Saturday, July 18, 2020 | 2 a.m.
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Global supply chain disruptions brought on by COVID-19 are prompting American companies that offshored U.S. manufacturing to consider bringing it back home — a trend known as reshoring.
We hear concern about doing business in China among members of Congress who have not been vocal in the past about the need to have dependable supply chains. China’s lack of transparency and accountability in the aftermath of COVID-19 woke us up. American companies are being urged to bring manufacturing closer to home.
Offshoring (in the name of globalization) has taken place for nearly half a century and was caused by companies being seduced by the lower cost of labor in foreign countries, especially those in Asia. Offshoring started with Japan and spread to Taiwan, South Korea, Singapore and Malaysia before settling in China.
Globalization made American companies more profitable, provided our consumers with affordable products and propelled our economy. The greed to maximize profits drove the exportation of many U.S. jobs and essentially resulted in deindustrialization of the U.S. It was highly lucrative to American companies that amassed huge profits from overseas production and sales. They sheltered those profits abroad.
America generally received the better end of the bargain in globalization with Asian countries. However, lately it seems to have become a victim when it came to China.
America awakened a sleeping giant when President Richard Nixon visited China in 1972 with a policy to liberalize its economy. Subsequently, every president embraced China with the hope of integrating it as a member of the world community. All of them believed that a free market-oriented China would become internationally reasonable, or perhaps even democratic.
Instead, China played the globalization game on its own terms and with self-interest. While entering into treaties like the World Trade Organization, China violated them by forcing technology transfer as quid pro quo for doing business on its soil. What became the norm were unfair trade practices such as asymmetrical deals which benefited the domestic businesses, providing state subsidies to manufacture goods and dumping such subsidized goods on the U. S. market, and restricting importation of American goods into China.
At first, China’s noncompliance was ignored by our government, which only encouraged such transgressions. No American president confronted the Chinese Communist Party, which is known to control every move in China with the ideology of totalitarianism.
The U.S. may not be able to change China’s behavior through persuasion or threats. Instead, our strategy should be to reboot our economy on our soil and lead it to recovery. The recent U.S.-China trade dispute and the COVID-19 pandemic are accelerating our companies to reshore and duplicate supply chains closer to home.
There is another motivation that is accelerating reshoring. The 2017 U.S. Tax Cut and Jobs Act enabled a portion of over $3 trillion of profits held overseas by American companies to return home tax-free. Because of the drop in economic activity caused by COVID-19, the repatriation of foreign profits surged to $124 billion in the first quarter of 2020, according to the U.S. Department of Commerce. The purpose behind the act was to encourage companies to use the repatriated profits to create jobs at home.
With the current pro-business drive by Washington galvanized by the elimination of many government regulations that plagued businesses in the past, it is increasingly attractive now to reindustrialize America.
In the wake of COVID-19, new legislation is pending in the Senate, such as the Forging Operational Resistance to Chinese Expansion Act, which among others would provide tax breaks to pharmaceutical and medical supply companies moving their operations from China to the U.S.
While the many incentives that our government is offering are laudable, it is important that our companies should help to get our house in order so we become self-dependent and self-sufficient. Our companies should show their social responsibility to our country.
U.S. companies realize the benefits of bringing manufacturing back home. The reindustrialized company would have better control over their intellectual property and manufacturing know-how, as this property would remain in-house. The company would have a dependable supply chain for products since they would be produced here. Importantly, skilled jobs result from domestic production. American workers are among the most productive in the world. With investment in smart technology and cutting-edge tools and workforce development of their skills, productivity would be high. This would usher in the 21st-century modernization of American industry.
These benefits would be somewhat offset by higher wages and meeting stricter labor, occupational safety and environmental standards, which may eat into profits. The consumer may have to pay more for products made in the USA, which many people may not mind.
Also, the newly signed U.S. trade agreement with Mexico and Canada (USMCA) is an opportune time for American companies to partner closely with companies located across our borders to reshore manufacturing and establish supply chains in North America. Mexico and Canada may be able to fill the vacuum created by curtailing our dependence on China. The USMCA improves the investment opportunity and creates more certainty of our supply chains.
T. Rao Coca specializes in intellectual property law. He served as an executive at IBM, NVIDIA and IGT. He lives in Henderson.
