October 12, 2020 BARRON’S 25
can economy vulnerable. A report from
the McKinsey Global Institute found
“180 products across value chains for
which one country accounts for 70% or
more of exports, creating the potential
for bottlenecks.” Worse, many of those
products come from an increasingly
hostile China, a circumstance with pro-
found national-security implications for
the U.S. and other democracies. That’s
why Democrats and Republicans alike
are looking for ways to revive U.S. manu-
facturing.
They’ll have to work hard. Despite
the trade conflict, the coronavirus, and
fear of a new cold war, a recent survey
by the American Chamber of Com-
merce in Shanghai found that 71% of
U.S. manufacturers had no plans to
move production out of China, while
only 4% said they would transfer some
to the U.S. Moreover, even those that
expected to move some production from
China planned only small changes, not
wholesale shifts in supplier relation-
ships.
U.S. companies have directly in-
vested about $260 billion in Chinese
operations since the early 1990s, ac-
cording to an analysis from the Rho-
dium Group. Replacing those assets
elsewhere would be expensive—espe-
cially if the new property, plants, and
equipment were in America—and the
running costs would be far higher, as
well. The worst-case scenario for inves-
tors is that they will have to bear tril-
lions of dollars of losses as companies
write down stranded assets, are forced
to hold more inventories, and shift oper-
ations in ways that lower margins.
The good news is that reshoring
doesn’t have to hurt. The past few de-
cades of globalization drove business
cycles closer together and made compa-
nies increasingly dependent on global
sales. Researchers at the Boston Con-
sulting Group’s think tank note that this
came at the cost of tighter correlations of
financial assets across countries, which
means that reshoring could help diver-
sify international stock portfolios and
improve the risk/return trade-off for
investors. What’s more, investors stand
to benefit if reshoring means a longer-
term revival in innovation and flexibil-
ity in production.
But reshoring won’t succeed without
long-term commitments of money, at-
tention, and expertise from the federal
government. Companies have spent
decades developing supply chains and
procurement practices to cut costs to
maximize returns for their shareholders
and to cut prices for consumers, so the
only way to alter their behavior is to
offer new, radically different incentives.
“Made inAmerica” won’t happen at
scale unless Washington makes it sig-
nificantly more profitable than the alter-
natives.
Some politicians seem to appreciate
this, which explains why the latest
batch of ideas from Democrats and
Republicans—who are sometimes
working together on these issues—are
about structural changes to the U.S.
economy. In 2019, Sens. Tammy Bald-
win (D., Wis.) and Josh Hawley (R.,
Mo.) co-wrote legislation to make
American manufacturing more com-
petitive by lowering the value of the
dollar, while Sen. Marco Rubio (R.,
Fla.) called for a new “industrial pol-
icy” to encourage business investment
in the U.S. to counter Chinese protec-
tionism. Since the pandemic began,
Sen. Elizabeth Warren (D., Mass.) and
Rubio have cooperated on bills to re-
“What’s missing is the
capability to pivot”
to sudden changes
in demand.
Erica Fuchs, professor of engineering and public policy
at Carnegie Mellon
By MATTHEW C. KLEIN
After decades of U.S. companies moving production overseas, there
is a bipartisan push to bring some back—particularly in the crucial
defense and pharma industries. Here’s what it means for investors.
F
or years, investors cheered as
U.S. companies shifted manu-
facturing overseas to reduce
costs and boost profit margins.
That could soon start to
change, with decades of off-
shoring replaced by reshoring.
The shortages of personal protective
equipment and other essential items
during the early stages of the pandemic
were a powerful reminder that corporate
managers’ obsession with efficiency and
cost-cutting at the expense of diversifica-
Illustration by Dave Murraytion and resiliency had made the Ameri-
The American Dream:
Reshoring Manufacturers
INDUSTRIAL EVOLUTION