Harry Moser: Is the U.S. Succeeding at Reshoring?

China-based supply chains have been the source of 44% of reshoring and supply chains there are especially vulnerable today due to the perceived risk of decoupling and the rise in Chinese wages, let alone some geopolitical pressures. Reshoring away from China is feasible, said Harry Moser, founder of the Reshoring Initiative, a trade policy advocacy group, who presented to the U.S. China Economic and Security Review Commission on June 9. According to Moser, reshoring companies have brought back nearly one million manufacturing jobs. 

Following are some takeaways from Moser’s written testimony to the Commission.

Why do Companies Offshore?

Is it the corporate tax rate? Is it environmental regulations? Yes and yes. Anything that lowers the cost of goods produced entices companies to offshore production. 

Companies source products and locate their factories abroad at least 70% of the time based on FOB price/manufacturing cost (“price”) comparisons of the offshore versus the domestic source. Another top reason why companies offshore is because of availability, but many times the reason the product is unavailable here is because the local industry was eliminated by low-priced imports, Moser said. 

U.S. prices are about 40% higher than the Chinese price and about 15% higher than most other developed countries, thanks in part to an overvalued dollar, Moser said. 

Faced with domestic and offshore competitors accessing those lower prices, U.S. companies aggressively offshored, starting with Japan and Mexico, followed by S. Korea, India, S.E Asia and China in the late 90s and early 2000s. “As long as that huge price differential remains, our trade imbalance and weak supply chain will not improve,” he said. “To subsidize enough domestic production to overcome our $1.1 trillion 2021 goods trade deficit would cost about $330 billion annually.”

Where Does Reshoring Stand Today?

Moser uses some what of a “cheat code” to measure onshoring. He measures reshoring by U.S. headquartered companies sourcing from the world, along with foreign direct investment (FDI) by foreign headquartered companies into the U.S.  Combined, these efforts have led to about 6,000 manufacturing jobs per year in 2010 to about 260,000 per year in 2021, based on Reshoring Initiative’s numbers. 

They forecast 400,000 manufacturing jobs this year will be created through reshoring, as defined above.  This number could be derailed by policy shifts such as tariff removal and a recession. 

“We believe that new offshoring (closing U.S. factories and replacing with either factories or outsourcing offshore) has fallen dramatically since around 2010. The best evidence is the trend in manufacturing employment, consistent with an increased rate of reshoring and reduced rate of new offshoring.” — Harry Moser, Reshoring Initiative, written testimony to the U.S. China Economic and Security Review Commission, June 9, 2022. 

By Dec. 31, 2021, employment was about six million people higher than it was projected to be before the Great Recession. Because of this positive trend, the goods trade deficit stayed flat at about 4% of GDP from 2010 to 2019 prior to an import surge driven by Covid lockdowns and an unprecedented economic stimulus.

Four Ways to Strengthen U.S. Supply Chains

Moser listed four ways to bring supply chains home – or better yet, closer to home. Recognizing that price played a huge factor, and that an overvalued dollar made it more attractive to invest overseas where capital goes farther than here, Moser both recommended the Market Access Charge to curtail dollar inflows that lead to higher dollar values, and simply taking supply out of China and into other countries – what Washington refers to regularly as “working with allies.”

• Reshoring: Always the best choice, if economically feasible. Optimal impact on manufacturing, economy and domestic supply chain. Example: Two huge nitrile glove factories (PPE) funded by the U.S.: United Safety Technology, Inc. and Renco Corporation. Reshoring also increases U.S. purchases of raw materials and components from our trading partners, providing diplomatic advantage.
• FDI: Achieves the same benefit in terms of manufacturing and self-sufficiency, but more of the profits are lost to offshore and engineering is less likely to be here. About 50% of the 1.3 million jobs brought from offshore since 2010 have been due to FDI. FDI is often the best source of product and process technology when filling supply chain gaps. For example, BMW, Toyota, Mercedes all brought with them many of their suppliers from their home countries. Many EV battery plants have been either pure FDI or joint ventures with auto companies here. Example: GM and LG. 
• Nearshoring: Essentially means Canada and Mexico. The biggest driver of jobs to the U.S. is proximity to the market, so nearshoring is more feasible than the work with allies approach, which means Japan, Europe, Australia, New Zealand, much of Latin America, South Korea, India and even parts of Southeast Asia. Exports to the U.S. from Mexico are reported to contain 40% U.S. content vs. 5% for exports from China. Mexican wages are lower than Chinese wages in some manufacturing jobs. U.S. jobs are offshored to Mexico for the saving in wages and due to the availability of labor. Nearshoring from Asia to Mexico increases U.S. exports and makes supply accessible. Longer-term, the nearshoring raises Mexican wages, reduces new offshoring to Mexico, and stabilizes our neighbor’s economy. 
• Friend shoring: Far better than sourcing from China but less preferable than any of the first three processes. Much offshoring has resulted from the U.S. providing privileged access to its market, sacrificing U.S. manufacturing to achieve its diplomatic and humanitarian goals: spreading democracy, pulling countries out of poverty, geo-politics, etc. via Most Favored Nation status and other favors. For example, China’s Most Favored Nation status contributed to our loss of millions of manufacturing jobs, when China was then considered a friendly nation.

Convincing Companies to Onshore

Moser knows that all of this depends on individual companies and not the government. The only way the government can play a role is to raise tariffs to make up for an overvalued dollar and lower labor costs in the emerging markets.

He says government officials looking to convince companies to move supply chains out of China need to convince companies to consider total cost of ownership. This includes things beyond what the price is at the ports, but insurance and warranties and 30 other cost factors.

The biggest obstacles to reshoring are the same forces that drove offshoring: Uncompetitive manufacturing cost, shortage of skilled workforce and failure of companies to source based on the total cost of ownership. 

“This is a ‘teach them to fish’ opportunity,” Moser said, about convincing companies about reshoring. “If you just rely on incentives, companies will need those incentives forever. With a level playing field, companies will reshore in their own self-interest.” 

The U.S. is still the largest market in the world. If the government were as clearly committed long-term to solving supply chain imbalance as the Fed was to achieving stability during Covid, companies would rush to reshore, Moser told the Commission. 

“The federal government needs an industrial policy instead of what has been, in effect, a deindustrialization policy,” he said, highlighting what is often deemed a dirty word in Washington. He said that one specific area for policymakers to work on is to build a skilled labor force that can make things. As it stands now, the National Association of Manufacturers estimates that the country will have a 2.1 million labor shortfall in the next 10 years. Even if the dollar were to weaken, a MAC charge was implemented as Moser recommended, and tariffs were to remain sticky, companies would be hard-pressed to invest in new manufacturing without a workforce ready to do the job.  

“Substantial policy and behavioral changes are needed,” Moser said. 

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