In real terms, Italy’s primary manufacturing exports to the U.S. jumped nearly 27% year-on-year in 2022. That might have been dismissed as a one-off effect of a general recovery from pandemic-era drops, but through Q1 of this year exports were up more than 16% – slower growth but still significant. What’s behind the increases and what can it tell us about shifting supply chains?

Italy is not widely viewed as a major node in most global production networks. Asked to name the country’s exports, most would surely list wines and cheeses and olive and pasta and luxury apparel, among other products associated with La Dolce Vita. But three of Italy’s top four exports by value have been manufactured intermediate goods.

And its largest extra-EU market for these exports is the U.S. The chart below shows the annual value of exports to the U.S. in euros from 2019 - 2022 for those three categories: machinery, equipment and parts (HS 84); electrical machinery and parts (HS 85); and vehicles and parts (HS 87). The nominal export values were adjusted using Italy’s Industrial producer price index for the non-domestic market, i.e. production for export. The navy blue bars at the bottom of each year’s column are the real totals through Q1, with the seafoam green on top showing the annual sums.

In 2022 that sum was €18.7 billion, of which nearly €11.4 billion was machinery and parts, up 20% from 2021. This was followed by vehicles and parts at €4.6 billion, up 39% year-on-year, and electrical machinery and parts at €2.7 billion, up nearly 41%. Through Q1, the combined total was €3.9 billion versus €3.3 billion in 20222.

In searching for an explanation, we can start with the U.S. - China trade tensions. U.S. imports from China across these three categories saw a cumulative drop of 74% from 2021 to 2022, or $191 billion in nominal terms. Close to half this amount was from two sub-categories alone: computers and tablets (HS 8471) and smartphones (HS 8517). Italy produces and exports relatively small volumes of these products, certainly relative to China’s output.

But what we can see in the data is Italy picking up small shares in a wide array of other sub-categories where U.S. imports from China fell. Take, for example, electric transformers, static convertors and inductors (HS 8504). Imports from China declined 75% year-on-year from 2021 to 2022, while imports from Italy were up 19% over the same period. These small to medium-sized gains added together across tens if not hundreds of sub-categories, while not headline-grabbing, provide a plausible explanation for Italy’s increasing overall export to the U.S.

It also calls into question the focus on other countries in Asia as being the only viable options for “China+1” or broader supply chain diversification strategies. For all the attention Vietnam and Indonesia receive in this context, for example, there are limits to how much of China’s production capacity they can actually replace and are already confronting constraints related to skilled labor and infrastructure, especially the reliability of electricity.

While Italy cannot compete with the likes of Vietnam on labor costs, its wages are lower than many other developed economies with similar industrial profiles. According to the latest comparable data from the International Labour Organization, in U.S. dollar terms monthly manufacturing wages in Italy as of 2020 were 12% lower than wages in Japan and 25% lower than in South Korea. It’s unlikely this gap has narrowed much over the past three years; if anything, it may have expanded given the slack in Italy’s labor market compared to the tightness in Japan and South Korea.

Italy is also investing in upgrading its advanced manufacturing capabilities under a plan called “Piano Transizione 4.0.” On offer are €13.4 billion in tax credits and other incentives for firms investing in capital and intangible goods, research and development, innovation and training. Separately, firms like Intel are considering multi-billion dollar investments in production in the country.

Those looking for a single big number that indicates global supply chains are shifting will fail to find one. What Italy’s recent exports to the U.S. might tell us instead is that the process is going to be spread out over a number of countries and industries and that the shifts, while underway, are going to be smaller and incremental rather than large and all at once.

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