2 May 2020

Europe: Could the COVID-19 crisis contribute to a “reshoring” of production?

Over the last weeks the idea of “reshoring” has been mentioned increasingly often in conversations and debates, here in France.

This is probably because, during the COVID-19 crisis, we have turned more conscious of the consequences of moving our production abroad. The ongoing turmoil has made us bitterly aware of our dependence on foreign countries like China, India or the US for our medical equipment, drugs and vaccines. In the food sector, it has also forced us to worry about the considerable weight of foreign fruit and vegetables, as well as of ingredients that have grown indispensable for feeding our livestock, the imports of which are being hampered by border restrictions. While this is painfully true in the case of France, it equally applies to many other countries in Europe and elsewhere.

This has made that when politicians, experts and journalists talk about the post-COVID-19 era, they often sing and dance around the idea of bringing production back home. They tell us that we will need to reshore and that reshoring will for sure occur in the near future.

What exactly would reshoring mean? What would be its consequences? And what are the main obstacles of a movement that, for many, appears to be a solution to several of our problems? This is what this short article will attempt to explore while avoiding going into too much technical detail.

Bringing production back home is often presented as a new panacea, a source of renewed sovereignty that would help us to be stronger, create more jobs and reduce our greenhouse gas emissions (because of reduced transport) and thus to combat climate change, one of our key concerns before the virus appeared. In a nutshell, this awesome solution of reshoring would seem to be the promise of better times. There are, of course, here and there, some unwelcome pundits who explain to who is willing to listen that this change would mean higher prices… An argument discarded by its promoters advocating that when sovereignty is at stake, price does not matter.

Nevertheless…

Reshoring and relocation overseas

Reshoring means that the intention is to produce again locally what was relocated overseas in the past. The main argument in favour of relocation abroad has always been economic efficiency and the price reduction it is supposed to imply. This is roughly the argument that is used to explain the benefits generated by trade. Let’s remind here that, since the end of World War II, international trade has followed an extraordinary expansion that occurred at a rate much higher than world economic growth: between 1948 and 2013, the volume of global transactions was multiplied by 300! [read]

If you read information prepared for businessmen [read], arguments for relocating to some foreign place usually include:

1. •the opportunity to reduce costs, particularly the cost of production: the decision is to operate in a country:
   

1. 1. •where salaries and social contributions are lower (as there is  less or no social protection for its labour force);
      

   2. •where labour law is more flexible (working time, security norms and more freedom for hiring and firing); and,
      

   3. •where environmental rules and regulations authorise polluting technologies that are forbidden (or heavily taxed) at home.
      

2. •the benefit of a lower tax regime, particularly for the profit tax; and,
   

3. •in other words, the search for countries with the best conditions for doing business.
   

The race to countries with the most advantageous context has led, worldwide, to a competitive race that has contributed to lower social and environmental norms, a process that we have already mentioned elsewhere [read p. 8].

The wish to be closer to a targeted market or to a source of bulky raw material costly to be transported before processing may also sometimes justify relocation.

It is interesting that over recent years, before the beginning of the COVID-19 crisis, there has been some reshoring occurring that was often explained by reasons such as political instability, economic insecurity or deficiency in services in places of relocation, as well as the strength of the « made back home » as a marketing tool when it becomes synonymous of quality and support to economic nationalism.

To summarise, reshoring of activities would imply, at constant technology, to produce in a costlier way and thus selling at a higher price, all other things being equal.

What would happen if production were brought back home?

It appears clear from what has just been said that reshoring would imply higher costs and prices for reshored goods, unless:

1. •it took place together with technological change (such as digitisation of the garment industry);
   

2. •businesses were ready to invest capital to produce with less profit (this second assumption is highly unlikely unless some kind of political pressure was exerted on them);
   

3. •our governments decide to implement typical policies aiming at gaining competitiveness, by reducing profit taxes and the cost of labour (by cutting social contributions): this would weaken the social protection system in place in the relocating country, and this country would enhance its participation in the international economic competition. This option would be welcomed by some in the business community.
   

In absence of such changes, the price increase resulting from bringing activities back home could probably be absorbed by the well-off consumers. For them, the advertised superior quality of locally produced goods, national interest and, in some cases the environmental argument, could be sufficient to accept to purchase more expensive items. This kind of consumer behaviour can already be seen in the food sector, where the well-off prefer to pay more for domestic strawberries (rather than Spanish strawberries with a strong taste of sex and pesticides [read]), for local premium mutton and lamb produced on natural pastures (rather than lamb imported from New Zealand), or for domestic organic food (rather than stuff originating from countries where norms might be less stringent than at home).

If this were so, reshoring would contribute to an aggravated market segmentation: local « quality » food for the rich, cheap low quality imported food for the poor.

In the case of livestock feed, consequences would be felt not only on prices, but also in the structure of supply chains (a different composition of animal feed would imply changes in local production to ensure the availability of cereals or protein crops to be used as fodder in substitution to soya imports).

In all these cases, home jobs would be created (an argument strongly emphasised by pro-reshoring advocates), strategic security and sovereignty would be secured (as production is managed locally, dependency on foreign sources would be reduced).

Obstacles to reshoring

As can be seen, cost, price and profitability differences may constitute obstacles to bringing activities back home. Another argument could be to refuse the establishment of two categories of goods: one for the rich, and one for the poor. 

It is worth remembering that locally produced goods will continue to compete with items imported from abroad and that many consumers will continue to purchase imported goods because they are cheaper, so as to preserve their purchasing power that benefitted from globalisation (In France, for example, purchasing power increased tremendously for this reason between 1996 and 2010 [read p. 5. and the following]). Competition between local and imported goods will be all the fiercer when it is difficult to make the difference between them: it is not as straightforward to make the distinction between Chinese pills or respirators and the locally produced ones as to differentiate a Spanish strawberry from its local cousin. Unless, of course, a considerable effort is made to inform consumers (logos, labels and other indications) or to nationalise some businesses (mainly in the industrial sector, in the case of pharmaceutical companies, for example) in order to make them benefit from a hidden subsidy by not paying dividends to shareholders that would otherwise be paid by private companies, a way to circumvent some international rules. Another possibility could be to support the development of workers’ production cooperatives.

In the absence of technological change, acceptance of reduced profits or pro-competitiveness policies at time of reshoring, it should be feasible, in theory, to restore the balance between locally produced goods and their equivalent from abroad by eroding the social system, as already mentioned above, or by applying taxes and subsidies in a way that allows selling local goods at the same price as imported ones, thus making them similarly attractive for poor consumers. In reality, however, such policies do not seem to be applicable, as commitments taken in the framework of the WTO or bilateral agreements ban any sustained “protectionist” measures of this kind and a country violating this rule would likely be facing retaliatory action on its exported goods (for example, in the case of France: on weapons, planes, luxury items, wines, spirits, etc.)*.

In this situation, the obstacles to reshoring could only be overcome by challenging the results of more than 70 years of international trade negotiations that, while being binding and supportive of a liberalised international trade, offer, however, a certain degree of protection to the weaker countries [read p. 3. and the following]. Indeed for a small or middle-sized nation, it is awkward to negotiate bilaterally with economic giants like the US, the EU or China [read]. Just take the example of the difficulties met by Mexico while renegotiating NAFTA (North American Free Trade Agreement) after Trump’s election.

This being considered, the answer to the question in our title is that it is more than likely that reshoring of production will remain limited in volume, unless there is a fundamental change in international trade rules, a dismantling of the existing international economic system and/or a downgrading of the local social system. In the absence of such a reshuffle - that is a possibility, considering the current political context -, reshoring will probably be limited in the case of the food sector to some well-identified items on the ground of quality (organic or conventional) or geographical origin. It will certainly benefit from a proliferation of local initiatives taken in the framework of the agricultural transition [read]. It will nevertheless probably occur at the cost of a greater social segmentation of the market. The bitter experience gained during the COVID-19 crisis could probably create a broader movement in the case of products earmarked as strategic like drugs, vaccines and medical equipment.

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* Some may challenge this point of view, at least in the case of the WTO, since the Dispute Settlement Body of the WTO has ceased to be operational since late 2019 as it does not have a minimum membership of three people because of the US blockage of nominations after 2017.

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To know more :

1. •J.M. Caballero, M.G. Quieti and M. Maetz, International Trade: Some Basic Theories and Concepts in “Multilateral trade negotiations on agriculture - A ressource manual", FAO 2000.
   

2. •WTO, Agreement on Agriculture, Marrakech Agreement, WTO, 1994.
   

3. •WTO, Agriculture: fairer markets for farmers, WTO website.
   

Selection of past articles on hungerexplained.org related to the topic:

1. •Borders in the global economy - Control of labour, mobility of goods and capital, preservation of profits and exacerbation of inequalities, 2018.
   

2. •Opinion : Free Trade Agreements Promote Corporate Interests, 2017.
   

3. •Is “free-tradism” agonising? Why is it increasingly difficult to enter into free trade agreements? 2016.
   

4. •Are existing food and agricultural policies supportive to local sustainable food systems? 2015.
   

5. •International trade in agricultural commodities, 2014.

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