Reshoring Realities

Shores are a popular vacation destination. People are drawn to them because of their beauty, and the activities they support. The weather is often more temperate at the waterfront…and if it isn’t, you can always take a dip. That’s why people flock to Surfer’s Paradise, the Copacabana, Monaco…and Seaside Heights, New Jersey.

Shorelines provide vistas to gaze over the horizon, and ruminate about what may be on the other side. Shores have also been the subject of rumination in economic circles recently. After decades of moving activity offshore, firms are considering bringing it closer to home. “Re-shoring” would have a significant impact on economic performance and inflation around the world.

The geography of global manufacturing has been shifting for seventy years. In the 1950s, the United States made about 40% of the world’s steel, and 60% of its cars. Today, those fractions are 4% and 12%, respectively. The migration has been especially rapid since 2001, when China was granted entry to the World Trade Organization.

Initially, the movement of manufacturing was prompted by labor cost differentials and energy efficiency. Western plants were older, union wages were elevated and successive shocks in the price of oil raised the costs of operations and transportation. In the 1980s, Japan rose to prominence as a dominant global producer; twenty years later, China took the leadership mantle and has held onto it ever since. China has maintained its position despite a gradual erosion in its labor cost advantage.

As a result, the United States now has a trade deficit in goods that amounts to more than 7% of annual gross domestic product. Heavy industries in the West have cried foul throughout the offshoring era. Foreign providers are not held to the same environmental and labor laws, and leading firms in Japan and China operate with the sponsorship (or ownership) of the state. Accusations of economic espionage and unfair trade practices have been leveled frequently.