lready tenuous economic relationships with China are being tested even further due to global outrage over Beijing’s recent crackdowns on trade hub Hong Kong and increased military activities in the South China Sea. Meanwhile, the pressures of the coronavirus pandemic are accelerating the “decoupling” of global trade and leading to reshoring efforts by a multitude of companies, including those based in the United States and Australia. Supply chains on everything from toilet paper to toys and medical supplies are still snarled following COVID-19 related lockdowns, prompting businesses to explore a return to home soil more seriously than ever before. But before citizens laud an impending influx of new jobs back home, it is important to understand how new and urgent relocation efforts may take shape, as well as the impact on global trading systems and role of emerging economies.
Rethinking Supply Chain Design
To this point, the term reshoring has usually described a company’s return of overseas production facilities to its home country, home continent, or the location where the goods will be sold. In today’s COVID-19 economy, the term reshoring is being used more flexibly to reference the move of supply chains away from dependence on a single country—mainland China in most cases now. These supply chain redesigns would not necessarily result in the return of manufacturing jobs to the countries of origin. For many companies with China-dependent operations, reshoring conversations may include so-called greenfield or brownfield investments, which would involve moving operations to newly created subsidiaries in other countries, including emerging economies nearby. Alternatively, China Plus One strategies center around moving some assets, but not all, to new locations. In the past, experts would have been quicker to label these relocation efforts as additional offshoring to other countries or near-shoring to countries closer to home base.
Big hurdles remain for companies deliberating the change, with cost and efficiency being among the key drivers. In the United States, labor markets are expensive, heavily regulated, and energy costs are high compared to other countries. At a recent U.S. Chamber of Commerce event, CEOs of several multinational enterprises said that additional infrastructure needs could impact the return to U.S. domestic production. Building new facilities for complex operations could take up to five or ten years, which would be prohibitive. Companies also want to hear more about possible incentives for relocation and many governments are responding. U.S. officials are exploring the idea of creating a large reshoring fund and other measures. Japan is offering to offset construction costs for companies that build active pharmaceutical ingredient plants. In this era of advanced automation, 5G phone technology, and 3D printing, businesses also need more workforce with high STEM skills.
It should be noted that the reshoring push has been growing for years, with experts warning about overreliance on a single source for manufacturing. An estimated 180,000 manufacturing jobs returned to the U.S. in 2018, up from 6000 jobs in 2010, according to trackers such as the Reshoring Initiative. Most of those were from China. Companies attracted to China years ago with the promise of perks and cheap labor now complain that the business environment there is increasingly unfair for foreign investors and heavily favors state-owned firms. They also cite stronger internal operating constraints by Beijing’s Communist regime and rampant intellectual property theft. Additionally, Chinese labor costs have increased significantly over the past decade.
Vietnam, India, and Mexico are among those already attracting China’s disillusioned investors. They and other countries can often offer foreign companies lower labor costs, often less political interference, and possibly their own forms of incentive. New overseas partners can also offer shorter transit times to other key markets, including Europe and Asian countries, where consumer demands are growing.
Vietnam, India, and Mexico are among those already attracting China’s disillusioned investors. They and other countries can often offer foreign companies lower labor costs, often less political interference, and possibly their own forms of incentive. New overseas partners can also offer shorter transit times to other key markets, including Europe and Asian countries, where consumer demands are growing.
Preparing New Partners
Vietnam, India, and Mexico are among those already attracting China’s disillusioned investors. They and other countries can often offer foreign companies lower labor costs, often less political interference, and possibly their own forms of incentive. New overseas partners can also offer shorter transit times to other key markets, including Europe and Asian countries, where consumer demands are growing. But the constraints that previously kept these relationships from blossoming still remain. In many cases, it is the lack of a business enabling environment.
Typically, countries with established democratic institutions and more market-based economies are better positioned to accept investors with shared values. From a practical matter, top roadblocks for multinational enterprises include the lack of alignment among trading partners and differences in standards on everything from regulatory matters to parts measurements. CEOs also lament a lack of infrastructure and advance manufacturing capacity, including fair and efficient customs processes, necessary utilities, and too few skilled workers, as well as concerns about corruption. Unclear laws or documentation on ownership of land and buildings are another major issue.
Pacts and free trade areas, such as those created by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the African Continental Free Trade Area, which will create a continent-wide market of more than a billion people, are a good start to building new business relationships abroad and finding common ground. For a lot of would-be host countries, more groundwork will be needed in the coming months and years to attract and secure capital. Even before COVID-19, many less-developed economies were already beset with serious challenges: major debt, governance issues, rampant corruption, high unemployment, large informal sectors, and few reliable systems for social support. Some now face double digit drops in GDP due to coronavirus.
Facilitating Innovation
So, what will it take? In short, these countries must demonstrate improvement in the rule of law and governance matters, as well as modernize and expedite key processes to launch businesses and move goods across borders. Such initiatives must also include steps to reduce corruption and measures to foster transparency and accurate reporting mechanisms, so firms can make predictable and long-term investments. Greater public-private partnership will be key. Efforts on the ground are already underway in many countries, such as work by the multilateral Global Alliance for Trade Facilitation (GATF) and local partners. GATF is among the international organizations working together with companies on both ends of the supply chain and customs officials in numerous countries, including Malawi, Sri Lanka, and Brazil to alleviate urgent problems and border clearance issues, with a focus on moving medical supplies and implementing rapid response measures for emergencies such as COVID-19.
GATF, which is jointly led by CIPE, the International Chamber of Commerce, and the World Economic Forum, just completed a groundbreaking project with Colombia’s National Food and Drug Surveillance Institute and think tank Invima. They introduced a new risk management system for inspecting and moving food and beverages through the country’s ports, borders, and airports. This should reduce the need for in person inspections by 30% and cut the time to clear goods from three days to two hours in some cases. Savings to importers are estimated at more than $7 million annually.
The formation of business associations within sectors to foster collective action, dialogue with government, and activities related to corporate social responsibility, can be another big step. During this time of economic recovery, many governments want to hear the voice of business. Lebanon’s Minister of Industry credits much of its new coronavirus recovery program to recommendations by the Association of Lebanese Industrialists. Government officials in Kenya are reviewing COVID-19 Response Frameworks and other proposals by a number of active private sector groups. Meanwhile, associations and chambers in Ethiopia are working with the government to create awareness about coronavirus and fundraise for the National COVID Response Fund, which will be used to increase testing capability, equip health professionals with protective supplies, and develop isolation centers.
E-commerce conditions must also improve. And factors including internet infrastructure, access, inclusivity, and literacy will be key to building and managing trade flows, as well as fostering the capacity of domestic firms to participate in trade. In many countries, including Bangladesh and Jordan, the overwhelming majority of businesses are micro, small, and medium-sized. They also have large “informal” sectors, meaning vendors who are not registered with the government. Their activities are not easily tracked. Many sales are done with cash and at open markets among participants who do not have bank accounts. Facing prolonged stay at home orders, and even work from home forever mandates by some companies, their overseas partners must find new ways to get products to market and ensure access to reliable electronic means of moving capital. Experts, including the Center for International Media Assistance, assert that digital freedoms will become more important than they ever have been. The internet is increasingly viewed as a right, not just a delivery method. For most people, it is now the top tool to keep them informed, alive, and employed.
Private Sector Push
How can we foster efforts to facilitate trade among emerging and advanced economies? Western development and aid policies should work to help potential host nations and governments achieve these standards and norms, and to build the capacity of local private sectors to participate in the global economy. The next round of globalization should look to build an international economy of opportunity and good governance. To do so, policymakers must realize that a competing variant of globalization is being put forward by authoritarian states. The authoritarian version impedes rule of law, embraces corruption, tolerates labor and environmental abuse, and only offers economic access to the few and well connected.
The COVID-19 crisis has been used by autocrats in numerous countries, including Russia, The Philippines, and Hungary to consolidate power. In addition to edicts controlling the economy, laws and limitations framed as medical and security safeguards have led to increased surveillance on citizens, opposition figure arrests, bans on some political parties, and censorship. Fact-checking and time limits or “sunset provisions” for some COVID-19 related laws are among the controls and accountability measures that the private sector in these economies should be doing or demanding in concert with civil society allies. For example, experts in Serbia, North Macedonia, and Bosnia and Herzegovina are working to analyze the gaps in governance that facilitate inflows of “corrosive capital” and may facilitate foreign meddling in the Western Balkans. They say the activities are encouraging an exodus of the best and brightest from the region
Ensuring that quality local standards are reinforced and rewarded by the global trading system means that we must also focus on getting World Trade Organization reform right, protecting ethical business standards, and ensuring that digital trade standards reflect democratic ideals and norms. In Latin America, prominent think tanks in Argentina, Mexico, and other countries are coming together to identify specific issues that are holding back the workforce and investment in their countries. The leaders of México Evalúa, Colombia-based Fedesarrollo, and Argentinian think tank CIPPEC (Center for the Implementation of Public Policies to Promote Equity and Growth) say big technology gaps, large informal sectors, slow information, and fake news are among the major challenges in their countries.
Freedom Wins
In the meantime, the International Chamber of Commerce is among those who stress that current, established supply chains are an important form of protection for frontline workers and urge decision-makers to strongly analyze alternatives that maximize resilience before making drastic moves or enacting highly protectionist policies. Such actions might invite retaliation and other unforeseen problems. Furthermore, U.S. Chamber of Commerce CEO Tom Donohue reminds that the majority of customers for U.S. businesses “live beyond our shores” and companies and governments must strike the right balance of security and risk management to ensure economic vitality. They should “see supply chains for what they are: instruments of opportunity, not conduits of risk,” said Donohue. Regarding the relationship between the U.S. and China, many economists note that the two still need each other very much—perhaps more than ever before in some ways—in order to recover economically from the pandemic.
In short, promoting democracy, freedom, and trade will not be easy. But a coherent policy strategy based on liberal-democratic values can ensure strategic coherence and improve the chances of success to create trusted trade partners. The result will be a truly competitive global business environment that is fair to all, including American companies and American workers. Done right, this can help kick-start a new era of sustainable growth.
a global affairs media network
The Great Reshoring
June 5, 2020
A
lready tenuous economic relationships with China are being tested even further due to global outrage over Beijing’s recent crackdowns on trade hub Hong Kong and increased military activities in the South China Sea. Meanwhile, the pressures of the coronavirus pandemic are accelerating the “decoupling” of global trade and leading to reshoring efforts by a multitude of companies, including those based in the United States and Australia. Supply chains on everything from toilet paper to toys and medical supplies are still snarled following COVID-19 related lockdowns, prompting businesses to explore a return to home soil more seriously than ever before. But before citizens laud an impending influx of new jobs back home, it is important to understand how new and urgent relocation efforts may take shape, as well as the impact on global trading systems and role of emerging economies.
Rethinking Supply Chain Design
To this point, the term reshoring has usually described a company’s return of overseas production facilities to its home country, home continent, or the location where the goods will be sold. In today’s COVID-19 economy, the term reshoring is being used more flexibly to reference the move of supply chains away from dependence on a single country—mainland China in most cases now. These supply chain redesigns would not necessarily result in the return of manufacturing jobs to the countries of origin. For many companies with China-dependent operations, reshoring conversations may include so-called greenfield or brownfield investments, which would involve moving operations to newly created subsidiaries in other countries, including emerging economies nearby. Alternatively, China Plus One strategies center around moving some assets, but not all, to new locations. In the past, experts would have been quicker to label these relocation efforts as additional offshoring to other countries or near-shoring to countries closer to home base.
Big hurdles remain for companies deliberating the change, with cost and efficiency being among the key drivers. In the United States, labor markets are expensive, heavily regulated, and energy costs are high compared to other countries. At a recent U.S. Chamber of Commerce event, CEOs of several multinational enterprises said that additional infrastructure needs could impact the return to U.S. domestic production. Building new facilities for complex operations could take up to five or ten years, which would be prohibitive. Companies also want to hear more about possible incentives for relocation and many governments are responding. U.S. officials are exploring the idea of creating a large reshoring fund and other measures. Japan is offering to offset construction costs for companies that build active pharmaceutical ingredient plants. In this era of advanced automation, 5G phone technology, and 3D printing, businesses also need more workforce with high STEM skills.
It should be noted that the reshoring push has been growing for years, with experts warning about overreliance on a single source for manufacturing. An estimated 180,000 manufacturing jobs returned to the U.S. in 2018, up from 6000 jobs in 2010, according to trackers such as the Reshoring Initiative. Most of those were from China. Companies attracted to China years ago with the promise of perks and cheap labor now complain that the business environment there is increasingly unfair for foreign investors and heavily favors state-owned firms. They also cite stronger internal operating constraints by Beijing’s Communist regime and rampant intellectual property theft. Additionally, Chinese labor costs have increased significantly over the past decade.
Vietnam, India, and Mexico are among those already attracting China’s disillusioned investors. They and other countries can often offer foreign companies lower labor costs, often less political interference, and possibly their own forms of incentive. New overseas partners can also offer shorter transit times to other key markets, including Europe and Asian countries, where consumer demands are growing.
Vietnam, India, and Mexico are among those already attracting China’s disillusioned investors. They and other countries can often offer foreign companies lower labor costs, often less political interference, and possibly their own forms of incentive. New overseas partners can also offer shorter transit times to other key markets, including Europe and Asian countries, where consumer demands are growing.
Preparing New Partners
Vietnam, India, and Mexico are among those already attracting China’s disillusioned investors. They and other countries can often offer foreign companies lower labor costs, often less political interference, and possibly their own forms of incentive. New overseas partners can also offer shorter transit times to other key markets, including Europe and Asian countries, where consumer demands are growing. But the constraints that previously kept these relationships from blossoming still remain. In many cases, it is the lack of a business enabling environment.
Typically, countries with established democratic institutions and more market-based economies are better positioned to accept investors with shared values. From a practical matter, top roadblocks for multinational enterprises include the lack of alignment among trading partners and differences in standards on everything from regulatory matters to parts measurements. CEOs also lament a lack of infrastructure and advance manufacturing capacity, including fair and efficient customs processes, necessary utilities, and too few skilled workers, as well as concerns about corruption. Unclear laws or documentation on ownership of land and buildings are another major issue.
Pacts and free trade areas, such as those created by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the African Continental Free Trade Area, which will create a continent-wide market of more than a billion people, are a good start to building new business relationships abroad and finding common ground. For a lot of would-be host countries, more groundwork will be needed in the coming months and years to attract and secure capital. Even before COVID-19, many less-developed economies were already beset with serious challenges: major debt, governance issues, rampant corruption, high unemployment, large informal sectors, and few reliable systems for social support. Some now face double digit drops in GDP due to coronavirus.
Facilitating Innovation
So, what will it take? In short, these countries must demonstrate improvement in the rule of law and governance matters, as well as modernize and expedite key processes to launch businesses and move goods across borders. Such initiatives must also include steps to reduce corruption and measures to foster transparency and accurate reporting mechanisms, so firms can make predictable and long-term investments. Greater public-private partnership will be key. Efforts on the ground are already underway in many countries, such as work by the multilateral Global Alliance for Trade Facilitation (GATF) and local partners. GATF is among the international organizations working together with companies on both ends of the supply chain and customs officials in numerous countries, including Malawi, Sri Lanka, and Brazil to alleviate urgent problems and border clearance issues, with a focus on moving medical supplies and implementing rapid response measures for emergencies such as COVID-19.
GATF, which is jointly led by CIPE, the International Chamber of Commerce, and the World Economic Forum, just completed a groundbreaking project with Colombia’s National Food and Drug Surveillance Institute and think tank Invima. They introduced a new risk management system for inspecting and moving food and beverages through the country’s ports, borders, and airports. This should reduce the need for in person inspections by 30% and cut the time to clear goods from three days to two hours in some cases. Savings to importers are estimated at more than $7 million annually.
The formation of business associations within sectors to foster collective action, dialogue with government, and activities related to corporate social responsibility, can be another big step. During this time of economic recovery, many governments want to hear the voice of business. Lebanon’s Minister of Industry credits much of its new coronavirus recovery program to recommendations by the Association of Lebanese Industrialists. Government officials in Kenya are reviewing COVID-19 Response Frameworks and other proposals by a number of active private sector groups. Meanwhile, associations and chambers in Ethiopia are working with the government to create awareness about coronavirus and fundraise for the National COVID Response Fund, which will be used to increase testing capability, equip health professionals with protective supplies, and develop isolation centers.
E-commerce conditions must also improve. And factors including internet infrastructure, access, inclusivity, and literacy will be key to building and managing trade flows, as well as fostering the capacity of domestic firms to participate in trade. In many countries, including Bangladesh and Jordan, the overwhelming majority of businesses are micro, small, and medium-sized. They also have large “informal” sectors, meaning vendors who are not registered with the government. Their activities are not easily tracked. Many sales are done with cash and at open markets among participants who do not have bank accounts. Facing prolonged stay at home orders, and even work from home forever mandates by some companies, their overseas partners must find new ways to get products to market and ensure access to reliable electronic means of moving capital. Experts, including the Center for International Media Assistance, assert that digital freedoms will become more important than they ever have been. The internet is increasingly viewed as a right, not just a delivery method. For most people, it is now the top tool to keep them informed, alive, and employed.
Private Sector Push
How can we foster efforts to facilitate trade among emerging and advanced economies? Western development and aid policies should work to help potential host nations and governments achieve these standards and norms, and to build the capacity of local private sectors to participate in the global economy. The next round of globalization should look to build an international economy of opportunity and good governance. To do so, policymakers must realize that a competing variant of globalization is being put forward by authoritarian states. The authoritarian version impedes rule of law, embraces corruption, tolerates labor and environmental abuse, and only offers economic access to the few and well connected.
The COVID-19 crisis has been used by autocrats in numerous countries, including Russia, The Philippines, and Hungary to consolidate power. In addition to edicts controlling the economy, laws and limitations framed as medical and security safeguards have led to increased surveillance on citizens, opposition figure arrests, bans on some political parties, and censorship. Fact-checking and time limits or “sunset provisions” for some COVID-19 related laws are among the controls and accountability measures that the private sector in these economies should be doing or demanding in concert with civil society allies. For example, experts in Serbia, North Macedonia, and Bosnia and Herzegovina are working to analyze the gaps in governance that facilitate inflows of “corrosive capital” and may facilitate foreign meddling in the Western Balkans. They say the activities are encouraging an exodus of the best and brightest from the region
Ensuring that quality local standards are reinforced and rewarded by the global trading system means that we must also focus on getting World Trade Organization reform right, protecting ethical business standards, and ensuring that digital trade standards reflect democratic ideals and norms. In Latin America, prominent think tanks in Argentina, Mexico, and other countries are coming together to identify specific issues that are holding back the workforce and investment in their countries. The leaders of México Evalúa, Colombia-based Fedesarrollo, and Argentinian think tank CIPPEC (Center for the Implementation of Public Policies to Promote Equity and Growth) say big technology gaps, large informal sectors, slow information, and fake news are among the major challenges in their countries.
Freedom Wins
In the meantime, the International Chamber of Commerce is among those who stress that current, established supply chains are an important form of protection for frontline workers and urge decision-makers to strongly analyze alternatives that maximize resilience before making drastic moves or enacting highly protectionist policies. Such actions might invite retaliation and other unforeseen problems. Furthermore, U.S. Chamber of Commerce CEO Tom Donohue reminds that the majority of customers for U.S. businesses “live beyond our shores” and companies and governments must strike the right balance of security and risk management to ensure economic vitality. They should “see supply chains for what they are: instruments of opportunity, not conduits of risk,” said Donohue. Regarding the relationship between the U.S. and China, many economists note that the two still need each other very much—perhaps more than ever before in some ways—in order to recover economically from the pandemic.
In short, promoting democracy, freedom, and trade will not be easy. But a coherent policy strategy based on liberal-democratic values can ensure strategic coherence and improve the chances of success to create trusted trade partners. The result will be a truly competitive global business environment that is fair to all, including American companies and American workers. Done right, this can help kick-start a new era of sustainable growth.
