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CAN WE MEASURE WHETHER “RESHORING” IS REAL?

reshoring

CAN WE MEASURE WHETHER “RESHORING” IS REAL?

Ribbon Cuttings and Political Ads

Announcements about plant openings and closings make good political fodder. Politicians from both parties are guilty of extracting trends from single events, leaving context behind: “Jobs are coming home!” “Traitorous companies are leaving the United States!”

A popular claim over the years is that Washington policies have succeeded in either shaming or incentivizing American companies to bring manufacturing “back” to the United States, even if manufacturing overseas had been additive to domestic production. How can we know whether such “re-shoring” is actually occurring, and to what degree?

A Reshoring Index

Kearney recently released the seventh edition of their annual Reshoring Index, which attempts to do just that. The U.S. Reshoring Index tracks total manufactured goods imports from 14 traditional offshoring partner countries including China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka and Cambodia, as a percentage of U.S. domestic gross output of manufactured goods.

After rising almost steadily over the last decade, imports from those 14 countries contracted 7.2 percent in 2019 while U.S. manufacturing output remained steady. The decline is due almost entirely to fewer imported goods from China in reaction to the U.S.-China trade war, which also suppressed U.S. manufacturing exports. Notwithstanding the shock of the trade war, China’s share of the U.S. import market declined for the sixth year in a row.

According to Kearney, the U.S. market imported 12.1 cents worth of offshore production from these Asia-based “low cost countries” (LCCs) for every $1 of domestic manufacturing gross output, down from 13.1 cents in 2018. On the basis of the index, the United States experienced a net reshoring in 2019, as producers chose to source more goods domestically.

imports from LCCs

Diversification Away from China

The Kearney report also began tracking the so-called “rebalancing” of American company-centered supply chains to understand whether U.S. manufacturing imports are diverting from China toward other Asian LCCs. Overall, the LCCs exported $31 billion more in manufactured goods to the United States in 2019 than in 2018, with Vietnam garnering almost half of the shifting imports. Troublingly, a portion of U.S. imports from Vietnam represent China-origin goods diverted through Vietnam to dodge U.S. tariffs.

Nearshoring: Buying More from Mexico

Not only are imports shifting away from China toward the rest of Asia, Kearney finds another trend: increased sourcing of goods from Mexico, characterized as “nearshoring”. Mexico has some advantages over LCCs in Asia and a longer relationship with many U.S. manufacturers through NAFTA.

Over the last seven years that Kearney calculated its near-to-far trade ratio, there were approximately 37 cents worth of manufacturing imports from Mexico for every dollar of U.S. manufacturing imports from Asia LCCs. Last year, however, that ratio increased to 42 cents as U.S. imports of manufactured goods from Mexico shot up 11 percent between 2017 and 2018 and another 4 percent in 2019 as tariffs on goods from China escalated.

Asia LCCs v Mexico

But Not Necessarily for Economic Reasons

As economist Caroline Freund explains, reshoring does not necessarily reduce risk: “A better strategy to reduce the risk of potential supply-chain disruption would be for firms to reduce dependence on any individual supplier.” While it’s not clear the reduction in sourcing from China will benefit domestic suppliers, it does seem apparent that what’s motivating the shift in imports is diversification away from China.

As Freund says, firms will reshore if it is more profitable and less risky to move production close to the market. They will also reshore if compelled to do so through trade and other national policies such as “Buy America” requirements. The big question is whether supply chains restructured on that basis will make economic sense.

We’ll be watching the Kearney Reshoring Index to understand whether continued tension in the U.S.-China trade relationship and post-pandemic policies keep moving the reshoring needle.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

UK Joins US, China as Top Global Tech Markets

Santa Clara, CA – Technology industry leaders are most bullish on revenue growth in the US, China, and the United Kingdom, according to the results of the annual Technology Business Outlook survey of US-based technology executives conducted by business consultancy KPMG LLP.

The UK ranking is one of the biggest surprises in this year’s survey with 42 percent of the technology leaders projecting that market as their first, second or third highest revenue growth rate for their companies in the next 12 to 24 months, compared to only 18 percent in last year’s survey.

The US remains the No. 1 market, selected among the top three by 81 percent of the respondents – higher than results in the prior three annual surveys – followed by China at 47 percent. The executives were each asked to select their top three markets.

“The jump by the UK is the result of strong economic recovery in the country combined with the effects of tax incentives which have encouraged investment in the tech sector,” said Tudor Aw, head of KPMG Technology Europe.

The findings, he said, “reflect KPMG’s most recent local technology report showing UK tech sector business activity growth at its highest for almost 10 years supported by steep rises in incoming new work and the lowest rate of cost inflation for over four years.”

Interest in Brazil, Mexico and South Korea Declines

Unlike a year ago when Brazil, Mexico, and South Korea appeared on the rise, fewer survey respondents see those three countries as their biggest revenue and employment growth markets.

Brazil’s position as a revenue growth market declined 10 percentage points to 23 percent and as an employment growth market 5 percentage points to 21 percent.

Tech executives’ expectations for their company’s revenue growth in South Korea declined from 14 percent in 2013 to 7 percent in this year’s survey, and for employment growth it slipped two percentage points to 10 percent.

The outlook for Mexico dipped six percentage points to 9 percent for revenue growth, and fell six percentage points to 15 percent for employment growth.

Technology executives believe the US, India, and China will be the leading markets for tech employment growth between now and 2016.

Other countries with higher tech company expectations for employment growth are Canada, at 30 percent up from 23 percent, the UK 28 percent up from 21 percent, and Germany 15 percent up from 7 percent.

Offshoring Outgaining Onshoring

While 58 percent of those surveyed don’t plan to make any changes in how they deploy their manufacturing in the next two years, 24 percent are either moving more manufacturing offshore or incrementally adding new offshore manufacturing.

Eleven percent are either moving manufacturing back or adding new manufacturing operations in the US.

At the same time, 61 percent of the technology executives say their companies are not planning to re-shore non-manufacturing functions. Sixteen percent say they will, and 23 percent say maybe.

The KPMG survey was conducted in the US in March among executives from companies based in the US and overseas with 74 percent represent companies with revenues of $1 billion or more and 26 percent represent companies with revenues in the $100 million to less than $1 billion range.

06/11/2014