Let’s Talk Reshoring: A Guide for the Rest of Us
Wednesday, August 23, 2023
What is reshoring? Basically, it is when you take a multi country business that manufactures in one nation and then exports those goods for sale in another nation. Reshoring is moving the operation back home or to another country for operations to maintain. For our context, we are going to be talking about the recent trends happening in U.S. Manufacturing. “Reshoring,” for the U.S. means that companies who have operations outside of the U.S. have started to move around their plants and manufacturing hubs searching for “safe havens.” Safe havens are essentially countries where labor and operations are cheaper, but the quality of your product is not too diminished for it to be brought to market abroad or at home. So, when you hear a politician talking about bringing back jobs to the United States, reshoring is what they are talking about. While we are on the topic of politics, please understand that I have no opinion on either party or candidates in any upcoming elections. With that small disclaimer out of the way, we will be discussing some recent policies and laws that are being enacted that will influence reshoring activities in the United States and abroad.
I have always believed that more trade outside of The U.S. is a good thing. However, as with all things, too much of a good thing can be bad. Just 5 years ago we as a nation had fears of China being the dominate economy in the world. Since then, we have experienced something that comes once every century. A pandemic. Covid-19 highlighted the weak spots in most infrastructures. This weakness in infrastructure was more apparent in China as Covid-19 went on. Poor reporting of the sick and deaths from sickness, potential human rights violations, saber rattling over Taiwan, total lockdown for a much longer period than the rest of the world, political dissent, and potential major changes to China’s government all came within the last three years. To give you some insight, it took The U.S. between 1950 and 1972(after the Korean War) to begin trading with China again. That is a very long time for both countries to stick to their prospective positions. So much change in China, in such a short amount of time signifies a long term risk that has not yet happened but could be on the horizon. Because of this risk we are starting to see reshoring happen across several industries either back to The United States or to other safe havens.
So, what does this all mean? In a word, we are getting what we have been asking our leaders for. We wanted another economic boom in The United States for the middle class. The good news is that it is happening! There has been more legislation passed in the last five years that emphasizes America first then there has been in some time. Namely, the trade war and tariffs imposed on China, the chips act, America COMPETES Act of 2022, etc. One could even make the case that banning entertainment apps based in China (Tik Tok) is also a good indicator of our feelings on trade relations with China. All of these pieces of legislation are designed to do one thing. Limit the abilities of China’s trade capability with the United States and the rest of the world. There is a downside, however. The diversification of supply chains and reshoring is painful in the short term. Production slows during this time and thus supply diminishes. When supply drops, prices rise. When prices rise, the income of consumers must increase to meet the increased price. If this happens enough times, the cycle is called inflation. The America first approach to global trade made by the last two presidential cabinets, in my opinion, is both necessary and painful. That is the part that you don’t hear on the nightly news. If you asked me to break all this down into one line it would be this. “I want more jobs and better prosperity in the United States, and I am willing to take the pain now for my kids to experience the economic boom in the future.” Remember, we wanted more prosperity, and we are getting it. I just wish I had known that it was going to hurt this badly before agreeing to it.