Reshoring and Nearshoring Trends

In recent years, especially since the onset of the COVID-19 pandemic, American-based companies have been returning their overseas operations to the United States. The decision to reshore their manufacturing facilities, bringing them back to the US, or to nearshore, moving manufacturing to neighboring nations including Mexico and Canada, has been motivated by a variety of factors. Principally, costs are at the forefront of decision-makers’ minds, and many of the challenges posed by the pandemic have altered the equations manufacturers have used for the past two decades when deciding where to produce their products. Legislative developments have also played a key role in this trend, encouraging US-based companies with financial incentives and efficiency gains. When coupling the broader supply chain dilemmas companies face with the new direct economic motivations to manufacture in the US, the decision to bring production back to American factories, or move closer to US borders, becomes clear.

“Shoring” up the Supply Chain

The pandemic illuminated each and every pitfall that can slow down the supply chain process, bringing global trade at certain points to a halt and leaving importers and exporters alike scrambling to move their products. One factor that had long been discounted greatly accentuated the problems supply chain managers faced — distance. For years, moving cargo across the world’s largest body of water from manufacturing-focused nations such as China to consumer-driven nations such as the US seemed to be more or less a given. While issues were always guaranteed to arise at some point, companies could reasonably expect their products to arrive on either end of the Pacific in a cost and time efficient manner.

2020 completely changed that reality, with cargo ships booked to capacity, shipping containers in short supply at key junctures, and the costs of shipping skyrocketing to unprecedented levels. The US Bureau of Labor Statistics reported a nearly sevenfold increase in international shipping prices during the pandemic, a jump practically unheard of since the advent of the shipping container. This prompted companies to rethink the placement of their production centers, the goal being to avoid future disruptions by relying less on exceptionally long-distance cargo shipping in favor of overland and shorter-distance alternatives. A company selling to the US market needn’t worry about shipping container availability in Guangzhou if they manufacture their products in Georgia. Likewise, it takes significantly less time to truck a product from Tijuana to Chicago than to ship it from Shanghai to Chicago, and typically costs less. For companies seeking to sell their products in the United States, reshoring and nearshoring saves time, money, and headaches. Manufacturing in and around the US provides a form of ‘insurance’, so to speak, against global and regional supply chain disruptions. Supply chain resiliency is bolstered when the distance between origin and destination is reduced, not only in terms of the potential complications that could arise, but also by providing companies with greater leeway. A manufacturing or shipping delay for an American product made in Canada is more easily rectifiable than one in Vietnam, given the shorter transit times that afford a greater chance to make up for the delay. With reliability and resilience being at the forefront of nearly every supply chain professional’s mind, reshoring and nearshoring aid these efforts tremendously.

Total Cost of Ownership

Reduced shipping costs resulting from shorter shipping distances are just one of many factors that make reshoring and nearshoring a cost-effective strategy for companies. Bills passed by the United States Congress during the pandemic and in its immediate aftermath have incentivized manufacturers to return to the US, specifically the Chips and Science Act, Inflation Reduction Act, and Bipartisan Infrastructure Law. These bills not only encouraged investment in manufacturing and production, but also facilitated improvements to key points in the supply chain that enable more effective and efficient shipping, namely in railways and ports. This has helped improve the movement of goods within the US.

Tariffs aimed specifically at trade with China have also shifted the decision-making framework for companies with American markets. Even with wage increases, with manufacturing salaries for Chinese workers growing by over 9% on average each year since 2013, the specific cost of manufacturing is lower in China than in the US. But manufacturing is just part of the equation. The Reshoring Institute found that US-based manufacturing is more cost effective than Chinese-based manufacturing in only 8% of cases when exclusively considering manufacturing costs. That number jumps to 46% when considering the total cost of ownership, including all shipping costs and tariffs. Tariffs were found to have a particularly significant impact in providing economic motivation for reshoring. For nearly half of the companies studied, it was more cost effective to manufacture products in the US than in China, making for a relatively straightforward decision. When factoring in the risk reduction and ‘insurance’ of manufacturing in the US, as well as Mexico and Canada, reshoring and nearshoring will likely continue to become more and more appealing options for companies in many industries, especially if existing tariffs are upheld and new ones are implemented.

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