1. Business
January 11, 2022

Reshoring: Companies homeward bound, but globalization is here to stay

By GlobalData Thematic Research

Reshoring is becoming an increasingly attractive option. Essentially the reversal of offshoring, reshoring is when the production of goods is returned to the company’s original country.

Though there are worries that the momentum surrounding reshoring signals a forthcoming period of deglobalization, there is very little chance of this happening in an age of thriving global trade and a clear reluctance among governments to isolate themselves.

The factors pushing companies to reshore

ESG pressure for companies to reduce their carbon footprint is motivating the localization of production. Moreover, the cost advantage of offshoring is becoming less pronounced following rising labor costs in countries such as China. According to the International Labour Organization’s Global Wage Report for 2021–21, real wages more than doubled in China between 2008 and 2019, but declined in the UK.

Supply chain disruptions and shortages are also responsible for increased interest in reshoring. Concerns over electric vehicle (EV) battery production and domestic semiconductor supply have US manufacturers looking to reshore production of these critical components and rival China’s vertically integrated EV supply chain. In terms of global lithium mining, GlobalData predicts that China’s lithium-ion battery capacity will fall from 80.5% in 2020 to 61.4% in 2026, following North America and Europe’s efforts to build their own supply chains.

Reshoring will not lead to deglobalization

Reshoring will also support domestic economies by bringing jobs home, though there are caveats to this. Reshoring will likely destroy more jobs in developing countries than it will create in developed countries, and it will not make up for all the jobs initially lost through offshoring, as today’s production line is less labor-intensive. Importantly, however, it will still make a welcome difference as developed economies shake off the Covid-19 pandemic. According to the Reshoring Initiative, new reshoring and foreign direct investment (FDI) job announcements in the US were 38% higher in 2021 than in 2020, returning over 220,000 jobs.

Moreover, there is a geopolitical side to the increased interest in reshoring, particularly in the US. The direction of foreign policy is driving President Biden to reduce the US’s reliance on China.

The acceleration of reshoring hints at autarky, but it will not lead to deglobalization. The US knows it stands to gain little from political and economic isolation, and that it currently stands at a crucial juncture in global cooperation on issues like climate change. Moreover, the explosion of the global trade in goods during the pandemic has demonstrated that the world is more interconnected than ever.

There is a big leap between localizing elements of the supply chain and withdrawing from globalization. On the demand side of commerce, markets will remain globally integrated. Keeping the world intimately connected is still as important as ever.