Covid-19 Shows the Need to Reshore U.S. Manufacturing – Barron’s

by admin on June 16, 2020

As the Covid-19 crisis showed, American manufacturers couldn’t adequately produce ventilators or even face masks and so had to import them from China. But this same lack of capabilities is true in virtually every area of manufacturing, from production of steel, LCD displays panels, and chip manufacturing to telecommunications hardware.

Clearly this situation is no longer tenable if America wants to remain an advanced, prosperous society. Production has shifted overseas so extensively that the U.S. is now dependent on other countries, particularly China, to supply many basic necessities. Having lost sight of the critical requirements of a vibrant economy—better-paying jobs—reviving domestic manufacturing is a way to prosperity for millions of unemployed people across the country who have lost hope.

Giving up on basic commoditized manufacturing has also meant the U.S. has foregone future innovations and whole industries stemming from these industries. This can be seen in the 5G hardware debacle in the U.S. Hence, it is not enough for the U.S. to create a strategic supply of face masks. The country needs to reindustrialize and make sure all of its critical supply chains are no longer concentrated in only one region in the world.

The question, then, is how to do it? Specifically, how to reshore at least minimal levels of production to the U.S. so that it remains on the technological frontier and isn’t left behind on innovations in manufacturing and entire new fields stemming from these innovations. The challenge is that the country has lost critical skills and capabilities, including entire sub-supplier networks.

The first step to reshoring is better measurement and disclosure. The business truism that you can’t manage what you can’t measure holds true for assessing domestic production in a time of complex supply networks. Is critical production taking place in the U.S., or just simple final assembly? The Strengthening America’s Supply Chain and National Security Act, sponsored by a bipartisan group of senators, including Marco Rubio (R-Fla.) and Elizabeth Warren (D-Mass.) as well as a House version by Reps. Michael Waltz (R-Fla.) and James McGovern (D-Mass.), is tackling this issue in the pharmaceutical industry. The bill would, in part, require drug makers to disclose the source of “active pharmaceutical ingredients” in their products. Comparable legislation, with analogous metrics, should be extended to other manufacturing industries.

Disclosure could also drive consumer demand for products made in the U.S. Labels that tout sustainable manufacturing practices and ingredient sources for everything from toothpaste to spaghetti already exist. Imagine the prices consumers would be willing to pay for drugs that could proclaim to be “free from FAIs” (foreign-made active ingredients).

Disclosure of supplier network sources should also influence institutional investors and corporate boards. This is not about patriotism, but reducing risks. An overabundance of supply networks and production centered on one region of the world—China—as Covid-19 has shown, is poor risk management.

The main driver of demand should come from “Made in America” requirements for government purchasing. There are already “Buy American” executive orders, but these contain numerous loopholes, including exceptions such as sourcing outside the U.S. for reasons of “public interest,” or “nonavailability,” and need to be dramatically tightened.

Thanks to the Department of Defense, the Manufacturing Extension Partnership Programs, and initiatives such as the Advanced Manufacturing Partnership, the U.S. has actually saved very small pockets of manufacturing skills and resources that could be tapped to support growth in commercial manufacturing. The Manufacturing Extension Partnership programs, for example, work with small-to-medium-size enterprises to increase productivity as well as focus on product design, lean manufacturing, business development, and quality management and control.

The U.S. can also learn from China, where the local government maps product supply networks and gaps, and then implements actions to close them. U.S. states interested in reindustrializing could do the same to ensure that there are local suppliers for manufacturing components. The U.S. can also create entire new manufacturing institutions similar to those in other countries with a strong manufacturing base that focus on the R&D needs of local SMEs. For instance, Germany has Fraunhofer Institutes, which are independent institutions primarily funded by contract research that translate advanced R&D into applied processes that firms can use in manufacturing.

With stable demand and improvements in supply, manufacturing can and will return to the U.S. Once one company opens the first state-of-the-art production facility and develops a resilient supply chain with sufficient U.S. domestic sourcing, the costs for companies that follow will be significantly lower. Economies of scale, learning, and downward-sloping cost curves will further reduce costs as new factories in the U.S. utilize cutting-edge technologies. As Germany has clearly shown in the last twenty years, the real cost of labor depends on overall productivity, not wages per hour.

Covid-19 has brutally exposed both a national manufacturing weakness and the fragility of the way globalization is now managed. The task is difficult and will take years to bear fruit. However, if resilient and sustainable globalization is the goal, the pandemic gives the U.S. a chance to change. In so doing, prosperity for future generations of Americans can be secured.

David Adler is author of The New Economics of Liquidity and Financial Frictions and co-editor of the anthology, The Productivity Puzzle, both published by the CFA Institute Research Foundation. Dan Breznitz is the Munk Chair of innovation studies and co-director of the Innovation Policy Lab at the Munk School of the University of Toronto. He is also a fellow of CIFAR, where he co-directs the Program on Innovation, Equity, and the Future of Prosperity. His next book, Innovation in Real Places: Strategies for Prosperity in an Unforgiving World, will be published in January 2021.

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