The Manufacturer’s Dilemma: Reshoring and Resiliency in a Pandemic World

From the Rust Belt to the White House, policymakers, manufacturers, and consumers are debating the merits of reshoring, nearshoring, and building more resilient supply chains. The previous administration maintained a sharp focus on strengthening manufacturing in the United States through trade remedies, tariff protection, and reshoring measures. President Joe Biden has largely followed suit, maintaining many of the previous administration’s trade policies while outlining his own administration’s commitment to “Buy American” and build more resilient supply chains.

In the years between World War I and World War II, the rise of nationalist ideologies and crushing economic conditions ushered in an era of trade protectionism. In the interwar years, trade liberalization that had accelerated through 1913 essentially halted, dismantling previously established trading networks. However, these protectionist dynamics shifted with the signing of the Reciprocal Trade Act of 1934, which institutionalized tariff reduction reforms. Then, the 1944 Bretton Woods Agreement at the end of World War II laid the groundwork for the postwar economic world through the establishment of the World Bank, the International Monetary Fund, and eventually the General Agreement on Tariffs and Trade and its successor organization, the World Trade Organization, which was intended to serve as the global promoter of trade liberalization. During this time, the world trading system witnessed a reduction in tariffs and a push toward regional and multilateral trade agreements. With newly realized access to foreign markets, multinational firms—especially those in the manufacturing sector—initiated a trend of offshoring, which allowed firms to pursue lower costs abroad and achieve higher productivity gains.

As trade liberalization expanded, companies began to reexamine their production processes and disaggregate them in order to take advantage of lower relative prices and high productivity abroad in a bid to reduce the overall costs of goods production. Significant declines in transportation and communication costs were instrumental in this development. They enabled companies to develop supply chains that take advantage of low costs around the world to produce parts and components in different locations and then assemble them in a third location. International companies, particularly within the manufacturing sector, benefitted from decreased production costs and cheaper labor, but not without a cost to U.S. workers. Following a 30-year trend of offshoring, some firms have begun renationalizing their production chains, particularly since the 2008 recession. Meanwhile, the effects of globalization on manufacturing capacity and the U.S. trade deficit have grown to play a more prominent role in public discourse.

The Covid-19 pandemic caused unique supply chain challenges and demand shocks for nearly every industry. Quarantines and border closures constricted imports from foreign producers, and manufacturers faced severe material and labor shortages, lengthy manufacturing delays, and decreases in consumer demand. As this daunting confluence of factors was exposed, policymakers began to sound alarm bells and warn that existing supply chains would be unable to handle the bottlenecks in production. In response, two different approaches to supply chains have emerged: resiliency and reshoring.

To read the full report from the Center for Strategic & International Studies, please click here.