The systemic disruption to global supply chains observed over the past few months has precipitated calls, not least by politicians, for the re-shoring of manufacturing from Asia (predominantly China) and other lowcost markets to the USA and Europe.
Whilst demands for repatriating jobs by re-shoring production are not new – President Trump was elected partly on this mandate – Coronavirus has added new impetus to this campaign and it is not hard to see why. Analytics company Dun & Bradstreet estimated that around 51,000 businesses had a direct supplier in Wuhan, the epicentre of the outbreak, and 5 million businesses worldwide had second tier suppliers based in the Wuhan region. Many of these businesses were shut for an extended period over the Chinese New Year and into March as the Chinese government-imposed lockdown restrictions on companies, workers and logistics suppliers. This has had a severe impact on the many retailers and manufacturers in the West which have become highly dependent on out-sourced and off-shored supply chains.
The disruption led to delays in shipments, stock outs as well as the build-up of inventory at various bottlenecks resulting in costs running into billions of dollars (see section below on Inventory Costs).
Presently, according to US Department of Commerce figures, US manufacturers import 20% of their intermediate goods, which compares with 15% in 1997. Analysis by US bank Wells Fargo estimated that if offshoring was rolled back to 1997 levels the US would import around $180 billion less product from foreign suppliers. Out of this total, China would lose out by $56 billion. The drop in the value of product sourced from China would constitute 2.1% of Chinese exports which although sounding small would have a significant impact on shipping and air cargo sectors. For illustration purposes only, if it is assumed that international logistics costs comprise 5% of the total value of these imports, this could amount to a hit of $9 billion to the logistics industry involved in moving goods to the US.
But how realistic is the prospect of re-shoring and the de-Chinaization of supply chains? In this paper, we will discuss the fundamental reasons behind offshoring of production and whether it is feasible to reverse this long-term trend.