President Donald Trump likes to brag that he’s bringing manufacturing back to the U.S. And indeed, with global trade slowing, the planet-spanning supply chains that have symbolized modern economic globalization do appear to be contracting.
But don’t be too quick to dismiss the idea of “borderless” production as a 1990s fluke. Even if their reach is more limited than before, far-flung supply chains are almost certain to remain a fact of global manufacturing. There are simply too many incentives for companies to continue to produce and source in every corner of the globe—from the abundance of cheaper workers to technological capabilities and changing patterns of consumer spending.
Sure, some production that was “offshored” in the 1990s and 2000s from the U.S., usually to cheaper locales such as China or Mexico, may return. The Reshoring Initiative, an advocacy group, says 1,389 companies reported they were reshoring or making foreign investments in new manufacturing operations in the U.S. in 2018, a 38% increase from the year before. Trump’s tariffs aren’t the only motivating factor. The Boston Consulting Group Inc. points out that disparities in manufacturing costs and competitiveness between countries have also been narrowing, which gives manufacturers more flexibility to set up factories closer to home.
That may excite those workers and policymakers seething over the supposed theft of factory jobs by nefarious foreigners. So far, though, the actual impact on trade and supply chains has been negligible. Consulting firm A.T. Kearney Inc.’s latest Reshoring Index, released earlier this month, shows that goods imports into the U.S. from 14 low-cost countries in Asia continued to grow faster than factory output at home in 2018, an indication that U.S. companies are not shutting down global supply chains to any meaningful degree.
Nor are they likely to do so. A survey released in May by two branches of the American Chamber of Commerce in China found that fewer than 6% of the companies that were shifting or considering moving production out of the Middle Kingdom were choosing the U.S. as a new destination. Instead, nearly 25% were relocating production to Southeast Asia.
Part of the reason remains labor costs. In certain industries—such as apparel—even modern factories require a lot of human hands. According to a recent survey by the Japan External Trade Organization, the monthly salary of a factory worker in India is $265, in Vietnam $227 and in Bangladesh a mere $109—pennies compared to wages in the U.S. That’s one reason why only a small amount of apparel production has returned to American shores. Even though U.S. production of clothing surged by 67% between 2009 and 2017, it still accounts for only 3% of the market, according to the American Apparel & Footwear Association.
On top of that, it is far from clear that manufacturers who wanted to move back home could even find the workers they’d require in the U.S. American factories are already facing severe labor shortages; the latest data from the U.S. Bureau of Labor Statistics showed more than 500,000 unfilled job openings in the manufacturing sector. A dearth of available workers has bedeviled a Trump-touted plan by Taiwan’s Foxconn to build an assembly plant in Wisconsin. The problem is only likely to get worse. A study by Deloitte and the Manufacturing Institute estimates that by 2028, the U.S. manufacturing sector could face a shortfall of 2.4 million workers.
In addition, some suppliers possess technology or technical skills that are difficult to recreate elsewhere. For instance, in the business of dinnerware—plates, mugs and so on—Chinese manufacturers remain unrivaled in their ability to produce the massive quantities necessary to fill shelves at Wal-Marts and Targets at an acceptable price and quality. High-tech manufacturers such as Taiwan’s Largan Precision Co., which makes camera lenses, or Japan’s Murata Manufacturing Co., a specialist in foldable circuits, are so skilled at what they do that they can’t be easily replaced.
Finally, companies will continue to produce in different countries to serve local markets. Trump has attacked General Motors Co. for keeping factories open in China while shutting them in the U.S., apparently unaware that those plants are primarily making cars for Chinese, not American, drivers. As families throughout the emerging world grow richer, more factories will inevitably be built by U.S. firms in places such as China and India to sell to them. Homi Kharas of the Brookings Institution has figured China will account for 22% of global consumption by the middle class (in purchasing power parity terms) by 2030, India 17% and the U.S. only 7%.
So, in all likelihood, U.S. companies will continue to ship car and iPhone parts from Germany to China to Mexico. Trying to stop them with tariffs, threatening tweets and other forms of pressure will simply undercut the competitiveness of corporate America. Global supply chains are no more than a response to economic realities. The sooner U.S. politicians recognize that, the better off American firms will be.
