The question rests on everyone’s minds. Will manufacturing outsourced over the past 30 years to China and elsewhere be coming back to the USA? Let’s look at recent government action, effects of the pandemic and some underlying trends to gain some perspective.
With unemployment at an all-time high, Congress is currently putting together a phase-four stimulus package. The legislation aims to strengthen US manufacturing with incentives for companies to bring back, or reshore, operations from other countries.
In addition, the Trump administration has recently taken steps to reclaim pharmaceutical manufacturing from China and India. The benefits to the US of reshoring manufacturing include not only a stronger economy but also increased national security.
Effect of the Pandemic
With cost being the primary driver of outsourcing 30 years ago, the trade wars added risk of disruption to the supply chain calculus. Now, the pandemic adds a third factor, resilience, to the equation, increasing the motivation to come back to the US. In other words, manufacturers must be able to withstand unforeseen shocks.
With companies unable to restart supply and China suffering a public relations nightmare, a return to pre-pandemic conditions seems unlikely. Kearney consultants predict that companies, “will be compelled to go much further in rethinking their sourcing strategies, (and) their entire supply chains.”
What will US manufacturers do in response to the pandemic. Most likely, we will see them moving to hedge their supply chain dependence on China by diversifying their sourcing. Many will bring back operations to the US when it makes sense. China’s role as the first-choice manufacturing partner to the US will never be the same.
Before the world-wide COVID crisis, Chinese manufacturers started moving to the US seeking lower production costs and more favorable regulations. Surprisingly, the tax burden for manufacturers in the US is significantly lower than in China.
Rapidly increasing wages and higher transportation costs also make China operations less profitable. Lower energy costs and cheaper land make the U.S. more attractive.
According to Forbes, April 2020 data shows that U.S. companies are leaving China. That is probably due to the trade war, but the pandemic is sure to add to the trend.
The annual Kearney Reshoring Index also shows a “dramatic reversal” of US manufacturing vs Asian exporters. China suffered the hardest hit. Last year, companies ey often persuaded their Chinese suppliers to avoid tariffs by moving to other countries, or totally abandoned Chinese sourcing.
Recently, observers have noted Chinese manufacturers in glass, paper and clothing relocating or starting new operations in the US with investments topping $20 billion.
Back to the USA Building for Some Time
To summarize, the shift of manufacturing back to the USA began quietly before the pandemic. Forces have been building with the effect of removing some of the Chinese manufacturing luster. More favorable costs, regulations and other factors started to make the US more attractive. The Pandemic has greatly accelerated that trend.