US president Donald Trump has proposed tax credits for manufacturers relocating from China to the US © Getty Images
US president Donald Trump has proposed tax credits for manufacturers relocating from China to the US © Getty Images

Report highlights $1tn cost of supply chain reshoring

18 August 2020

Shifting manufacturing away from China could cost businesses $1tn over the next five years, according to a study that highlights the ‘fragility’ of many global supply chains. 

The report, from the Bank of America, said firms in more than 80% of global sectors had experienced supply chain disruptions during the Covid-19 pandemic, which had led many to consider revisiting their current arrangements. 

“Global supply chains were built to maximise returns by optimising labour cost arbitrage and lower overheads. The pandemic has, however, exposed the fragility of far flung supply chains,” it said. 

The bank added that while disruptions from the pandemic had acted as a catalyst in reshoring plans, an ongoing shift towards “stakeholder capitalism” – where corporations consider the needs of consumers, employees and the state alongside shareholders – was also a contributing factor.

“While each of these stakeholders is examining the location of supply chains from very different perspectives, they are – interestingly enough – arriving at the same conclusion: namely, portions of supply chains should relocate, preferably within national borders and failing that, to countries that are deemed allies,” the report said. 

Bank of America said arguments against reshoring had always been made on the grounds of “lost efficiency and ruinous costs”. It estimated shifting all manufacturing currently based in China that is not intended for consumption in the country would cost $1tn over the next five years. 

“This would be significant, but not prohibitive,” the report said. 

The current diplomatic situation between China and many advanced economies is a further complicating factor. The report came as US president Donald Trump threatened to strip government contracts from firms that continue to outsource work to China. 

The president, who is set to begin a re-election campaign, has returned to a popular theme by pledging to end the US “reliance” on China and pledging to create 10m new jobs in the next 10 months. This would be achieved by offering tax credits to US businesses that relocate their manufacturing facilities to the country from China, he added.

Earlier this week, the US further tightened its restrictions on Chinese tech firm Huawei to ban suppliers from selling computer chips made using US technology to the firm.

In May, global chipmakers that used US technology were told they had to obtain a licence from the US government to work on designs for Huawei.

However, the new restrictions now require firms to seek permission even if they are selling a general purpose design.

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