Could the coronavirus pandemic bring about more reshoring in the U.S.?
The question is not just of interest in the U.S. By many measures, Europe has been hit as severely by the pandemic. If anything, Europe is even more reliant on global supply chains than the U.S.
The political philosophy that underpinned the Trump administration’s efforts to slow China’s advance — that is, to bring jobs back to the U.S. and “level the playing field” — is also prevalent in Europe. However, in the more fragmented political environment of the E.U., that philosophy is arguably taking longer to come into focus.
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Supply chains, reshoring and a ‘great reset’
Disruption to supply chains due to lockdowns was a relatively short, albeit very sharp, shock.
Automakers temporarily shut down Japanese production lines due to a shortage of parts from China in Q1. Furthermore, there is ongoing chaos at European, particularly U.K., ports due to a host of pandemic-related factors.
Supply chains far and wide have struggled during 2020. These challenges are prompting many to ask: is this the jolt needed to stimulate a great reset?
As The Economist notes, there can be a business case for it, too.
The case for reshoring
In order to cut transport costs, improve speed to market, or reduce inventories, developing domestic supply chains has advantages.
In the U.S., the Reshoring Initiative, which advocates for more manufacturing in America, cites the allure of “Made in USA” branding for older Midwesterners. Some cite new technologies, such as 3D printing or the development of robotics, as trends that will encourage reshoring.
The post cites a report by ING bank, which predicted 3D printing alone could wipe out 40% of trade flows by 2040.
Going the other way
Yet, experience suggests that for every company reshoring production, there may be more doing the opposite. This comes despite rising tariff barriers intended to drive behavior in the opposite direction.
A separate Economist article notes that in 2019, as average American tariffs on Chinese imports rose from 12% to 21% and tariffs in the other direction rose from 17% to 21%, America’s share of Chinese imports and exports fell to its lowest in 27 years. However, no offsetting increase in gross domestic manufacturing production followed.
A study by Ben Charoenwong of the National University of Singapore and Miaozhe Han and Jing Wu of the Chinese University of Hong Kong suggests that, while trade-policy uncertainty was associated with a reduction in the number of foreign suppliers to American companies serving the home market, on average these acquired no more domestic suppliers.
One caveat may be that the pandemic is less than a year old, yet reshoring takes years to implement. Maybe 2021 will be the year of reflection, development and implementation.
However, so far there is more media speculation than plans in boardrooms.
The Economist reported a survey by EY in October found that just 37% of executives were still considering reshoring. A recent survey of firms in the U.S. and Europe by Euler Hermes, a trade-credit insurer, found that less than 15% were contemplating reshoring because of COVID-19.
Rather, there seems to be a doubling down on making supply chains more resilient. That trend comes not just as a result of what many view as short-term trade wars or pandemic disruptions. In addition, longer-term issues, such as environmental footprint and labor standards, are major factors.
In the long run, robotization may prove the single largest influence in reshoring production, at least for products with high manual input. However, evidence in Spain suggests as firms invest in robotics, they expand and end up importing more components for their robots to assemble. Unless a region, or in the case of the U.S., a country, has a highly developed end-to-end supply chain, specialization in various parts of that supply chain will continue to accrue to those countries most able (or best supported) to deliver those parts.
Where government strictures or support prevail, there will be changes.
For example, the reshoring of chip manufacturing will likely get carrot and stick from the new administration, as it did from the old.
While industrial policy seems to be coming back in vogue across the Western world, they do not run command economies. As such, the vast majority of industries will continue to optimize their businesses on the basis of economics.
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