The shifting landscape of global manufacturing: from offshoring to reshoring and its welfare implications

Global manufacturing has undergone a remarkable transformation in recent decades, moving from a landscape dominated by offshoring to one increasingly characterized by reshoring and protectionism. This shift reflects not just evolving economic realities but also the complex interplay of technological advancements and socio-political pressures—factors that have significant implications for labor markets and overall welfare.
 

The Rise of Offshoring

In the years leading up to the 2008 Great Recession, offshoring became a key strategy for many companies seeking to maximize profits. By relocating low-skilled production to developing countries, businesses achieved substantial cost savings and enhanced productivity, all while contributing to economic growth in these regions. Countries like China benefited immensely, experiencing dramatic reductions in poverty and impressive job creation. However, as labor costs in these once-cheap manufacturing hubs began to rise, the limitations of this strategy started to surface.
 

The Turn Towards Reshoring

Advanced economies faced job displacement and growing income inequality, leading to a rise in reshoring as companies reevaluated their offshore operations. Several key factors have fueled this shift:

1. Technological Advancements: The increasing availability and affordability of advanced production technologies such as production robots reduced the dependency on low-cost labor and made it feasible to bring manufacturing back to offshoring economies.
2. Supply Chain Vulnerabilities: The COVID-19 pandemic caused significant disruptions in supply chains and exposed significant weaknesses in global supply chains and risks of over-reliance on distant manufacturing hubs, prompting countries to prioritize resilience and security in their trade policies.
3. Protectionist Sentiments: Heightened political pressures, induced by job displacement and growing income inequality, led to a shift toward trade protectionism, with governments focusing on safeguarding domestic jobs and industries using subsidies, tariffs, and non-tariff measures.

These dynamics have resulted in a substantial reorganization of global value chains and prompted countries to reassess their trade policies and priorities.
 

Patterns of Trade Restructuring

Our paper shows that both the U.S. and EU markets are experiencing significant trade restructuring. Between 2017 and 2023, U.S. imports from China declined sharply, while countries like Mexico, Vietnam, and Bangladesh gained market share. Similarly, the EU saw a contraction in trade with Russia, coupled with an increase in imports from nations such as South Korea, India, and Brazil.
 

U.S. import growth by main trading partners and product, 2017–2023

^{Note: Calculations based on data from UN Comtrade. Import growth is computed as log differences and based on real values using the GDP deflator (2010 = 100).}

EU import growth by main trading partners and product, 2017–2023

^{Note: Calculations based on data from UN Comtrade. Import growth for the EU is computed as log differences and based on nominal values.}

Estimates from a gravity model reveal that a 1% increase in tariffs leads to a decrease in total trade of approximately 7.25% for the U.S. and 4.67% for the EU. These findings highlight how sensitive trade flows are to policy changes and underscore the potential consequences of protectionist measures.
 

Who Benefits from Restructuring?

Besides geographic and socioeconomic proximity and political alignment, three key factors influence whether countries gain or lose market shares.

• Labor Productivity: Proxy for economic competitiveness affecting investments and reshoring of manufacturing.
• Logistics Capability: Logistics performance in terms of customs clearance efficiency, trade and transport infrastructure quality, ease of arranging affordable international shipments, logistics services quality, tracking capability, and on-time delivery frequency.
• Technological Readiness: Technological capability to effectively utilize frontier technologies, encompassing credit access, skill availability, ICT infrastructure, capabilities in high-tech manufacturing and digital service delivery, and R&D.

Descriptive evidence shows countries with higher competitiveness, better logistics capability especially in trade and transport infrastructure and greater technological readiness, particularly access to finance and industrial capacity, are positioned to gain market shares and become new production hubs. These factors contribute to the emergence of new production hubs, altering the global manufacturing map and influencing job creation across various regions.
 

Welfare Implications

Our paper reviews recent evidence on trade restructuring, especially technology-induced reshoring, and shows the restructuring has significant welfare implications. Automation displaced demand for exports from countries and resulted in employment and earnings losses, with stronger impacts found for sectors with high levels of automation and in local labor markets with strong export relationships. Additionally, the deployment of industrial robots domestically has also led to wage declines. While automation has led to productivity gains and increased reshoring, it has not necessarily translated into job creation or wage increases for low-skilled workers. In fact, many of the benefits of automation have accrued to high-skilled workers, leaving lower-skilled workers vulnerable to job displacement and wage stagnation.

Moreover, protectionist measures have caused welfare losses through higher consumer costs and a reduced variety of available products. Importantly, these effects are unevenly distributed across locations and more pronounced for less skilled, manufacturing, female, older workers, and those in small and medium-sized enterprises.
 

Conclusion

As countries navigate this evolving landscape of global manufacturing, it is crucial to understand the complex interplay of factors driving these changes. The trade restructuring offers opportunities for some countries while presenting significant challenges for others. Policymakers must consider the broader welfare implications of trade restructuring, ensuring that the benefits of these shifts are equitably distributed and that vulnerable populations are supported in the face of rapid change. Policy dialogue should also aim to avoid trade wars and fragmentation, and strengthen economic partnerships. Despite increasing evidence on the impacts of recent policy measures, further research is needed to fully understand their effects both across and within countries.