Primarily, the reshoring drive has been driven with a focus on China as the strategic competitor, hence the need to reduce dependence on its supplies. This has seen large capital investments by the U.S government in an attempt to strengthen North American supply chains.
For instance, the Inflation Reduction Act (IRA) includes almost $400 billion in federal funding for clean energy and special tax credits for EVs manufactured in the region. The Chips and Science Act includes over $50 billion in funding domestic chip manufacturing.
In addition, U.S reshoring plans also hinged on the success of the United States-Mexico- Canada Agreement (USMCA), which entered into force on July 1, 2020. USMCA lays the foundation of expanding investments in the complex and capital-intensive manufacturing and supply chains across North America.
However, with all these subsidies and the North American trade alignment, is it possible to replace fully the supply chains located in China?
While it is still in the early days, David Dollar, a Senior Fellow of the Brookings Institution, in a new report titled USMCA Forward 2023, underscores some evidence to bear the claim that resurgence of manufacturing in the U.S is still not yet visible. Indeed, it is possible to track the effect as reshoring policies have been in place since 2018.
“While generalized reshoring is unlikely, it is still possible to subsidize the expansion of particular industries such as semi-conductors or electric vehicles. But without a change in the macroeconomic stance, it is unlikely that these policies will crowd out other manufacturing sectors, with the result that overall size of U.S manufacturing is unaffected. There is no free lunch, so subsidizing the expansion of say, semiconductors will reduce other consumption and hence lead to some contraction of other manufacturing industries,” noted David Dollar.
In terms of nearshoring to Mexico and Canada as envisaged in the USMCA trade agreement, Dollar adds there is also no evidence of such. The reason is that Canada (being a high-wage economy) is not well suited to producing the kind of products that the U.S imports from Asia. Mexico is a low-wage developing country, but has a lot of weakness in its investment climate.
Additionally, although 25 percent tariffs on Chinese products have been in place for four years, only a modest impact has been achieved on both the volume and value of U.S- China trade. Between 2018 and 2021, China’s share of U.S manufactured imports declined from 24 percent to 20 percent.
But it is important to highlight that the greatest variation occurred by product category, with U.S imports from China of telecommunication equipment now down 50-60 percent. Imports of other products such as computers, agricultural machinery, exercise equipment and furniture have all held up.
Trade figures for 2022 released by the U.S Census Bureau show that U.S- China goods trade hit a record high of $690 billion last year. U.S imports from China grew 6.3 percent to $537 billion, while exports rose 1.6 percent to $154 billion. As David Dollar observes, the economic shift between the U.S and China is more of a tech war than a trade war.
Wendy Cutler, Vice-President of the Asia Society Policy Institute (ASPI), observes that while the untangling efforts between the U.S and China are largely focused on strategic and emerging high-technology goods, the lines are increasingly blurred between what is and what is not strategic.
Source: The Maritime Executive