The Return of U.S. Manufacturing
In July, U.S. manufacturing activity expanded for the seventh consecutive month and struck a four-year high. According to the Institute for Supply Management, the sector registered a manufacturing PMI of 55.6 percent, which was 2.3 percentage points above the June reading. Reshoring has, in large part, propelled this manufacturing growth and could substantially impact regional economies.
What is Reshoring in the U.S.?
Reshoring refers to the relocation of goods manufacturing back to the United States from overseas. Whether through incentives, tariffs, or federal and state funding, U.S. policies have increasingly prioritized the practice.
As lockdowns revealed vulnerabilities in the global supply chain, the COVID-19 pandemic spurred some American companies to engage in reshoring, returning manufacturing back to the U.S., often despite higher labor costs. Moreover, proponents of reshoring have attributed geopolitical and national security concerns, dependence on foreign suppliers for critical goods, transportation costs and delays, and automation and changing international cost differences as drivers of their practice.
While reshoring may improve supply chain resilience, domestic investment, and employment, it can also increase production costs, strain labor markets, and demand copious infrastructure and public investment. Still, economic effects vary widely by industry, location, policy design, and time horizon.
Therefore, understanding how reshoring will impact the U.S. economy beckons a look beyond simple, raw numbers such as jobs created or factories constructed, and instead to an examination of inter-industry relationships with labor forces, suppliers, consumers, governments, and regional economies.
Reshoring in Practice: What is the CHIPS and Science Act?
The CHIPS and Science Act exemplifies one U.S. federal initiative to reshore manufacturing. Signed into law on August 9, 2022, the bill provided $52.7 billion to support the domestic production of semiconductors and authorized research in various programs and federal science agencies.
The CHIPS Act articulates several key objectives, including:
- Bolstering the security and resilience of the semiconductor supply chain, a network hitherto heavily concentrated in East Asia.
- Strengthening U.S. leadership in semiconductor technology.
- Promoting the construction of domestic fabrication plants (“fabs”) as a boost to job creation, skilled technical workforces, and the overall U.S. economy.
The statute could impact multiple dimensions of the economy, from construction and equipment investment, engineering and skilled manufacturing jobs, material and service suppliers, demand for electricity, water, transportation, and housing, and the security of downstream industries.
What are the economic benefits of reshoring?
Despite logistical challenges and costlier domestic labor and production, reshoring can stimulate the economy and offer advantages to U.S. companies.
Supply Chain Resilience and Security
For certain products – from semiconductors to pharmaceuticals to defense products and critical minerals – it becomes in the best interest of the United States to reduce the risk of overseas production in a foreign country.
To secure greater control and visibility over their supply networks, businesses may shift toward reshoring. Returning manufacturing to the U.S. tends to reduce exposure to overseas disruptions such as port closures, shipping delays, trade restrictions, and geopolitical conflicts. Moreover, maintaining domestic production capacity can also produce shorter lead times: the total time that passes from the creation to the delivery of a product.
However, it is important to distinguish supply chain resilience from complete self-sufficiency; after all, domestic production may still depend on imported equipment, materials, and components.
Direct Employment
Another frequently cited reason for reshoring is employment, as reshoring creates manufacturing jobs that can curtail unemployment. These jobs include temporary construction workers and sustained operational jobs in manufacturing, engineering, and administration.
Multiplier Effects: Output, Income, and Tax Revenue
In addition to direct effects engendered by activity at a reshored manufacturing facility, decision-makers and policymakers must consider indirect and induced effects that can multiply and ripple through regional economies. When manufacturers invest capital in facilities, machinery, and equipment, they can increase demand for domestic suppliers, transportation, utilities, and maintenance.
Reshoring can also increase total output, resulting in higher labor income and household spending. Workers earning more income thereby obtain more disposable income to spend on various goods and services in the local economy. Such activity can generate local economic boons in the manufacturing regions that were once dependent on a limited number of industries, with potential growth in business tax revenues.
Still, in many cases, the size of multiplier effects often hinges upon how much activity remains within the regional and U.S. economy. If intermediate inputs arrive from overseas, then some of the potential economic benefits leak out of the region.
Population and Community Development
Job creation may attract workers and families, leading to population growth and new demand for housing, retail, healthcare, education, and other services, in turn revitalizing former industrial communities.
Innovation and Technology Gains
Reshoring may also stimulate innovation and technological development. When companies move production back to the United States, they must invest in advanced tools such as automation, robotics, artificial intelligence, and smart factories to keep costs low and quality high.
Furthermore, increased proximity among manufacturers and engineers can foster knowledge sharing and promote quicker research and development. If domestic industries grow more productive and competitive, it can increase companies’ export capacity in the future.
What are the economic drawbacks of reshoring?
Yet, depending on economic circumstances, reshoring efforts do not always succeed.
U.S. companies must weigh greater reliability and reduced economic vulnerability with potentially higher fees, logistical planning, and manufacturing constraints.
Production Costs and Consumer Prices
U.S. companies can underestimate the labor, land, and regulatory costs to transition manufacturing back home. Often, these costs exceed those in foreign countries that have already established themselves as manufacturing powerhouses. Considering the overall regional economy, these domestic cost hikes can increase consumer prices.
Workforce Availability and Skill Gaps
In areas with greater competition for a limited workforce, manufacturers may struggle to source engineers, technicians, construction workers, and other skilled employees. Such competition can raise operating costs and wages. There is debate around whether reshoring employs underutilized workers, attracts new workers, or competes with existing employers for an already constrained labor supply. By competing with existing businesses for resources such as land, labor, and capital, reshoring may cause industry displacement and draw employers out of a regional economy.
Infrastructure and Resource Demands
Relocating manufacturing facilities back to the United States also calls for a greater abundance of resources to sustain reshoring in the long term. For example, electricity generation, water, transportation, digital infrastructure, and housing, schools, and public services may need to expand rapidly, imposing a high short-term cost on local governments and ratepayers.
How can REMI help with economic impact analysis?
Why Economic Impact Analysis?
A static number, such as jobs created or manufacturing plants reshored, rarely tells a complete story. Truly understanding the economic impact of reshoring warrants dynamic economic modeling and a deeper examination of the inter-industry relationships within a region.
While reshoring manufacturing can generate employment, strengthen supply chains, and support new investment, its benefits are neither automatic nor evenly distributed. Workforce constraints, infrastructure requirements, higher production costs, and competition for regional resources can substantially influence economic impacts. Given these factors, dynamic economic modeling allows policymakers and economic development leaders to move beyond headline investment.
Furthermore, the effects of reshoring can vary drastically by region; in particular, existing industries, suppliers, workforce size, skills, the availability and cost of energy, transportation, and housing, the makeup of the region (urban, rural, industrial), and infrastructure capacity are only a few input factors to consider when modeling economic impact.
Different manufacturing facilities also engender different economic patterns. Hence, decision-makers must use region-specific dynamic modeling to determine economic impacts during the construction and operational phases.
How Can REMI Help?
REMI (Regional Economic Models, Inc.) provides dynamic economic models, enabling users to project the economic impacts of policies, projects, and investments up to 2060. REMI models incorporate inter-industry relationships, behavioral responses, economic geography, peer-reviewed econometric equations, computable general equilibrium, and a compilation of data sets sourced from trusted federal and state agencies.
By taking inputs such as new manufacturing output, factory capital investment, employment for reshoring purposes, changes in production costs, wage adjustments, government incentives, and expenditures, REMI can then analyze impacts on a range of economic indicators, including:
- Employment;
- GDP / Gross Regional Product;
- Outputs by industry;
- Personal income;
- Population and migration;
- Prices and production costs;
- Government revenues;
- And other economic indicators of regional economies!
Interested in evaluating how manufacturing reshoring affects your regional economy? Book a demonstration, explore different REMI models, or register for our upcoming webinar on the data behind economic forecasting.
For more on the economic impact of manufacturing reshoring, see our webinar slides here.