufacturing clusters and specialized supplier networks. Recreating an intricately connected network of suppliers in new markets takes time. In the meantime, companies will face not only higher costs but also greater disruption risks and less sustainable transportation of materials.

Rare Earth Minerals and Electric Vehicles

Shortages of critical minerals pose another major challenge. The growth in demand for electric vehicles and advanced electronics is set to collide with supply constraints for minerals such as cobalt, lithium, which are heavily concentrated in China. Disruptions to the Chinese supply will have far-reaching consequences. Developing alternative sources of these minerals requires mining, processing and refining processes that include long lead times and substantial investments. While it will be difficult to quickly reduce reliance on China, we’ll see companies pursuing vertical integration strategies to secure their access to these minerals.

Outlook: Procurement professionals can only contend with the uncertainty and fluidity of these global trade shifts by prioritizing greater supply chain visibility. Building a comprehensive understanding of their suppliers, and their suppliers' sourcing networks, will equip supply chain leaders to assess the potential impact of new policies, identify potential vulnerabilities and develop robust contingency plans. This enhanced visibility will enable organizations to make informed decisions, mitigate risks and seize opportunities in a rapidly changing global environment.

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