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SUPPLY-CHAIN managers have had a stressful few years. From Sino-American trade wars and Brexit to covid-induced restrictions on medical exports and travel, there has been a lot to deal with. At the worst of the pandemic company bosses inevitably wondered if bringing production closer to consumers might help. In April a survey conducted by EY, an accounting firm, found that as many as 83% of multinational executives were contemplating so-called “reshoring” or “nearshoring”. Recent history shows how sticky supply chains can be, but might this time be different?
Politicians have long angled for companies to shift production to their shores because they want jobs for their constituents. There can be a business case for it too, in order to cut transport costs, say, or reduce inventories. The Reshoring Initiative, which advocates for more manufacturing in America, cites the allure of “Made in USA” branding for older Midwesterners. Some reckon technology might encourage reshoring. In 2017 a report by ING, a bank, predicted that 3D printing could wipe out 40% of trade flows by 2040.
Yet the experience of the past decade suggests that for every company reshoring production, there may be more doing the opposite. A survey of German manufacturers found that 2% brought production home between 2010 and mid-2012. Four times as many shifted operations abroad during that time. A study published in 2016 by the OECD, a club of mostly rich countries, found that the effects of reshoring on national economies were “(still) limited”.
Nor does recent history suggest that new technologies will cannibalise trade. Take 3D printing. A study by Caroline Freund, Alen Mulabdic and Michele Ruta of the World Bank found that its use in the hearing-aid industry increased trade by 58% over nearly a decade, compared with what it might have been expected to be otherwise. As the technology was useful for only part of the manufacturing process and hearing aids are cheap to transport, supply chains did not retreat. Gary Gereffi of Duke University cites the failure of Adidas to print shoes in America and Germany as evidence of the importance of highly orchestrated production networks. He found that a lack of locally available components meant the shoes had to be simplified so much they lost their consumer appeal. The adoption of other technologies can make importing, rather than reshoring, more attractive. Katherine Stapleton of the World Bank and Michael Webb of Stanford University found that Spanish firms using robots were more likely to increase their imports from low-income countries, or open affiliates there. Productivity-enhancing automation led firms to expand output, and so import more parts.
The rise in tariffs in America and elsewhere over the past four years could, in theory, have been a game-changer, encouraging companies to move supply chains nearer consumers. But evidence of a great shift towards “Made in USA” following President Donald Trump’s tariffs on Chinese imports is scant. Although American manufacturing imports from 14 Asian countries fell in 2019, there was no offsetting increase in gross domestic manufacturing production. A study by Ben Charoenwong of the National University of Singapore and Miaozhe Han and Jing Wu of the Chinese University of Hong Kong suggests that, while trade-policy uncertainty was associated with a reduction in the number of foreign suppliers to American companies serving the home market, on average these acquired no more domestic suppliers.
Might the pandemic prompt a shifting of supply chains? So far signs of reshoring are limited. In America import growth is outpacing domestic manufacturing production. Medical companies may be scarred by their experience of the swine-flu outbreak in 2009. At a hearing held by the United States International Trade Commission in September this year, one speaker recalled that companies ramped up production after the swine-flu pandemic, only to be driven to the verge of bankruptcy when demand fell back to normal. Sebastien Miroudot of the OECD finds that the evidence in favour of diversifying across many suppliers is shaky; experience suggests that firms with fewer, longer relationships recover from shocks more quickly. Rather than relocation, he has written, the research seems to argue for ensuring that production can be flexibly moved from place to place in an emergency.
The call of home
After their initial scare at the start of the pandemic, many companies now seem to have lost their urge to rush back home. A follow-up survey by EY in October found that just 37% of executives were still considering reshoring; a recent survey of firms in America and Europe by Euler Hermes, a trade-credit insurer, found that less than 15% were contemplating reshoring because of covid-19.
Some caution is in order, though. The pandemic is not over, and shifting production can be a slow business. There is some sign of movement in specialist industries: Biju Mohan of GEP, a supply-chain consultancy, reports increased interest from life-sciences firms in moving production from China to America. And industrial policy is back in vogue, and only just gathering steam in Europe and America. Both have plans to subsidise chipmaking, for example, and to make home-grown renewable-energy investments. The economic plan of America’s president-elect, Joe Biden, talks of firms being “dangerously dependent on foreign suppliers”.
The resilience of supply chains so far may come down to a virtuous circle created when globalisation accelerated in the 1990s. When production networks stretch across several countries, trade restrictions can backfire, hurting both the exporter and the importer. That gave governments a big incentive to co-operate, and in turn meant companies were comfortable building or relying on far-flung factories. But, as Brexit, the trade war and a hobbled World Trade Organisation show, that trust is eroding, and companies’ sense of security with it. Companies do not want to hunker down behind borders. But they could yet be forced to do so. ■
This article appeared in the Finance & economics section of the print edition under the headline “Location, location, location”
Source: Finance - economist.com
