September 22, 2020 at 5:00 am ET
As the presidential race heats up, both candidates are targeting battleground states in the industrial Midwest. Both are talking about bringing back manufacturing jobs, which dropped by one-third since the turn of the century. And both emphasize re-shoring as the solution.
Joe Biden wants to change the tax code to punish outsourcing and reward firms that bring jobs back to the United States. Donald Trump is threatening something similar and has already offered federal loans and contracts for re-shoring production of essential medicines.
The idea of re-shoring isn’t unique to the United States. The pandemic has revealed the fragility of global value chains, and calls for re-shoring can be heard around the world: in France, Germany, Australia, Japan, and South Korea.
But is re-shoring the answer to our manufacturing woes?
Not completely — international trade has greatly benefited consumers across the world and lifted as many as one billion people out of poverty. And although the pandemic has raised the cost of trade, a world without it would be even more vulnerable to supply chain disruptions.
How about re-shoring some things — those critical to national security or foundational to future economic growth? Probably a good idea — if we can correctly foresee which goods and supply chains will be critical in the future (not so easy), if we are willing to spend taxpayer dollars (it is expensive) and if private sector firms are willing to relocate back to the United States (not a given). Even if we manage all of this, what if the next big supply chain disruption arises not in China, but here at home?
Fortunately, more and better options arise from a focus on resilience — a manufacturing sector that can adjust in real time to supply chain disruptions — wherever they may occur — while minimizing any loss to consumers.
To see the possibilities, consider the four components of resilience, representing “four legs” of the resilience “stool” we should seek to build.
The first is re-engineering. Supply chain risk is inherent in its design. Therefore, re-engineering can lower risk. Re-engineering includes re-shoring, but it also includes attracting foreign direct investment and investing in research and development to support next-generation products and processes. Government can assist through subsidies or changes in tax policy.
The second is collaboration involving all entities along a supply chain. Government can help firms by reducing the costs of supply chain collaboration across national borders (e.g., through trade agreements and regulatory cooperation), between levels of government (e.g., by aligning economic development initiatives), between government and industry (e.g., through information sharing), or between firms (e.g., via subsidies or tax breaks to encourage collaborative R&D).
The third is risk management. Firms can establish clear lines of responsibility for addressing supply chain disruptions and identify potential vulnerabilities. Government can facilitate risk management by providing information to firms (tools to identify supply chain vulnerabilities), direct monitoring of supply chain risk; and creating or amending legal authorities for intervention (such as the Defense Production Act and National Stockpile Act).
The fourth is agility. Agility encompasses both visibility (see things sooner) and velocity (reduce the time to respond to an event); it is related to the number of options available to a firm to respond to a disruptive event. For example, firms can adopt flexible production technologies or invest in smart manufacturing. Government can invest in infrastructure and offer incentives for workforce training.
To strengthen U.S. manufacturing, the government must pay attention to each leg of the resilience stool. A focus on just one component (e.g., re-shoring) would be insufficient; the stool would topple over.
The concept of resilience is gaining traction. Congress has held hearings on the subject, trade associations have offered policy solutions and think tanks have convened panels of experts, including an upcoming virtual event.
The November election represents an inflection point. The winner has an unprecedented opportunity to strengthen domestic manufacturing. A comprehensive, sustainable approach focused on resilience — and not simply re-shoring — will reap the greatest rewards.
Keith B. Belton is founder of Pareto Policy Solutions, LLC, a consulting firm advancing US competitiveness.
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