Of course, I understand that some products are strategic and U.S. national security is threatened when they are made overseas, especially in adversarial nations.
But…
The U.S. is a capitalist country. Companies, not the government, make production decisions. Company executives answer to shareholders (and the market which values the stock price that is part of manager compensation).
Who will compensate a company that moves production from a low-cost manufacturing plant overseas to a higher-cost manufacturing plant in the U.S.? The government can’t subsidize every strategic product, nor can they fix the price of a product that is oversupplied relative to demand.
Besides the strategic chip plant initiative that the Federal Gov’t is backstopping, I’m thinking we, the consumers of all of those other products will be paying for this re-shoring move in yet higher prices.
I think that is what the market is thinking now…
'38Packard
@MarkR - I’m not sure what you’re asking me to clarify. But I’ll try.
I’m under the impression from reading recent news articles that the Fed Gov’t is subsidizing the chip manufacturers to re-locate their manufacturing centers back to the US. That is a Fed gov’t initiative which I agree will be paid for by our Fed taxes (and probably by consumers of those products as well).
For non-chip industries, think medical devices, pharmaceuticals, etc. which I do not think are getting strategic funding from the US Government, then I’m assuming that the consumers of those products will be paying for those costs.
Possibly backlash against too many critical products made elsewhere, that when shutdown cause big supply chain backlogs. So it might not be consumers that have any real say, but all the small/medium sized businesses that want to be a supplier to a larger company that can say in their bid we make it local and have inventory that is local…so you might pay more but you get reliability.
It’s obviously hard to talk about without specifics. But, to state the obvious, with the exception of the chip making act already mentioned (where the difference is being paid via public funds), the company itself is paying the difference. Potentially passing the costs onto consumers, if the market will bear it.
So, that implies the question of “what would be the business reason they do that?”. And the answer to that is the same answer to everything business value question: either cost, revenue, or risk.
There isn’t as much savings to outsourcing as there used to be
There is a potential revenue benefit to reshoring (such better quality or faster turnaround)
There is some risk to outsourcing that the business wants to avoid (such as supply chain issues or IP risk)
I think it’s only natural that there was a hype curve associated with outsourcing. Some of the early outsourcing adopters saved a lot of money. But now some of the benefits have been eroded and some of the opportunity costs exposed. And, especially with the supply chain issues of the pandemic and China political risks headlined, I think it’s only natural that we see some decisions about locations reverted.
It’s certainly not going to be everything brought “local”. It’s a global economy now. But when even Apple, a company known for its operational excellence in outsourcing and supply chain muscle, is experiencing huge pains from its dependency on China, it’s only natural that everyone is going to rethink their onshoring/offshoring/reshoring decisions.
Here is a post from @tjscott0 on a different thread that has a link to a MA medical products manufacturer. The website lists the many reasons why their customers would want to work with a US based company as opposed to a foreign company.
Here is a direct link to the web page with the rationale from this manufacturer’s standpoint:
I would be delighted if the reshoring was to Mexico, rather than subsidizing US plants so that the net labor and compliance cost to the “JC” is equal to Mexico.
Several years ago, I read of people making their way from Guatemala/Nicaragua and similar garden spots, heading for the US, never made it, because they were recruited to work in factories in Mexico, where they were welcome, and everyone spoke their language.
I don’t understand why Mexico has such problems with corruption and illegal activity. The country is blessed with resources, population and size. It should be as peaceful and prosperous as the US and Canada.
If US strategic supplies were coming from China, or anywhere else on the Pac Rim, and the government gets in a snit with the US, it is difficult for the US to reach out and “touch” them. If a revolution in Mexico put a defacto Kim ally in power…well, the US has invaded Mexico to secure it’s interests several times before.
For fiscal year taxpayers with taxable years ending between January 1, 2022 and December 31, 2023, the corporate tax rate would equal 21% plus 7% multiplied by the portion of the taxable year that occurs in 2023. This proposal was also made by the Biden Administration in the Fiscal Year 2022 Green Book.
Wendy et al,
Note the rise in the effective corporate tax rate. While corporate taxes were low if a corporation spent on a new factory more of the money being used came out of profits. The higher corporate taxes and the top income bracket rate go the more investing in the US will happen. No sense in paying Uncle Sam when expensing factories, R&D and better pay for workers comes out of taxes in part.
As for the US v Mexico, we are the expensive value added product and Mexico is the less expensive less value added product. Both are going to do quite well.
But why? Why would we end up in a situation where all the factories come back to the US/Mexico?
China has no more growth in their economy. The Chinese economy had been the main exporter of a deflationary manufacturing force globally. That is over entirely.
This is an opportunity for the US to pick it up as the main manufacturing power exporting a global deflationary force.
Interest rates play a role. The strength in the USD and now joining us the other western currencies is lowering input costs nominally. There are still supply problems, ie Neon. Regardless of the economic fits and starts we are reindustrializing.
Why leave China? Among other reasons the Chinese central government is juggling which factories in China will get any supplies of inputs and labor at all. That will very soon include not supporting foreign factories in China. In the meantime regardless of Covid restrictions there has been more limited electricity production at times and water shortages. Costs are rising in China while the internal market is suffering. Xi has never known what he was doing. Now it is worse Xi is consolidating more and more power including over the PBoC which he has had too much say over all along. China is a basket case.
adding…there are also economies of scale. Meaning the more factories that move back to the US/Mexico the more factories that will move back to this region. The reason being the factories produce for each other and produce for consumers who use one product with the next.
If I were reshoring to a new factory, II would pay attention to making it as automated as possible - so the net increase in employment will likely not maintain the same ratio to capital investment that it had in the past.
That certainly will happen but there is much more to this. First as more of the factories build out and the infrastructure builds out product design is never ending. Meaning consumption of new products will rise. We have around 60% of our workers in 2019 making less than $40k per year. That is changing. We will see dramatic increases in wealth in the US and Mexico. Hiring in one factory does not have to overblown.
It is also happening in China. There is nothing new there since 1880.
The U.S. is a mixed economic system. For at least a century now (and arguably from its very beginning), government has been deeply involved in putting a thumb on the scales in all kinds of ways to influence production and consumption decisions. Sometimes that’s worked wonderfully (e.g., railroads, agriculture, medicine, aerospace, the Internet), sometimes less so (slavery, Prohibition?). The U.S. population contains citizens across the full range of intelligences and abilities. It’s a legitimate government responsibility (“life, liberty, and the pursuit of happiness”) to do what it can to jiggle the system so that it provides a reasonable opportunity for all Americans to lead productive, safe, healthy lives. If that means increasing the price of washing machines or generic drugs or lightbulbs or whatever by a few percentage points, I don’t have a problem with that.
It is not too hard to understand. “Strategic” items are things the govt wants to prevent from being cut off due to issues outside the US.
What has been omitted are known facts. There are essentially two markets–the US market and the non-US market(s). The US market is a relatively slow-growing market overall. Really fast-growing markets (with juicy profit potential) are outside the US. Those are the markets the various businesses want to be located in terms of sales.
In terms of production, making things in the US is usually more expensive due to substantially higher costs for labor. Automation can reduce the per-unit cost to some extent in the US, but if there are significant direct-labor costs involved in production, then the US-based cost per unit will be higher. With essentially full automation, location is pretty much irrelevant in terms of cost because the process of making the product is fully automated.
Thus, expect multiple production locations. One for the North American market (higher costs/security/etc) and others located outside the US for lower costs AND closer to fast-growing markets. This also allows companies to offer product differentiation to better suit various target markets without interfering with the US product.
The non-US market is far larger than the US market (fact, not opinion). The US has been a slow-growth market for many decades. People are buying replacements, not making first-time-ever purchases. An EV will mostly be a replacement for an existing car, not many first-time car (of any type) purchasers.
All of that will be turned on its head. Meaning you were right about all of it. It wont be that way going forward.
There are some 60% of American workers who were making very little money. In 2019 less than $40k per year. That is a huge untapped consumer demand. Most of them will become much more wealthy middle class consumers.
Mexico & South America countries have a culture of corruption as do Middle East countries & Afghanistan. US involvement in Iraq & Afghanistan was unable to change that culture.
Culture is ingrained in humans. Very difficult to change.