Ryan Beene of Bloomberg writes:
There has been a sense in financial circles that the fever among American executives to shorten supply lines and bring production back home would prove short-lived. As soon as the pandemic started to fade, so too would the fad, the thinking went.
And yet, two years in, not only is the trend still alive, it appears to be rapidly accelerating.
Beene’s evidence is a review of corporations’ earnings calls and conference presentations, which find increased discussion of “onshoring,” “nearshoring,” and “reshoring” since the start of 2020, and especially over the past four quarters.
It’s not just talk, though. It’s money and action, too:
The construction of new manufacturing facilities in the US has soared 116% over the past year, dwarfing the 10% gain on all building projects combined, according to Dodge Construction Network. There are massive chip factories going up in Phoenix: Intel is building two just outside the city; Taiwan Semiconductor Manufacturing is constructing one in it. And aluminum and steel plants that are being erected all across the south: in Bay Minette, Alabama (Novelis); in Osceola, Arkansas (US Steel); and in Brandenburg, Kentucky (Nucor). Up near Buffalo, all this new semiconductor and steel output is fueling orders for air compressors that will be cranked out at an Ingersoll Rand plant that had been shuttered for years.
Scores of smaller companies are making similar moves, according to Richard Branch, the chief economist at Dodge. Not all are examples of reshoring. Some are designed to expand capacity. But they all point to the same thing — a major re-assessment of supply chains in the wake of port bottlenecks, parts shortages and skyrocketing shipping costs that have wreaked havoc on corporate budgets in the US and across the globe.
In the past, says Chris Snyder, an industrials analyst at UBS, it was as simple as “if we need a new facility, it’s going in China.” Now, he says, “this is being thought through in a way that has never been done before.”
In January, a UBS survey of C-suite executives revealed the magnitude of this shift. More than 90% of those surveyed said they either were in the process of moving production out of China or had plans to do so. And about 80% said they were considering bringing some of it back to the US. (Mexico has also become a popular choice.)
Some of these moves are subsidy-induced, but many are not. By and large, businesses are responding to the negative incentives that Xi Jinping’s government has given them. It seems that the Shanghai Covid lockdowns were a turning point for many executives. As I wrote in April, those lockdowns made clear that the Chinese Communist Party values its political power and ideology more than foreign business. To many observers, that was clear long before then, but anyone in denial could not deceive himself any longer.
Perhaps counterintuitively, this means U.S. transportation systems are only going to be more important in the future. Many see issues such as port congestion as arising due to overreliance on Chinese production, but that’s not quite right. Whereas port congestion is currently driven by the importation of finished goods, more production occurring in the U.S. could mean congestion from importation of basic materials. There are also plenty of countries that stand to benefit from businesses leaving Xi behind. Indonesia and India, in particular, are looking to capitalize, and imports of finished goods from those countries would cause congestion just the same as imports from China.
Beene’s mention of Mexico is also important. Protectionist policies make cross-border trucking between Mexico and the U.S. difficult, and increased reliance on those supply networks would add strain to an already poorly functioning system. More production in Mexico has the potential to benefit both the U.S. and Mexico, especially border states in both countries, but it could be stymied by poor transportation policy.
Finally, new factories in the U.S. must be integrated into the domestic transportation network to be effective. That means more stress on our freight-rail network, which has not been performing well recently. Government is full of proposals to make things worse, from bureaucratic route planning to preventing technological progress to letting wasteful new Amtrak routes disrupt key freight-rail links. If freight rail becomes less competitive, more companies will resort to trucking instead, increasing highway-traffic congestion and air pollution.
The exit from China makes sense for many businesses and will probably have positive geopolitical consequences as the U.S. becomes less dependent on production in a communist regime. But the fundamental transportation problems the U.S. faces will remain the same, and some might even get worse.