The physical remnants of what globalization caused are still visible if you drive through any mid-Ohio town where a manufacturing facility closed in the 1990s: the abandoned lot where the factory once stood, the commercial strip that never fully recovered, and the school district that lost its property tax base. The economic explanation for why this occurred was presented and widely accepted for thirty years: it was less expensive to produce goods abroad, American consumers’ costs decreased, and the theoretical benefits of trade were expected to spread widely enough to offset the particular losses.
That deal held in part. Consumer products become significantly more affordable. Supply chains become incredibly effective. When the pandemic struck a single container port in a single province in China, the whole system—from children’s toys to semiconductor wafers to pharmaceutical ingredients—showed how brittle the optimization had actually made it.
Bringing manufacturing back was the quick and bipartisan political conclusion that followed, unlike anything else in modern American politics. Supply networks should be reshored. Restore domestic capability for important tasks. The manufacturing elements of the Inflation Reduction Act, the tariff regimes, and the CHIPS Act all demonstrate a real change in the way the U.S. government views industrial policy, departing from the free-trade orthodoxy that predominated from about 1990 to 2020.
Similar actions are being taken by the EU. Japan has encouraged domestic production of batteries and semiconductors. Reshoring rhetoric has been prevalent. It becomes more difficult to have an honest discussion since the economics of really accomplishing it are much more complex.
The IMF calculated the cost of widespread economic fragmentation to the world economy, and the results are startling: after the full effects of trade contraction, redundant supply chains, and decreased specialization are felt, the yearly cost would be between 4.5 and 5 percent of GDP. According to the OECD’s analysis, in severe relocalization scenarios, global trade volumes could decrease by more than 18%.
These are not theoretical forecasts for some far-off future; rather, they depict the total cost of choices being made in boardrooms and congressional offices today as businesses and governments attempt to optimize for efficiency and security at the same time and find that those objectives are often at odds. There are actual factories being constructed in Ohio, Arizona, and North Carolina, and they will generate actual output. Additionally, they will manufacture things that are more expensive than those produced abroad, and this expense will eventually be reflected in prices.
The phrase “tariff absorption wall” has been coined by supply chain management to characterize the point at which tariff-related cost increases surpass corporate profits, meaning that price rises begin to show up on customer shelves rather on balance sheets. At some point during the current cycle, almost 75% of supply chain executives anticipate hitting that wall. When they do, the idea that reshoring creates security and resilience will be put to the test against the real-world experience of having to pay more for commonplace items.
In the end, whether or not that compromise is worthwhile is a political as much as an economic one. Depending on whether you are a household watching your grocery bill rise or a defense planner concerned about semiconductor dependencies, the answer can differ significantly.
The more practical businesses have opted for hybrid strategies that steer clear of the binary decision between complete offshore and complete reshoring. Through clothing, electronics, and consumer products, “China Plus One” strategies—diversifying some manufacturing to Vietnam, India, or Mexico while retaining Chinese operations—have grown quickly.
As American businesses transfer production closer to the American consumer while keeping labor costs under control, nearshoring has led to a development boom in northern Mexico. Furthermore, robotics is taking up some of the wage gap between domestic and offshore production as automation is placed over everything. Observing this in real time gives the impression that globalization is being renegotiated, albeit on harsher terms and at larger costs, in order to create a system that is clearly more costly but also more durable.
