Supply-chain security costs more as tariffs and relocation reshape global trade, manufacturing, consumer prices, and economic resilience.
In March 2025, Isaac Larian, the chief executive of MGA Entertainment, the California-based maker of Bratz and LOL Surprise dolls, said his company would move about 40 percent of its manufacturing out of China to India, Vietnam and Indonesia within six or so months, up from roughly 10 to 15 percent. He also explained why the work would not come to the United States. MGA runs a factory in Hudson, Ohio, yet "there is no way to get American labor to do that tedious work," he said, according to a syndicated account of his remarks. Four months later the plan looked different. After two weeks in Indonesia he had put that project on hold once Washington set a 19 percent tariff on Indonesian goods, while the Vietnamese factories producing about a tenth of MGA's output were behind schedule and the company was paying late fees to retailers, he told the New York Post. An LOL Surprise doll that once sold for US$9.99 was going for as much as US$11.99.
The MGA episode illustrates a broader problem with supply-chain diversification: moving production costs money, takes longer than announced, and can be overtaken by the policy shifts it was meant to escape. The doll's higher price cannot be cleanly assigned to tariffs, new factories, freight or a retailer's margin. A popular view holds that cheap goods are disappearing because globalization is ending. The record supports a narrower claim. Globalization is being reorganized, a resilience premium is being paid in some sectors, and the premium is neither universal nor necessarily permanent. Paying it also does not guarantee that the buyer gets more security.
Understanding the cost of diversification requires first understanding why the old system made manufactured goods so cheap. Those low prices were never simply a product of cheap labor; they rested on a production system built over three decades. Economies of scale, the fall in cost per unit as a factory or a supplier network grows larger, let producers spread machinery, design and logistics costs across vast volumes. Just-in-time production, the practice of holding minimal inventory and having parts arrive shortly before they are needed, freed working capital that would otherwise sit in warehouses. Supplier concentration, where a large share of a product or input comes from a few firms or places, allowed buyers to negotiate hard and suppliers to specialize. Industrial ecosystems, dense clusters of component makers, toolmakers, testing labs, logistics firms and skilled workers, cut the time needed to source a part, fix a mold or switch a design.
This model of efficiency also produced a growing concentration of supply, a trend quantified in the Organisation for Economic Co-operation and Development (OECD) Supply Chain Resilience Review, published in June 2025. The review found that significant import concentration in the world economy was about 50 percent higher in the early 2020s than in the late 1990s, driven by non-OECD economies, while the level across OECD members was broadly stable. China's contribution to that concentration rose from about 5 percent to about 30 percent over 25 years, while the combined contribution of the United States, Germany and Japan fell from about 30 percent to about 15 percent.
The efficiencies of the old model, however, did not capture all the costs of producing and moving goods. On April 24, 2013, the Rana Plaza building in Dhaka collapsed, and more than 1,130 garment workers died, according to the International Labour Organization (ILO). Long routes and concentrated production also carried an environmental burden that freight rates did not price in. Part of the old low price was paid by workers and by the environment.
Beyond these long-standing social and environmental costs, concentrated supply chains also carry operational and geopolitical vulnerabilities that become visible when trade is disrupted. When attacks on commercial vessels pushed shipping away from the Red Sea from November 2023, the United Nations Conference on Trade and Development (UNCTAD) reported in February 2024 that Suez Canal transits had fallen 42 percent from their peak and that average container spot rates from Shanghai had risen 122 percent since early December, with the rate to Europe up 256 percent. Its fuller assessment found container tonnage through the canal down 82 percent by early February. Ships sailing faster to hold schedules could raise greenhouse gas emissions on a Singapore to Rotterdam round trip by up to 70 percent, UNCTAD estimated. The second shock was a policy decision. China's Ministry of Commerce (MFCOM; 中华人民共和国商务部) and General Administration of Customs (GACC; 中华人民共和国海关总署) announced on July 3, 2023 that exports of gallium and germanium items would require a license from August 1 that year. Licensing is not a ban, but it gives the issuing authority discretion over inputs used in chips and electronics, and buyers with no alternative supplier carry that exposure whether or not a license is ever refused.
These vulnerabilities create a trade-off for firms: reducing dependence on a concentrated supply chain can lower the losses caused by disruption, but it also introduces costs that public debate often conflates. The first is a transition premium, the one-time cost of moving: new plants, supplier qualification, training, duplicate tooling, and the period when a new site runs below full efficiency. The second is an operating premium, the continuing cost of a less concentrated system, such as smaller production runs, higher inventories and redundant suppliers. The third is insurance value, the losses a firm avoids when a shock hits. The first two appear in accounts. The third appears only when something goes wrong, and never if diversification was badly chosen. The table separates the main sources of the diversification premium from the potential benefits of disruption avoidance.
| Cost category | Why it arises | Possible consumer or economic consequence |
|---|---|---|
| Relocation and setup | New factories, equipment, supplier audits and worker training before output reaches full speed | Delays, late deliveries and one-time price increases on affected lines |
| Component sourcing | New assembly sites often still import parts, sometimes with added duties or freight | Higher unit costs that persist until local suppliers mature |
| Lower initial scale | Smaller plants cannot spread fixed costs as widely as established clusters | Higher prices or thinner margins during the ramp-up period |
| Redundant capacity | Keeping a second supplier or spare capacity means paying for capability that sits partly idle | A continuing premium, most visible in strategic goods |
| Logistics and inventory | Safety stocks and longer or less efficient routes tie up capital and space | Higher storage and freight costs, partly passed to buyers |
| Compliance and trade rules | Rules of origin, export licensing and documentation require staff and audits | Administrative costs that weigh most on smaller firms |
| Tariffs and trade uncertainty | Duties and shifting rules change the relative cost of each location | Price increases that can reverse when policy changes |
| Disruption avoidance | Diversified sourcing can limit losses from shipping, political or natural shocks | Fewer shortages and steadier prices if the redundancy is placed well |
Apple's manufacturing strategy illustrates why the costs of relocating production must be distinguished from the costs of tariffs and the continuing dependence on existing supply chains. In April 2025, a source familiar with the plans told Reuters that Apple aimed to source most iPhones for the American market from India by the end of 2026. The report said about 80 percent of the more than 60 million iPhones sold in the United States each year were made in China. It blamed steep Indian duties on imported phone parts for keeping production there expensive, and quoted the source as saying that manufacturing costs in India were 5 to 8 percent higher than in China, and up to 10 percent in some cases. That is one unnamed person's estimate. The company's own statements are firmer. On its results call in May 2025, chief executive Tim Cook said the majority of iPhones sold in the United States in the June quarter would have India as their country of origin, Vietnam would supply almost all iPads, Macs, Apple Watches and AirPods sold there, and China would remain the origin of the vast majority of products sold outside the United States.
Apple also kept tariff costs distinct from the structural costs of relocating production. On its July 2025 call, Cook reported about US$800 million in tariff-related costs for the June quarter and estimated US$1.1 billion for the September quarter, most of it from tariffs imposed on China under the International Emergency Economic Powers Act (IEEPA). A year later the picture had shifted. By April 2026 the company cited lower IEEPA tariff rates and a reduced global rate under Section 122 and said it was applying for refunds of tariffs paid, and in July 2026 it reported that tariff refunds added about 2 percentage points to gross margin. Tariff costs can be reversed when policy changes. A factory in India, once built, is a sunk cost.
However, Apple's shift to India raises a broader question about the limits of relocation: how much domestic industrial capability does a new manufacturing destination actually acquire? The Ministry of Electronics and Information Technology said in July 2025 that mobile phone production had risen from ₹18,000 crore in 2014–15 to ₹5.45 lakh crore in 2024–25. The same statement put value addition in Indian electronics manufacturing at 18 to 20 percent across various items, an industry estimate. A study by the Centre for Development Studies with the India Cellular and Electronics Association, an industry body, put direct and indirect domestic value addition in phone manufacturing at 23 percent in 2022–23. On either figure, most of the value in an Indian-assembled phone still comes from imported parts, and the study's director said India could not ignore China's role in components. Through the Production Linked Incentive (PLI) scheme, which rewards manufacturers for added output, Indian taxpayers also carry part of the transition premium. Overall, the longer-term test is whether rising production also deepens domestic component supply and reduces exposure to disruptions elsewhere in the supply chain.
Building domestic industrial depth is one route to resilience, but it is not the only one. Inditex, the owner of Zara, illustrates how supplier geography, short production runs and rapid replenishment can provide another route without requiring a complete relocation of manufacturing. Its 2025 annual report lists 6,684 factories in 49 markets, organized into supplier clusters that include Spain, Portugal, Morocco and Türkiye alongside India, Pakistan, Bangladesh, China, Cambodia and Vietnam. The company says a very significant portion of the factories doing cutting, sewing, dyeing and finishing for its 2025 garments sat in proximity markets near its Spanish base. Short production runs and quick replenishment keep inventory tight, and surplus stock in 2024 was 0.57 percent of articles sold. The report does not say what proximity costs per garment or saves in markdowns, so the premium and its payoff cannot be separated from outside.
The corporate examples point to a broader pattern in the trade data: selective diversification, often called China-plus-one, rather than a clean break with China. A World Bank working paper found that China's share of US imports fell from 21.6 percent in 2017 to 16.3 percent in 2022 as imports of tariffed goods dropped, yet the countries that gained "tend to be deeply integrated into China's supply chains" and saw faster import growth from China, especially in strategic industries. To displace China as an exporter, the authors conclude, countries must embrace China's supply chains. A Vietnamese or Mexican final-assembly stamp can hide continuing dependence further up the chain.
The shift in sourcing has also been associated with higher unit values for some imports from alternative suppliers. In a 2023 National Bureau of Economic Research (NBER) paper, it was found that a 5 percentage point fall in China's share of US imports of a product was associated with a 9.8 percent rise in the unit value of that product from Vietnam and a 3.2 percent rise from Mexico. The authors describe this as an association that likely reflects rising production costs or demand pressure in the new locations, and they say more work is needed to measure the effect on US prices and inflation.
Lower import costs or shorter distances do not automatically translate into greater resilience. Mexico borders the largest consumer market, but the International Monetary Fund (IMF) 2025 Article IV report on the country names critical infrastructure gaps in transport, water, energy and digital networks, and notes that about a quarter of firms report being affected by crime, which raises operating costs. The World Bank Logistics Performance Index 2023, a survey of freight professionals rather than a direct measure of costs, scored Mexico at 2.9 out of 5, against 3.7 for China, 3.4 for India and 3.3 for Vietnam. A new location can trade one exposure for another, from a distant chokepoint to a strained power grid.
The strongest counterargument to large-scale relocation comes from the OECD itself. The 2025 review reproduces modeling, first published by OECD economists in 2020, of a world in which every country raises tariffs, subsidizes domestic production and restricts foreign sourcing. In that scenario global trade falls by more than 18 percent and global real gross domestic product (GDP) by more than 5 percent, with losses for individual countries of between 1.1 and 12.2 percent. When the same stylized shocks were applied, the localized world was not more stable, and GDP became less stable in more than half of the economies modeled. The exercise is a simulation with strong assumptions and does not test targeted diversification, but its logic holds: domestic production is exposed to domestic shocks, and a country that shuts out foreign suppliers cannot switch to them when a local failure occurs. The IMF's 2023 Staff Discussion Note on geoeconomic fragmentation reached a similar range by different methods, estimating output losses from trade fragmentation of 0.2 percent of global GDP in a limited scenario and up to 7 percent in a severe one.
Beyond the aggregate economic losses, the costs of diversification are distributed unevenly across firms, retailers, taxpayers and consumers. Firms pay first, through capital spending and lower margins during ramp-up, and their shareholders absorb that in earnings. Retailers pay when deliveries slip or suppliers raise wholesale prices, as Larian said MGA would have to do on China-made goods because "we have to pass the extra cost to the retailer." Taxpayers pay through incentive schemes such as India's PLI. Consumers pay last and most visibly, in shares that depend on competition in each market. Each sees a different mix of tariff, currency, energy, freight, labor and margin effects, which most public data cannot isolate.
Who ultimately absorbs the diversification premium is only part of the question; its duration determines whether the adjustment raises the price level once or contributes to continuing inflation. A one-time move to a costlier supply base raises the price level once, and inflation, the rate at which prices keep rising, then returns toward its prior path. Continuing inflation would require the premium to keep growing, through repeated rounds of tariffs, ever more redundant capacity or rising costs in the new locations as they fill up. The NBER findings cover a period of rapid shifting and say nothing about where costs settle once new clusters mature. Learning effects and new suppliers could bring parts of the premium down over time, which is why the evidence does not support treating it as permanent.
For governments and boards, the test is whether a supply chain can absorb a shock, which calls for measuring resilience rather than relocation. Useful indicators include supplier concentration for each critical input, the time needed to switch to a qualified alternative, the time a plant or network needs to recover after a disruption, exposure to single shipping corridors such as the Red Sea or the Taiwan Strait, the availability of substitute materials, and the share of critical inputs that comes from suppliers independent of one another. A plan built on these measures starts from critical dependencies and points of failure, adds selective redundancy where a failure would be costly, invests in whole ecosystems rather than isolated assembly plants, and keeps cooperation with partners open so that a country can reach other suppliers in a crisis.
How governments and firms respond to these dependencies will determine which of three broad trajectories emerges. Under a scenario of expensive fragmentation, governments keep adding tariffs, subsidies and sourcing rules, firms duplicate capacity for political rather than risk-management reasons, and consumers face a higher price level with little gain in security. Under managed diversification, firms retain China as a major manufacturing hub while building alternative sources for critical inputs and sensitive markets. The premium remains concentrated in strategic goods such as chips, critical minerals and medical supplies, while staying more modest for toys and apparel. Under a third scenario, a more distributed production system emerges as industrial ecosystems in India, Southeast Asia, Mexico and Eastern Europe mature enough to compete on cost and depth. The premium could then shrink as economies of scale return and buyers gain genuinely independent alternatives.
The cost of cheap goods was never only the price on the shelf. It included workers killed in unsafe buildings, emissions that freight rates ignored, and a dependence that became visible only when ships were rerouted or licenses were required. A safer system will cost more in some places, and that premium is worth paying where a breakdown would be severe and the alternative supplier is genuinely independent. It is a poor use of money where it buys only a new label on the same chain of parts. Resilience should be paid for where it matters, measured by how quickly a supply chain recovers rather than by where its last screw is turned.
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