The Hidden Costs of Reshoring

For the past three decades (and in some ways stretching back up to five decades), the U.S. has been in a relative industrial decline. More specifically, the share of the U.S. economy that has been involved with manufacturing and related physical industry has declined, and the share of total global manufacturing held by the U.S. has declined as well. We can see this manifested in our structural trade deficit: And we can see it in our industrial production per capita: To some extent this is to be expected; as a country grows in wealth it tends to shift a bit more towards services, and begins to rely on developing countries to supply it with physical goods. However, a number of countries like Switzerland, Singapore, Japan, South Korea, Taiwan, and (at least until their recent energy problems) Germany have been successful at maintaining large industrial bases within rather wealthy countries. The challenge with de-industrialization is that an economy can become hollowed-out, and/or it can face national security issues during a cold war type of environment or during various logistical emergencies. In other words, it’s just not just about access to plastic trinkets; it’s about access to critical things we don’t think about like medical dyes, military components, or even just basic tools that we use for everything else. So, the themes of “onshoring” or “reshoring” or “nearshoring” have become a hot topic lately, to some extent on the corporate level but especially on the federal level. It refers to the idea of moving manufacturing facilities back to the U.S. or to nearby countries, so that supply chains in general are shorter, less complex, and more resilient. And along these lines, various stimulus efforts have gone into encouraging a boom in domestic manufacturing. And it is showing up in the data. This chart shows annualized spending on the construction of manufacturing facilities: The U.S. used to run sub-$100 billion per year in manufacturing construction expenditure, and now it has more than doubled. That’s tangible, even after adjusting for inflation. However, to provide context to the situation, the U.S. is currently heavily reliant on China’s industrial base that is worth many trillions of dollars. So, this extra $100+ billion just puts us in the first inning here, if this is indeed to be the start of a reversal. Running the Numbers For decades, the United States was a larger trading partner than China for most countries. However, by the late 2010s, China had flipped the U.S. in this regard, and it has only tilted further in China’s favor since then: Chart Source: How Much The ability to be the world’s largest trading partner requires both making stuff and having the logistics to organize and ship that stuff. Along those lines, among the top 10 container ports in the world , seven are in China, one is in Korea, one is in Singapore, and one is in the Netherlands. To find the U.S. on the list we have to dig down into the top 20 and top 30 container ports. China now produces more steel than the rest of the world combined (and more than 12x as much as the U.S.): Chart Source: Visual Capitalist China is by far the world leader in solar panels. In terms of market share, they are more important for the global solar market than Saudi Arabia is for the global oil market. Chart Source: The American Prospect , REC Silicon For rare earth elements broadly, which are widely used throughout the electronics industry including the alternative energy industry, China produces more than the rest of the world combined. In recent years, the rest of the world (ex-U.S.) has been regaining a minority share. Rare earth elements are not particularly rare, but they are found in low concentrations and thus tend to be environmentally destructive to extract and refine. Most wealthy regions don’t want to deal with that. Chart Source: Intereconomics Just within the past three years, China’s auto exports have hockey-sticked in terms of growth. Last year China surpassed Germany and this year they are rivaling Japan as the world’s largest auto exporter. We don’t see them in the United States but if you travel around the world, you’ll see a lot more Chinese cars on the road than just a few years ago. Here in 2023, China also officially put their first commercial airplane ( the Comac C919 ) into service. The world now has the ABC’s of commercial aviation: Airbus of Europe, Boeing of the […]

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