Will the Ukraine crisis affect long term US manufacturing strategies?

It is doubtful that the Ukraine crisis will result in any military response by the western powers. However economic sanctions in today’s global economy have the potential to severely cripple any nation. So as Russia continues on its path, one can be sure that economic sanctions will continue to increase. However as much economic pain that is sure to be brought on Russia, the US and its allies will not be unscathed.

US manufacturing could be significantly impacted. According to an article by Radio Free Europe: “The actual sanctions have been targeted, but the potential sanctions contemplated in the most recent executive order would do real damage to U.S. companies with no predictable result regarding Russian responses,” USA Engage, a Washington-based coalition of business groups, said in a statement on March 21. article source. The article went on to say that “US manufacturing is deeply concerned about the ongoing events”.

According to www.census.gov the US exported over 11 billion dollars of product to Russia in 2013. We imported over 27 billion dollars from Russia in that same year. While this is a drop in the bucket when compared to the 122 billion dollars we export to China, it still is a big number that could impact a number of US manufactures.

Many experts would say that anyone doing major investment in Russia should have understood the risks. This is certainly true, but any international investment in a country that is not a strong US ally is potentially risky. One country that comes to mind is China.

There are number global issues that could impact economic trade. What if China started to more strongly assert its claim to The Diaoyu-Senkaku islands? The US response will certainly start with diplomacy, but would it ever ratchet up to any kind of economic sanctions? Economic battles with China would have a far larger consequence than with Russia, but even minor skirmishes could result in loss of revenue for US manufacturers. Ultimately in any situation, The US response will likely consider economic impact, so it will come down to political will versus economic pain.

One could argue that indeed the US and China are in a cyber war. It has been known for several years that sources in China have been hacking into US government and corporate sites attempting to steal information. Over the years there has been behind the scenes discussion with China on curbing this practice. However the revelation by Eric Snowden that the US has been cyber spying on China is exasperating the situation. If anything the issue is escalating. See Article

Businesses considering outsourcing to China now have a few more items on the list of downsides:

  • Does outsourcing to China increase the risk of losing proprietary information?
  • Will potential local skirmishes with Japan, Taiwan and the Philippians affect shipments or trade?
  • Could other international issues (Russia, Iran, North Korea) affect economic relationships between the US and China

The question is this: Are US businesses re-evaluating foreign trade strategies as these international issues are playing out? Does outsourcing manufacturing to China appear more risky today than 5 years ago? Are US companies today taking a closer look at international politics and events? Could a consideration and evaluation of the international landscape cause some business to pull back on off shore sourcing?

It is too early to tell if any major company is changing strategy because of this. It seems at times that Businesses have a short memory and short term economic gain can overshadow long term risks.