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The Frost Feed: Thought Leadership Nearshoring, the Start of a Manufacturing Renaissance?

U.S. manufacturing has been in decline over the past three decades and five million jobs were exported globally. U.S. trade goods deficits have grown from 1.3% of GDP in 1990 to 3.9% in 2023, a change from $85 billion to $1 trillion. This was driven by cheaper production costs abroad, most notably in China. Rising worldwide trade tensions exacerbated by pandemic-related supply chain disruptions shifted attention to resilience rather than just cost efficiency. U.S. domestic policy has emphasized infrastructure projects, creating the potential for a shift toward a manufacturing renaissance in the U.S. and Mexico.

Despite the policy changes, it's unlikely that significant heavy manufacturing will return to the U.S., although there will be incremental changes in the medium term (around five years). A large segment of the manufacturing deficit comes from relatively simple goods (clothing, consumer electronics, subcomponents and raw materials) with complex supply chains that have proven surprisingly difficult to realign closer to American shores. For more advanced manufactured products such as semiconductors or aircraft, there is more interest in bringing supply chains closer, though the impact on the total deficit will be modest. Recent infrastructure spending such as the CHIPS Act, Inflation Reduction Act and Infrastructure Investment and Jobs Act support more advanced manufactured products, though these spending bills do little to shift the bulk of the deficit from simple production goods. China is entrenched as the world’s factory, with the ability to ship more of their goods through intermediaries, avoiding tariffs and trade barriers.

U.S. Manufacturing by the Numbers

Over the past three decades, U.S. manufacturing employment has fallen from 17 million in 1992 to 13 million in 2023. As GDP and employment have risen over the last 30 years, manufacturing has been nearly halved, from 15% to 8% of total employment. This was accompanied by an increasing trade deficit, growing from 1.3% of GDP ($85 billion) in 1992 to over 3.9% of GDP ($1 trillion) in 2023. This represents not simply finished goods being imported from foreign markets, but subcomponents imported for final assembly in the U.S. Today, the manufacturing base is deeply intertwined with global markets for their components.

Share of world manufacturing value added

China has become the world’s leading manufacturer. Three primary factors have driven the shift. First is a cost advantage in producing labor-intensive products more affordably. In 2006, wages in China were 19 times cheaper than in the U.S. While that has fallen to 4.8 times in 2023, China has continued to gain market share. Second, China has developed specialization of its raw materials and subcomponents supply chain, creating a network of manufacturers producing parts to support a broad range of end products. Third, China enticed many firms to launch production facilities to gain access to its population of 1.4 billion, and in turn surrendered their intellectual property and patented processes, providing China with a great leap forward for worldwide manufacturing and production.

Average annual manufacturing wage, U.S. and China

Commodities Compared to Airplanes

An enlightened trade policy would prioritize what is important to nearshore and which products make little sense to disrupt the currently efficient production and distribution networks. Less-intensive manufactured products and commodities represent 80% of the U.S. goods trade deficit today, with consumer electronics and apparel being good examples. These segments have little hope of being repatriated to North America. Two hurdles make a shift from overseas clothing suppliers illogical.

The first hurdle is cost, both in terms of production and what the consumers are able to spend. Foreign countries with cheaper labor using lower-quality materials can offer affordable products to consumers. Barring a shift in consumer behavior, companies must continue to compete aggressively on price, requiring the lowest-cost manufacturing.

The second hurdle is availability of supplies. Even something relatively simple such as clothing has a long list of intermediate steps that North America no longer offers. Raw cotton must be spun into thread, that thread has to be woven into fabric, and that fabric must be dyed and finished in order to be turned into a garment. The U.S. simply can’t increase the number of clothing manufacturers, as we lack the components needed to manufacture the simplest products. Reliance on imports from other countries fills the gap efficiently, providing capital for more complex, high-value products.

Source: Duke University

The U.S. has outsourced the lowest-quality products in favor of specialization in value-added production, and there is little reason to reverse this outcome. More worrisome is that the U.S. has outsourced its most complicated and technologically advanced manufactured products, as reflected within the Advanced Technology Product categories that have been in growing deficit over the past 20 years. This includes biotech, new drug research and production, semiconductors, aerospace and advanced computer parts including central processing units. These critical segments contribute approximately 20% of the trade deficit, though final assembly remains in the U.S. This is where nearshoring investment would offer opportunities for higher-margin manufacturing, better employment opportunities, protection of intellectual property for the U.S. economy and resiliency in the face of global tensions.

Source: Source: US Census Bureau

Supply chains remain the biggest gating factor to nearshoring at scale. Final assembly may be brought back to the U.S., but individual subcomponents are still being imported. The new Boeing 787 is a good example of how interconnected R&D, manufacturing and ultimate assembly is worldwide. Seventy percent of the design and development of its newest feature, the all-composite wing, came from a Japanese consortium. Most of the parts required for final assembly are imported, meaning that incremental changes could be made, but a large shift would be expensive and disruptive to the production process.

Recent supply disruptions for semiconductors have highlighted their importance to U.S. manufacturing, from autos to critical weapons production, but they face a similar dynamic to the example above. Final assembly is increasing in the U.S., with Intel and TSMC announcing new production facilities in Arizona, but subcomponents remain concentrated abroad. Semiconductor wafer production is concentrated in Japan, Taiwan, and Germany. Photoresists, which are light sensitive materials used to lay patterns on the silicon wafers, overwhelmingly are made in Japan. Even with final assembly shifting back to the U.S., independence from global supply chains would require monumental long-term investments in a country notoriously focused on short term returns.

U.S. Infrastructure Spending, a Limited Impact

Congress has passed three public funding bills intended to accelerate domestic manufacturing in these favored industries. The Infrastructure Investment and Jobs Act (IIJA) provided $550 billion in incremental spending for transportation and infrastructure, the Inflation Reduction Act (IRA) offered $733 billion in climate spending, and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act authorized $280 billion for domestic research and manufacturing of semiconductors. Looking at the announced $1 trillion in megaprojects (more than $1 billion in size) at the end of 2023, most of the spending is focused on semis, batteries/EVs and clean energy. While promising, these bills only address Advanced Technology Product end markets, which are a small percent of U.S. reliance on foreign manufacturing. This illustrates that to bring about a fundamental shift of production for critical industries, nearshoring requires huge subsidies, or tariffs, to entice private markets to make the needed investments.

Public and private announced mega projects by sector

U.S. manufacturing construction

The sum authorized in these spending bills is somewhat misleading, especially in the case of the Infrastructure Investment and Jobs Act. A lot of the funding goes toward upgrading infrastructure and utilities: roads and bridges, power and grid, railroads, water infrastructure and airports. All are critical to supporting the manufacturing base. Although this money doesn’t go directly to nearshoring projects, it is an important aspect of strengthening the economy to support these investments.

China and Mexico: What Does the Global Data Show

Official trade data reveals that China continues to be the dominant manufacturer, despite less direct trade with the United States. When U.S. tariffs began to increase on Chinese goods in 2018-19, China began aggressively using other countries as intermediaries rather than losing manufacturing share. As a result, Mexico became the largest exporter of goods to the U.S. in 2023, supplanting China, leading to exaggerated claims of reshoring already advancing. The IMF reports that Chinese exports rose significantly above 2018-19 levels as tariffs were increasing. If India, Vietnam and Mexico were actually manufacturing goods rather than acting as a transit point, this would have been reflected in reduced market share for China – but that hasn’t occurred. In an additional twist, in 2022 the Wall Street Journal showed the number of packages being routed from China that claim a de minimis exception, a loophole in the tariff structure meant to exempt small packages from duty taxes, had massively increased starting in 2018. These direct-to-consumer sales aren’t counted as official exports.

Total known value of de minimis shipments to the U.S.

China’s exports have skyrocketed despite U.S. tariffs

Source: NVIDIA internal analysis, Goldman Sachs, Cowen, Statista, Capital One, Wall Street Journal, Resource Watch

Trade data confirms that intermediate countries such as India, Vietnam and Mexico have been increasing their reliance on Chinese imports. Bernstein graphs the percentage of imports that come from China, and the general trend has been up. Especially in the case of Mexico, there has been a massive increase in imports of intermediate goods since 2017, well above the rise in imports of consumer or capital goods. This all supports China remaining the world's manufacturing engine, but now less transparently. The Bank of International Settlements released a paper in 2023 mapping manufacturing supply chains to their end customers and back upstream. Their conclusion was that global supply chains have lengthened, not shortened, especially for products starting in China and ending in the U.S.

Mexico and China imports

If nearshoring were occurring, we would expect a continuous increase in manufacturing foreign direct investment as a percentage of GDP. 2001-04 show the trend that would be expected from nearshoring. While companies are making public statements, we have yet to see it in the numbers.

Green Shoots: Where Could Upside Come From?

While official data shows a dearth of evidence related to nearshoring, there are signs that changes have begun. The Reshoring Initiative tracks announcements of new manufacturing jobs since 2010, and the trend has clearly been increasing since the COVID-19 pandemic. These are announcements rather than actual employment, but they are a potential leading indicator. Skepticism is warranted because the historic dataset shows a clear increase from 2010-17, when China continued to dominate. The data is compiled from announcements that are classified as nearshoring, but it doesn’t consider potential job losses from other domestic companies.

Source: Source: Reshoring Initiative

Conclusion

For now, the world remains reliant on China’s manufacturing output. The breadth of China’s manufacturing base gives it the ability to source all parts of the manufacturing process from raw materials to finished goods. In the U.S. and Mexico, most incremental manufacturing projects are focused on high-end products with an emphasis on final assembly. There isn’t much evidence of a move toward reducing dependence on global markets. Megaprojects coming from U.S. infrastructure spending similarly focus on high-end final assembly. China continues to supply most goods in the U.S. but uses intermediate countries to hide the point of origin. Within Mexico, we have seen a large increase in intermediate goods imports and a lack of manufacturing investment relative to the size of its GDP, suggesting no immediate shift. The rest of the world may slowly build up its manufacturing base, but that shift will require resolve and dedication and wouldn’t bear fruit for many years. The near term will continue to be dominated by Chinese manufacturing.

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