The coronavirus pandemic and the trade wars between the U.S. and China have disrupted global supply chains and raised concerns about the vulnerability of relying on foreign suppliers for essential goods and services. Some policymakers and business leaders have advocated for reshoring, or bringing back production to the U.S., to boost domestic manufacturing, create jobs and enhance national security. But is reshoring the best strategy to cope with the challenges of the post-pandemic world? And what are the implications for the American economy and its trading partners?
Reshoring: A Reality or a Myth?
Reshoring is not a new phenomenon. It has been happening since the 2000s, as some U.S. companies realized that the benefits of offshoring, such as lower labor costs and access to new markets, were outweighed by the costs of quality issues, transportation delays, intellectual property theft, and rising wages in developing countries. According to the Reshoring Initiative, a nonprofit organization that tracks reshoring data, about 1.4 million jobs have been brought back to the U.S. from 2010 to 2020.
However, reshoring is not as widespread or as easy as it may seem. A recent survey of U.S. and European firms 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 by diversifying suppliers, increasing inventories, and investing in digital technologies.
Moreover, reshoring may not be feasible or desirable for many industries that depend on complex global value chains, where different stages of production are located in different countries to take advantage of comparative advantages and economies of scale. For example, reshoring the entire output of an iPhone would increase its cost by 35%, according to a study by the Peterson Institute for International Economics.
The Costs and Benefits of Reshoring
Reshoring may have some positive effects on the American economy, such as creating more jobs in manufacturing, reducing trade deficits, and enhancing national security by reducing dependence on foreign suppliers for critical goods such as medical equipment, pharmaceuticals, and semiconductors. However, these benefits may come at a high cost for both the U.S. and its trading partners.
First, reshoring may reduce the competitiveness and productivity of U.S. firms by increasing their costs of production and reducing their access to foreign markets. Reshoring may also require significant investments in infrastructure, workforce training, and innovation to overcome the challenges of labor shortages, skill gaps, and technological obsolescence.
Second, reshoring may hurt consumers by increasing the prices of goods and services and reducing their variety and quality. Reshoring may also reduce consumer welfare by limiting their access to foreign products that may be better or cheaper than domestic ones.
Third, reshoring may have negative spillover effects on other countries, especially developing ones that rely on exports to the U.S. for their growth and development. According to a report by the World Bank, reshoring production by high-income countries and China could push 52 million people into extreme poverty by 2030. Reshoring may also exacerbate global inequalities and tensions by reducing trade flows and cooperation.
The Alternatives to Reshoring
Rather than pursuing reshoring as a panacea for the problems of global supply chains, policymakers, and business leaders should consider other alternatives that can enhance resilience without sacrificing efficiency and integration. Some of these alternatives include:
Diversification: Instead of relying on a single supplier or country for a given product or service, firms can source from multiple suppliers or countries that can offer similar quality and price. This can reduce the risk of disruption due to natural disasters, political instability, or trade conflicts. For example, some U.S. companies have shifted some of their production from China to other countries in Asia or Latin America.
Substitutability: Instead of depending on a specific product or service that may be scarce or unavailable during a crisis, firms can use alternative products or services that can perform similar functions or meet similar needs. This can increase flexibility and adaptability in response to changing demand or supply conditions. For example, some U.S. hospitals have used 3-D printers to produce medical equipment during the pandemic.
Digitalization: Instead of relying on the physical movement of goods and services across borders, firms can use digital technologies such as cloud computing, e-commerce, blockchain, and artificial intelligence to facilitate transactions and coordination along supply chains. This can reduce transportation costs and delays, improve transparency and traceability and enable customization and innovation. For example, some U.S. retailers have used online platforms to sell directly to consumers during the pandemic.
Conclusion
Reshoring is not a silver bullet for the challenges of global supply chains. It may have some benefits for the American economy, but it may also entail significant costs and trade-offs. Moreover, reshoring may not be feasible or desirable for many industries that depend on complex global value chains. Instead of pursuing reshoring as a one-size-fits-all solution, policymakers and business leaders should adopt a more nuanced and balanced approach that considers the costs and benefits of reshoring for different sectors, products, and markets. They should also explore other alternatives that can enhance resilience without sacrificing efficiency and integration, such as diversification, substitutability, and digitalization. These alternatives can help the U.S. and its trading partners to cope with the uncertainties and opportunities of the post-pandemic world.
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