Bye Bye Miss American Pie: The rise of US onshoring – by JM Finn
Charles Bathurst-Norman, Investment Director, discusses why so many American companies are moving their supply chains closer to home, and the impact this is having on the US economy.
In recent years, the United States has witnessed a significant trend toward ‘onshoring’ and ‘nearshoring’ supply chains – i.e. moving production back to, or closer to home shores. This movement is driven by various factors including geopolitical risks, energy security concerns, tariff impacts, advancements in automation, and the disruptive effects of global events like the Covid pandemic and the Russia-Ukraine conflict.
What is the economic and environmental impact of US onshoring or nearshoring?
Nearshoring can significantly improve working capital by reducing shipment lead times and inventory in transit, thus enhancing financial health and operational efficiency, allied with enabling companies to respond more swiftly to changes in market demand. Moreover, companies see nearshoring as a key strategy for safeguarding supply chains. This also makes alternative locations such as Mexico more attractive compared with Asia due to their competitive labour rates and proximity to the US market, evidenced by the fact that Mexico overtook China to become the number one exporter to the United States in 2023. One could also argue that nearshoring aligns with broader environmental goals, as shortening supply chains reduce the carbon footprint associated with long-haul transportation, making production processes more environmentally sustainable.
Which factors have played a contributing role to the onshoring/ nearshoring trend?
The pandemic exposed significant vulnerabilities in global supply chains, leading to increased interest in localising production to ensure stability and responsiveness.
In addition, the China trade war, coupled with geopolitical uncertainties like the Russia-Ukraine war, has prompted companies to reconsider their reliance on distant suppliers. The response from the US government has been to dust off the old US Federal Policy playbook and introduce incentives in the form of subsidies. This has led to a reshoring renaissance as US federal policies have provided financial incentives for domestic manufacturing and procurement of US-made products. Furthermore, the United States-Mexico-Canada Agreement (USMCA) provides a stable trade environment, encouraging companies to relocate production within North America. All these laws, subsidies and incentives encourage the domestic production of critical components and offer tax credits and other benefits to companies that relocate production to the US or nearby countries.
“Advances in robotics, artificial intelligence and other technologies are reducing dependency on manual labour.“
Which industries are nearshoring their operations the most?
Several industries are at the forefront of the nearshoring trend. The automotive and electronics sectors have been actively shifting their supply chains closer to home, primarily due to the need for greater control over production and reduced lead times, announcing significant investment in domestic manufacturing facilities. Furthermore, investments in automotive manufacturing facilities in Mexico have surged. Numerous companies, such as Tesla’s expansion in Nuevo Leon, are establishing or growing their manufacturing capabilities and reducing producing costs. This has also been the case for certain elements of the aerospace industry, such as Honeywell and Eaton Corporation, whose specialised trade agreements and incentives make nearshoring a strategic move for the aerospace sector.
Consumer goods manufacturers and retailers are increasingly sourcing materials and products from nearby countries to enhance supply chain resilience and react to changes in consumer demand more swiftly. Both Walmart and Procter and Gamble’s strategies to optimise their supply chains and source more products from nearby regions help to ensure better pricing for consumers. Within the pharmaceuticals and healthcare sector, the pandemic underscored the critical need for reliable medical supplies, prompting companies such as Eli Lilly to push towards domestic production of pharmaceuticals and healthcare equipment.
Is automation making nearshoring a more viable option?
Automation plays a crucial role in making nearshoring economically viable, by offsetting higher labour costs associated with domestic production. Advances in robotics, artificial intelligence and other technologies are reducing dependency on manual labour, which can be more expensive in nearshoring locations compared to traditional offshore locations. This is lowering overall production costs, increasing efficiency and making nearshoring more viable for many industries than in previous decades. Furthermore, automation allows for a more flexible and responsive manufacturing process, rapidly adjusting production levels and reducing the need for capital to be tied up in inventory, improving the overall cash flow of company balance sheets.
“Both Republican and Democratic administrations have recognised the strategic importance of strengthening domestic supply chains.”
A number of companies are already showing evidence of increasing order books, growing revenue and margin expansion for those companies with pricing power. Within the manufacturing and industrial sectors, firms like Caterpillar, Eaton Corporation and 3M are poised to gain from investments in domestic production facilities and the resultant operational efficiencies. Technology companies are expanding their US-based semiconductor manufacturing capabilities, driven by both government incentives and the strategic need to secure supply chains, reducing their dependency on Asia, especially Taiwan, in addition to helping companies avoid tariffs and benefit from regional trade subsidies. Logistics and supply chain management companies are also likely to benefit from increased demand for nearshoring-related services, as will other transportation equipment manufacturers, including those producing parts for commercial vehicles. Some firms outside America also stand to benefit from the nearshoring trend. Schneider Electric for example has exposure to the nearshoring theme in the US and it should also be a beneficiary of longer-term global trends of data centre infrastructure, electrification, digitalisation and decarbonisation.
What impact could the outcome of the US Presidential Election have?
Both Republican and Democratic administrations have recognised the strategic importance of strengthening domestic supply chains, albeit with different approaches. Republican policies typically emphasise reducing regulatory burdens and lowering taxes to encourage domestic manufacturing. Trump’s “America First” agenda has focused on reducing dependence on foreign supply chains, particularly from China. The previous Trump administration’s tariffs on Chinese goods and the renegotiation of the North American Free Trade Agreement into the United States-Mexico-Canada Agreement are examples of such policies aimed at protecting and promoting US industries. Tariffs especially have raised the cost of many products, making it more expensive for countries to import goods and maintain competitive pricing.
“While Harris is likely to support strengthening US manufacturing, her administration might prioritise sustainability, labour rights, and multilateral cooperation.”
Democratic policies primarily focus on providing direct incentives and subsidies to spur domestic production. The Biden administration’s infrastructure investments, the CHIPS and Science Act, and the Inflation Reduction Act include substantial funding for boosting US manufacturing capacity and technological innovation. A potential Kamala Harris administration might approach nearshoring with a different focus. While Harris is likely to support strengthening US manufacturing, her administration might prioritise sustainability, labour rights, and multilateral cooperation. Policies could include incentives for companies to nearshore operations while adhering to environmental and labour standards, possibly offering tax breaks or grants for companies that move closer to the US and maintain high standards.
Political uncertainty remains elevated in the US in the wake of Biden’s withdrawal and narrowing of Donald Trump’s lead in opinion polls, with Kamala Harris even moving ahead in some national polls at the time of writing. One could argue that a second Trump presidency would differ from the first, both because the world is messier and because Trump is less likely to tolerate official obstruction of his agenda. He has proposed a tariff of 10% on all imported goods, and some members of Trump’s circle have floated a 60% tariff on imports from China. The biggest negative impact would fall on textiles and electronics, industries where China currently dominates and where single-digit profit margins make it impossible for factories to absorb the tariff impact.
On a related note, a Trump administration would also grant lots of permits for new drilling, and oil production would increase. His policies on oil, as in other areas, are considered by some to be pragmatic, recognising the energy transition as just that. If re-elected, he has promised to remove all obstacles to massively ramping up drilling in the US for oil and natural gas. Trump stated: “When I am back in the White House, I will bring back a pro-American energy policy at long last.” He’s also vowed to speed up the approval of natural gas pipelines into the Marcellus Shale. Another priority, and a potential negative for the renewables sector are his promises of doing away with incentives to nudge the US in the direction of electric vehicles and clean energy.
US trade tariffs on imported goods will meet domestic and international resistance. But an easier way to achieve the goals of such a tariff — in terms of rebuilding domestic production — is to weaken the dollar. Like Richard Nixon with his proposed import surcharge, Trump, if elected, may drop his tariff and focus on the exchange rate, possibly by putting political pressure on the Federal Reserve. The risk of more inflation would surge, exacerbated by more tariffs, which would also slow growth.
Conclusion
As the onshoring and nearshoring movements continue to gain momentum, America’s economic security and industrial robustness will be enhanced for years to come. The onshoring and nearshoring of supply chains to the United States are driven by a combination of geopolitical tensions, pandemic-induced disruptions, government incentives, and advancements in automation. Key industries like automotivess, electronics, consumer goods, and pharmaceuticals are leading this shift, supported by companies that are strategically positioning themselves to capitalise on the trend. Both Republican and Democratic policies would play crucial roles in the US economy and trade relations to ensure that the US remains competitive and resilient in the global market. The details of how this trend is encouraged and implemented, however, would differ based on the administration’s priorities—whether focusing more on protectionist measures and economic nationalism, as might be expected from Trump, or on collaborative and sustainable approaches, potentially emphasised by Harris.
The election result will undoubtedly shape the economic landscape, consumer confidence and foreign policy. To mitigate the risk of this evolving political and economic environment, our focus remains on investing in a diversified range of businesses with strong competitive positions in good and growing industries, management teams with track records of value creation and strong balance sheets.