Covid-19 and Deglobalization

The Reshoring of Manufacturing

One of the largest and most significant aftershocks of the Covid-19 pandemic of 2020 will be felt in the manufacturing sector globally. The pandemic is set to accelerate the global trend towards deglobalization. A range of factors had begun to change the pattern of global production and global supply-chains ahead of 2020, such as rising wages in globalized industrial centers such as China and rapidly declining costs of industrial robots.

The Covid-19 pandemic has laid bare the risks of the world’s reliance on complex, interdependent global supply-chains. In April, as the pandemic gathered pace massive shortages of personal protective equipment, medicine, and other essential equipment along with shutdowns of factories, borders and trade routes represented a nightmare scenario for the complex supply-chains that govern global commerce today. At its peak, the port of Los Angeles (the largest port in the United States) reported a 50% drop in inbound container volume.

Firing an Empty Gun: Shortages and Shut Borders

As nations shut their borders and turned their attention inward to deal with public health crisis, many of the most developed economies in the world found their response crippled by the inability of their hollowed out industrial bases to rapidly adapt and scale production of essential items. Over 48,000 health workers in Spain have been infected in the last 3 months due to a lack of personal protective equipment. Health workers have been protesting as recently as this week over the continued shortages. In the United States — the richest and most powerful country in the world — the surgeon general put out an explainer video about how to make homemade masks because the country has proven incapable of producing enough masks for every citizen. A shortage of swabs have slowed the United State’s testing program and global shortages of key medicine are a growing problem.

This nightmare scenario has sparked significant anger among politicians and leaders around the world. Many have begun pushing to “reshore” or “onshore” manufacturing capacity that has been outsourced to countries like China over the last few decades — at least of certain items considered critical to national security. US Senator Josh Hawley recently put out a policy brief calling for medical supply-chains to be secured and reshored to the United States, mandating local content requirements in production (a tactic used by China to strengthen its industrial base over the last few decades) and Federally-backed, low-interest capital expenditure financing to stimulate domestic investment in manufacturing. Japan — in its stimulus package in April — allocated $2 billion in credits and loans to Japanese companies seeking to reshore production from China thanks to this pandemic. Finally, a Bank of America survey of 3,000 global companies across 12 industries found that over 80% of these companies were rethinking at least part of their supply-chains.

The End of Cheap Labor and the Rise of Robots

The pandemic has unleashed a significant reshoring wave that represents a material change to the globalization that the world has experienced over the last few decades. Globalization and the outsourcing of manufacturing capacity to Asia was driven by the economics of efficiency historically. By producing items in countries with much lower labor costs (such as China) global corporations were able to significantly lower production costs and expand margins and profits. However, these efficiency gains are starting to disappear.

Wages have been rising steadily in traditionally low-cost markets like China. In addition, the cost of industrial robots has been dropping consistently over the last few years. The combination of these two factors, along with the US-China trade war had already sparked a move to reshoring. The Kearney US reshoring index recently noted

“In 2019, imports of manufactured goods from 14 Asian low-cost-country offshore trading partners shrunk to $757 billion, from $816 billion in 2018-a 7.2 percent decrease-while US domestic gross output of manufactured goods reached $6,271 billion in 2019, virtually unchanged vs. 2018.”

By laying bare the vulnerabilities of highly globalized supply-chains along with organic changes in the economics of production, the Covid-19 pandemic will change the distribution of global manufacturing and production meaningfully. Manufacturing is once again becoming an issue of national security, instead of being a question of just cost over the last 30 years. In many ways, reshoring of manufacturing and less reliance on China as the world’s industrial powerhouse will help balance out trade disparities and give many countries greater economic independence.

The reshoring of manufacturing presents numerous opportunities to enterprising entrepreneurs across the globe. Governments will have to play an important role in stewarding this change with smart policy, astute application of capital and financing and by setting a clear agenda for what items are critical to produce domestically (at least in part). Reshoring is not the end of globalization. Instead, it is a new beginning. The beginning of an age where production no longer is a question of just labor and the continuation of the trends of the Fourth Industrial Revolution.

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Originally published at https://trajectory.substack.com.

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Investor @ Wavemaker interested in the intersection of politics, economics and technology. Sign up for my newsletter @ https://bit.ly/33FWVuq

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