The good news is that reshoring doesn’t have to hurt. The past few decades of globalization drove business cycles closer together and made companies increasingly dependent on global sales. Researchers at the Boston Consulting Group’s think tank note that this came at the cost of tighter correlations of financial assets across countries, which means that reshoring could help diversify international stock portfolios and improve the risk/return trade-off for investors. What’s more, investors stand to benefit if reshoring means a longer-term revival in innovation and flexibility in production. And higher operating costs could be offset by higher revenues, whether that’s through higher wages leading to greater consumer demand, government support, or some combination.
For years, investors cheered as U.S. companies shifted manufacturing overseas to reduce costs and boost profit margins. That could soon start to change, with decades of offshoring replaced by reshoring.
The shortages of personal protective equipment and other essential items during the early stages of the pandemic were a powerful reminder that corporate managers’ obsession with efficiency and cost-cutting at the expense of diversification and resiliency had made the American economy vulnerable. A report from the McKinsey Global Institute found “180 products across value chains for which one country accounts for 70% or more of exports, creating the potential for bottlenecks.” Worse, many of those products come from an increasingly hostile China, a circumstance with profound national-security implications for the U.S. and other democracies. That’s why Democrats and Republicans alike are looking for ways to revive U.S. manufacturing.
They’ll have to work hard. Despite the trade conflict, the coronavirus, and fear of a new cold war, a recent survey by the American Chamber of Commerce in Shanghai found that 71% of U.S. manufacturers had no plans to move production out of China, while only 4% said they would transfer some to the U.S. Moreover, even those that expected to move some production from China planned only small changes, not wholesale shifts in supplier relationships.
U.S. companies have directly invested about $260 billion in Chinese operations since the early 1990s, according to an analysis from the Rhodium Group. Replacing those assets elsewhere would be expensive—especially if the new property, plants, and equipment were in America—and the running costs would be far higher, as well. The worst-case scenario for investors is that they will have to bear trillions of dollars of losses as companies write down stranded assets, are forced to hold more inventories, and shift operations in ways that lower margins.
But reshoring won’t succeed without long-term commitments of money, attention, and expertise from the federal government. Companies have spent decades developing supply chains and procurement practices to cut costs to maximize returns for their shareholders and to cut prices for consumers, so the only way to alter their behavior is to offer new, radically different incentives. “Made in America” won’t happen at scale unless Washington makes it significantly more profitable than the alternatives.Some politicians seem to appreciate this, which explains why the latest batch of ideas from Democrats and Republicans—who are sometimes working together on these issues—are about structural changes to the U.S. economy. In 2019, Sens. Tammy Baldwin (D., Wis.) and Josh Hawley (R., Mo.) co-wrote legislation to make American manufacturing more competitive by lowering the value of the dollar, while Sen. Marco Rubio (R., Fla.) called for a new “industrial policy” to encourage business investment in the U.S. to counter Chinese protectionism. Since the pandemic began, Sen. Elizabeth Warren (D., Mass.) and Rubio have cooperated on bills to reduce America’s “overreliance” on Chinese pharma products.
Both presidential candidates want to bring manufacturing back, but their strategies differ. Democrat Joe Biden has unveiled a plan to boost federal spending on U.S.-made goods, support research and development, change the tax code to discourage offshoring, and close loopholes in rules that already require Uncle Sam to “Buy American.”
“What’s missing is the capability to pivot” to sudden changes in demand. ”
“The U.S. economy is far less resilient to shocks than it needs to be,” Jared Bernstein, one of Biden’s top economic advisers, tells Barron’s. “Serial abuse from dumb industrial policy” inflicted by Washington hollowed out the U.S. manufacturing sector, he says, and America needs to “onshore certain supply chains, both medical and defense.” One area of particular concern is the “increasing share of defense procurement that comes from foreign production.”
That last concern is shared by the Trump administration, which has defended the legality of its tariffs, on the grounds that they are necessary to protect the “defense industrial base.” But where Biden seeks to boost the nation’s manufacturers through additional procurement and R&D subsidies, Trump’s preferred approach has been corporate tax cuts and deregulation to encourage domestic investment, with levies on imports to discourage purchases of foreign-made goods. The Pentagon has also recommended “direct investment in the lower tier of the industrial base…to address critical bottlenecks, support fragile suppliers, and mitigate single points-of-failure.”
At the same time, Robert Lighthizer, the administration’s chief trade negotiator, is encouraging other countries to buy more U.S. products. The most substantial deal has been with Canada and Mexico, and is notable for its emphasis on labor standards, local content requirements, and environmental regulations. It also contained an unusual provision that any signatory that agrees to “a free trade agreement with a non-market country”—such as China—can get kicked out of the North American pact. George Magnus, the former chief economist of UBS and a China expert, told Barron’sthis could become a template for future deals that promote trade while excluding China. (Lighthizer didn’t respond to requests for comment.)