In the late 1970s, instances of offshoring—the relocation of a business process or operation abroad—accelerated among American manufacturers, as they pursued lower costs and higher profits by moving operations where labor and inputs were cheaper. However, manufacturers are now increasingly looking at the possibility of reshoring—moving business operations back to the United States. The reshoring decision is a complex one, with only one certainty: it's not an easy one.
Discussions of reshoring versus offshoring abound, but let's consider a couple of studies with differing viewpoints. According to a report from A.T. Kearney, a global consulting group, the number of reshored U.S. jobs continued to lag behind the rate of offshoring for a fourth straight year in 2015. So although reshoring may be occurring, so does offshoring—and to a greater extent. However, a study by the Reshoring Initiative, whose mission is to help companies realize the total costs and risks of offshoring jobs and bring manufacturing jobs back to the United States, contends that the United States broke even in its 2015 reshoring efforts. Let's consider some of the dynamics at work.
Although the relative cost of labor was the primary driver that influenced companies' decisions to relocate manufacturing facilities abroad in the late 20th century, numerous factors—not always easily reconciled—also played a central role in the decision. Do these reasons hold up in today's environment? It depends on where you stand. Without a doubt, labor costs in common offshoring locations like China and India have risen over the years and continue to rise, but other factors are also at play. Below are some factors that either work against or support the notion of reshoring.
Advantages of reshoring
- Government incentives: A number of federal, state, and local incentives are available to entice manufacturers to bring their operations back to the states. Government entities sometimes offer tax breaks and free real estate, and they foster labor development programs for the local workforce, such as education and training in STEM (science, technology, engineering, and mathematics) disciplines.
- Freight costs: Whether by sea or by air, shipping goods from the offshore country of production to the states—and then potentially to another country after that—is expensive. Therefore, reshoring may cut logistics costs.
- Rising wages: Emerging markets have seen wages and other labor costs increase sharply in recent decades. Average real hourly wages in China have risen by an average of more than 10 percent per year since 1995, and labor costs per hour have risen from 28 cents in 1995 to $4.40 in 2015 (see the charts).
- Proximity to the end customer: In a world where consumers demand quick access to products, goods that are manufactured closer to the end customer can allow quicker adjustment to shifts in consumer demand.
Drawbacks of reshoring
- Labor availability: One of the biggest problems facing manufacturers looking to reshore operations is the skills gap in the U.S. labor force. Skills necessary for workers at manufacturing plants have evolved from often very physical and labor intensive to highly technical. A 2015 study by Deloitte and the Manufacturing Institute reveals that over the next decade, nearly 3.5 million new manufacturing jobs will be created, but the skills gap will prevent 2 million of those jobs from being filled.
- Strong dollar: Although a transitory factor, a strong dollar can dampen domestic manufacturing activity. In mid-2014, the dollar began to appreciate (for various reasons), and as it did, manufacturing activity softened because domestic goods became more expensive to export relative to foreign-made goods. The correlation between the rise in the dollar and the declining Institute for Supply Management manufacturing index—a monthly index measuring business activity in the manufacturing sector—during the last few years illustrates this scenario clearly (see the chart).
- Cheap(er) labor costs: Despite rising wages in emerging markets, many still have lower labor costs than the United States.
- Supplier base: When manufacturers began relocating their manufacturing operations overseas, many suppliers naturally followed suit. Thus, moving operations back to the United States may also require reshoring the supply infrastructure.
Clearly, numerous complex factors go into a firm's decision to reshore, maintain operations abroad, or even consider offshoring, and those factors will surely change as the global economy evolves.
Troy Balthrop
Senior Regional Economic Information Network analyst in the Atlanta Fed's Nashville Branch
Rebekah Durham
Economic policy analysis specialist in the Atlanta Fed's New Orleans Branch