Re-shoring, On-shoring, and Near-shoring: what is the difference?

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SHORINGThe political backlash against globalization in the USA has focused the discussion on bringing back United States industries that have fled (expanded) to service foreign market opportunities. In the course of the discussion and potential structural changes we hear terms like reshoring, onshoring, offshoring and nearshoring. So, what do these terms mean and how do they relate to the United States economy?

Reshoring is the act of bringing manufacturing back to a country. This could mean a factory that moved overseas coming back to the home country or a factory that started overseas and then opening a factory here in the USA.

On the other hand, onshoring is sourcing or moving a brand’s production to a factory within national borders. There are several logistical advantages to onshore production — lead times, quality, accessibility, etc. — in addition to financial ones — lack of import tax. Onshoring frequently refers to an overseas investment by a domestic company (or overseas affiliate) that is subsequently reinvested back into the domestic marketplace; this is what is meant by bringing jobs back home. In reality, onshoring has a broader definition and is actually defined as any direct investment into the domestic marketplace by a domestic company. But simply stated, onshoring is  the repatriation back to the home country of some of the overseas investment.

One of the main reasons that some US companies are considering onshoring  has to do with preserving quality. In addition, the cost advantage of producing offshore has diminished in places such as China and India and the closing gap along with transportation costs and quality issues are also helping to promote the consideration of onshoring. According to The Economist, the services sector will be better positioned for some onshoring activity. This is because investments in this sector are much more flexible than manufacturing. Overseas inflation rates, all-in labor costs, labor quality, high churn rates, high benefits costs, training costs, waste, corruption, and increasing domestic and foreign competition will all be factored into any offshore/onshore investment decision.

Nearshoring is exactly as it sounds. It is sourcing or moving production to a factory close to but not inside of target market regions. While nearshoring is a domestic company investing outside the home country, home country investment is located in a neighboring or “near” country. For example, nearshoring to the United States would be a U.S. investment in Mexico or Canada

Most U.S. manufacturers that may be considering onshoring back to the United States will most likely instead nearshore back to other North American or Central American locations to remain globally competitive. However, most manufacturers-whether offshore or onshore-are experiencing all-time low capacity utilization rates and it will take some time for this capacity to be taken up by the market before new greenfield projects take place.

“Inshoring” is a new term that refers to an investment by a foreign company into the home country. This is also called an inbound foreign direct investment and may be a negotiated form of balancing out the disruptions of home country displacements.

“Offshoring” is defined as the relocation of a whole process, piece of a process, a function, or a discrete piece of work outside the boundaries of the United States. The argument for offshoring has been to “optimize shareholder value” by reducing the costs of production, taxation and re-positioning for growing markets. The conundrum is that the citizens of the USA are also indirect stakeholders in the USA spawned companies. Indeed, many major multinational corporations were dependent on government support, protections and tax incentives in their formative years and “owe” something back to the country and society of its origin.

Offshoring, Nearshoring and Inshoring are Inevitable for the Future

Most of the population growth in the next few decades will be outside the United States. Our present world of over 6 billion people will grow to 9 billion by 2050; 98 percent of these new inhabitants will be born in developing countries. It begs the question if trying to restrict the free movement of capital and expertise is a wise thing to do. Indeed, the evolution of global trade should lift all boats and provide for more innovation and opportunities but without the qualification of nationality or which regions of the world reap the benefits. In fact, it appears to get back to a form of tribalism and the favoring of one nationality over another which can be seen by those excluded as being unjust and discriminatory and moves the argument from one of economics to one of social-political. Indeed, this argument is the theme for many dystopian works of fiction as the need for global unification becomes a matter of survival for the entire human population. But with the election of President Trump and the Brexit event, perhaps the argument is moving from fiction to reality.

 

Additional Reading

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