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As Trade War Shifts Sourcing, Supply Chain Improvement Stagnates, Data Shows

The United States and China may have tempered their trade tantrums with the signing of a phase one trade deal, but their demonstration of differences over the past year brought more with it than just punitive tariffs.

According to data from Hong Kong-based quality control company QIMA, sustainability progress has stagnated in global supply chains as trade struggles drew the focus to finding new places to manufacture.

Companies “consistently prioritized operational concerns over sustainability” in 2019, according to QIMA.

“Over 18 percent of factories audited in 2019 had critical ethical violations, of which almost 40 percent were related to working hours and wage non-compliances,” the company noted. “Violations related to child labor where recorded in 3 percent of factories, a slight improvement on the 2018 figure.”

What’s more, the number of factories designated as “in need of improvement” grew to a record high last year, climbing from 37 percent in 2018 to 44.5 percent.

“This coincided with a drop in the percentage of compliant ‘Green’ factories (down by 4 points), signaling that buyers were more likely to settle for ‘good enough’ ethical performance, instead of driving continuous improvement in their supply chains and securing progress through regular follow-up.”

With more brands and retailers turning to emerging nations for sourcing to skirt challenges and tariffs in China, they may be meeting the new challenge of maintaining ethical sourcing.

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“Ethical performance of specific regions in 2019 mirrored the shifting sourcing geographies: social compliance was more likely to suffer in regions that experienced an influx of buyers,” QIMA said.

In Southeast Asia for one, where countries like Malaysia, Myanmar and the Philippines experienced double-digit growth from Western buyers last year, QIMA data showed average ethical scores dropped 4.6 percent from the previous year. The same was true for Bangladesh, which saw a “noticeable” 7.1 percent year-over-year drop in ethical performance.

On the other hand, ethical compliance in Chinese factories improved by an average of 5 percent compared to 2018.

“The shifting of price-sensitive sourcing to other countries may well be a factor in this: historical QIMA data shows that low-cost and manual-heavy sectors such as textiles and apparel are much more prone to ethical violations, compared to industries with higher cost of outputs, better training and more automation,” QIMA said.

China also continued to see “incremental improvement” in manufacturing quality: 24 percent of products inspected in Chinese factories were outside of specifications in 2019, compared to 27 percent the year prior. Regions ramping up manufacturing as a result of the trade fallout with China, however, are struggling to maintain consistent quality amid increased production levels.

“Among China’s neighbors, the rate of defective products grew by +13 percent YoY in Indonesia and +48 percent YoY in Thailand; while suppliers in North Africa and the Middle East had trouble coping with increased sourcing volumes, as the percentage of products outside of acceptable quality limits climbed by +21 percent YoY in 2019 vs. 2018 (+31 percent for textiles and apparel),” QIMA said.

A full phase two trade deal between the U.S. and China is still expected and could reportedly include additional tariff rollbacks, but as the tension and uncertainty between the two nations has already scattered the sourcing map, a key item on the 2020 agenda will be ensuring quality and sustainability in alternative sourcing countries can meet the market’s ever-increasing demands.