Reshoring and technology competition
At the start of the year, the EU and US both announced initiatives to increase their supply chain “resilience”. Although reshoring isn’t mentioned directly by either the EU or the US, the initiatives carry an implication that foreign suppliers are a source of risk, which some domestic production could help to offset.
In the EU’s case, specific attention is given to the health sector, with possible policy solutions already sketched out (crisis preparedness, diversifying production and supply chains, stockpiling, and fostering production and investment – not necessarily in the EU). In parallel, within a new digital strategy the EU set a target of doubling its share of global semiconductor production to 20% by 2030.
For the US, shortages of medical goods at the beginning of the pandemic are used as a jumping off point for a review of supply chains in several sectors, including critical minerals, semiconductors, and electric vehicle batteries, to report in June. A further set of sectors, including defence, energy and food production will also be reviewed over a longer timescale. In parallel, the US has announced Buy American, strengthening the obligations on Federal agencies to buy from domestic producers. Versions of the policy have existed for decades, but never in combination with such large-scale fiscal stimulus.
China had already been steadily reducing its dependence on foreign suppliers before the pandemic, with Chinese firms handling an increasing number of the steps in manufacturing, from simple to complex processes. China’s new five-year plan, announced in March during the Two Sessions, focuses on further self-reliance in the manufacture of increasingly advanced technology.
In the near term, not much will change while EU and US policymakers build up a picture of their selected supply chains, and China continues down its path of upgrading its manufacturing capability. Reshoring won’t happen while firms face higher costs to source from home, so competitiveness needs to be improved, through investment, but also reducing ‘red tape’, and access to suppliers, skilled labour and markets.
Even as the relative costs of complex, globalised supply chains increase – if tariffs remain high, or rise further, and if domestic competitiveness improves – the recent past suggests that production is slow to shift back home. The trade war shocks to the US-China trade relationship, in terms of the higher tariffs as well as ongoing uncertainty, have seen changes in the main exporters to the US, but little reshoring.
