Reshoring hits rough domestic waters
Tuesday, July 24, 2018
Some call the moves bold, others brash, but no matter which way you perceive the recent trade-related moves of the current administration, they're making some large, potentially negative waves for manufacturing.
One of President Trump's key talking points in the run-up to the 2016 election was the return of jobs to American workers, an optimistic promise of reshoring the large amounts of manufacturing that had set sail in search of more favorable foreign waters. For a time, it looked like it might have been a self-fulfilling prophecy, but in June, simmering trade tensions with China seemed to explode virtually overnight.
Saber-Rattling and Rattled Nerves
Beyond the direct impact of the escalating trade tariff situation with China, companies with overseas supply chains or manufacturing headquarters find themselves in a very difficult position.
Logic would seem to dictate that business should be pulled back "home" to wait out trade wars, but U.S.-based operational costs are often prohibitive, particularly where manufacturing labor is concerned. Even with the looming threat of tariffs and obstacle-ridden international supply chains, the financial benefits of using cheap foreign labor still outweigh the costs of reshoring, an uncomfortable truth that only becomes stronger as production volume scales upwards.
Companies are also hesitant to uproot an established manufacturing operation when laws, political attitudes, and important raw material costs are wildly fluctuating with every sound bite that hits the news.
Companies Won't Bear the Brunt of Cost
The vice president of supply chain and customs policy at the National Retail Federation, Jonathan Gold, recently noted in a Wall Street Journal article that shoppers will likely feel a tariff-driven retail pinch.
At least in the short-term, it's far less logistical effort for companies to pass along additional costs to an end consumer while they hash out their next supply chain moves. Until the market feels some stability where trade issues are concerned, these manufacturers aren't likely to upset the status quo by uprooting both their foreign outposts and their budgets.
While they may take some of burden with time, businesses can move at the speed of a container ship when the political waters don't look particularly inviting: slowly, methodically, and carefully.
Some Industries May Not Have a Choice
Labor is available both domestically and abroad, as are many other components of manufacturing — machinery, buildings, and so on. What could tip the scales in the U.S.' favor is the threat of an overnight price hike, as companies dealing with the aftermath of the steel and aluminum tariffs will be quick to confirm.
If companies are unable to source their domestic raw materials for export to their foreign manufacturing plants, they risk manufacturing quality — and ultimately, potentially compliance — taking a nosedive.
Already needing to bridge the gap between foreign labor and domestic expectations, the additional cost burden of tariffs — both shipping to and leaving from a foreign port — could be the proverbial back-breaking straw. While low-cost labor can be trained with enough management and oversight, added costs linger and pull down the bottom line the longer they're allowed to sit in place.
Companies facing challenges like these are likely to side with skilled, albeit more expensive, domestic labor and a controlled, largely tariff-free supply chain over the converse — raw materials are more likely to scale in demand than workforce numbers are, should business grow.
There isn't a clear path to success for companies caught in the trade war crossfire right now, and there might not be for months, or even years, to come. For large companies with manufacturing interests spread across the globe, the reshoring waters are likely going to get a lot choppier before any kind of smooth sailing can be expected.
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