New A.T. Kearney report fuels debate over U.S. trade policy’s effect on reshoring

A recent report from global management consulting firm A.T. Kearney calls into doubt the ability of U.S. trade policy in encouraging domestic manufacturing firms to reshore their production efforts. Following the government’s release of 2018 trade data, A.T. Kearney published the findings from its sixth annual Reshoring Index, which compares year-over-year changes in U.S. manufacturing gross output to imports of manufactured goods from 14 traditionally low-cost country (LCC) trading partners in Asia. It found that imports rose by 9 percent for the year while U.S. gross manufacturing output grew only 6 percent in the same period. Combined with the Foreign Derived Intangible Income (FDII) tax deduction created by the 2017 Tax Cuts and Jobs Act, the Trump Administration argued that manufacturing would be driven back to the U.S. by tariffs on imports. Despite the government’s stated intent of bringing back manufacturing jobs, its trade policies appear to be showing different results.

China’s share of imports has been steadily declining for several years as Chinese labor costs have continued to increase, and the trade war has accelerated the pace of manufacturing that has begun to flee the country. However, further analysis finds that U.S. imports from China have decreased sharply while imports from neighboring Asian LLCs have substantially increased for the third straight year. It appears that neither China nor the U.S. are benefiting from the escalating trade war, according to the AT Kearney analysis. Rather, China’s LCC neighbors have seen an increase (most pronounced in Vietnam) in manufacturing as producers relocate operations to these cheaper labor markets. Similarly, the report suggests that Mexico has shown accelerated growth in manufacturing as U.S. firms often prefer to “near-shore” rather than fully repatriate their operations.

The authors suggest that despite increasing foreign production costs and the new FDII tax deduction, the economic conditions necessary for reshoring are still not favorable. First, the FDII tax deduction is too new and faces a legal challenge from the World Trade Organization. With such litigation pending, the report asserts executives are not yet willing to invest in costly reshoring efforts based solely on the unclear benefits of the tax deduction and its uncertain future.

The report also finds that the domestic variable required to encourage broad reshoring in which the U.S. is most deficient is a robust workforce composed of the appropriate percentage of skilled workers. Another report from SelectUSA which presented case studies on six U.S. companies that had recently invested in reshoring operations (find SSTI’s coverage of that report here), found that a key challenge in their efforts was a lack of skilled labor. These findings are echoed in a July 19 Congressional Research Service report which found that the proportion of U.S. manufacturing workers involved in physical production processes relative to those involved in managerial and professional tasks has continued to decline as has manufacturing employment by workers with education lower than an associate degree. Furthermore, the SelectUSA report also found that a key factor to successful reshoring was close collaboration with local partners such as economic development agencies.