The coronavirus pandemic has once again brought to the fore the “manufacturing reshoring and nearshoring” debate. This time around, the conversation has focused on medical supplies, such as personal protective equipment, that ran low during the peak of the first viral wave to hit the United States and several European countries in March. Export restrictions freshly implemented by China, and severely curtailed cargo capacity in both passenger and commercial flights because of travel restrictions, created a shortage of masks, gowns, gloves and other supplies required by medical practitioners. Though domestic production eventually ramped up, it fell short of requirements, and federal programs akin to wartime efforts were launched to source critical supplies. The Strategic National Stockpile failed to meet the needs of several states, which eventually had to resort to sourcing supplies from private vendors in limited quantities at egregious prices. All of this focused the attention squarely on domestic production capacity and the debate around whether such critical industries, like medical supplies, should be reshored — bringing production back to the United States — and/or nearshored — bringing production back to North America.

To answer this question, and to address more broadly the question of manufacturing reshoring/nearshoring in the United States, we need to take a step back and consider both the historical context and the current state of manufacturing. In terms of value-add as a share of nominal GDP, private service-producing industries today contribute 70 percent of nominal GDP, while goods-producing industries contribute a mere 17 percent. Manufacturing is a significant component of the goods-producing industry and accounts for 11 percent of total GDP; however, that share has gradually declined from its peak in the early ’50s. Manufacturing employment likewise lost 7.8 million jobs over the four decades heading into the global financial crisis, and today accounts for slightly more than three-fifths of its peak employment, as reported in June 1979. Although many economists have attributed the trade deficit to this decline in manufacturing employment and its lower contribution to nominal GDP, a confluence of factors, including technological advancements, labor productivity and a shifting comparative advantage, are potentially responsible for the decline in U.S. manufacturing primacy.

We briefly touch on these factors below, starting with a discussion of the trade deficit. The United States became a net importer of goods and a net exporter of services beginning in the early 1970s, as reported in the balance of payments data from the U.S. Census Bureau. Many economists have attributed the rising and sustained trade deficit since the 1970s to the discontinuation of the Bretton Woods dollar-to-gold convertibility system in 1971, and the resultant usage of the dollar as the world’s reserve currency, which enabled the United States to indulge in deficit-financed consumption in the post-war boom period, according to Understanding the Roots of the U.S. Trade Deficit, published by the Federal Reserve Bank of St. Louis. However, rising labor productivity and real wages in the manufacturing sector, which peaked in the late 1970s, also may have nudged labor-intensive production processes to low-wage countries and away from the United States, which was moving further toward services.

We explore this shift in comparative advantage through two case studies — apparel production as a proxy for a labor-intensive industry and auto production as a proxy for the capital-intensive sector — and consider the possibility of reshoring and/or nearshoring to the United States in this context.

Case study 1: The apparel industry in the United States has lost more than nine-tenths of its jobs since the early 1990s, and the value-add to nominal GDP today is negligible. Today, nearly half of U.S. apparel is imported from China, but that share has decreased by approximately 10 percent over the past decade, with Vietnam emerging as the second-largest exporter to the United States over this period. The rise of Vietnam as a second-place contender is not a coincidence, but rather the result of a series of factors, including a concerted trade policy response by the U.S. government, the availability of co-located value chains for apparel in Asia, and the proximity of Vietnam to China for raw materials. It is also important to note no other trading partner within this category has reported a meaningful change in its export share to the United States over the past decade, including Mexico. Further, given the average age of equipment in the U.S. apparel- and leather-production industries is significantly higher than the average age of overall manufacturing stock, and given foreign investment by U.S. parent companies has exceeded domestic investment by 10 times, it is unlikely reshoring will manifest over the near to medium term. Longer term, however, a shift in demographics and the continued focus on sustainable and flexible production could incent major retailers and fashion brands to move toward a hybrid sourcing and partnership model, which could support the requisite investment in technology to make reshoring/nearshoring a possibility.

Case study 2: The auto industry is experiencing a similar theme in terms of the shifting role of major trading partners. The United States imports fewer cars today from Japan, Canada and Germany, and more from Mexico, than it did 10 years ago. Mexico’s success with autos and auto parts is particularly interesting in the context of nearshoring and, at first glance, might appear to emerge from the wage differential. It is a combination of several financial and strategic advantages, however, that are attracting both foreign and domestic automakers — advantages including duty-free exports, competitive tax abatements, and location and access to a qualified labor pool. A shift in U.S. customer preference from passenger cars to light trucks and SUVs, and the configuration of the assembly plants in Mexico toward smaller engine builds, have supported production and imports in the country over Canada, another nearshoring option. Last, as it relates to reshoring, although the average age of domestic equipment in the auto industry is lower than the age of overall manufacturing equipment in the United States, it is unlikely production capacity will reshore in the near term. Aggregate foreign investment in the auto sector has exceeded domestic investment by three times, and recent trade conflicts with export partners have limited the scope of duty-free trade agreements. In contrast, Mexico is fast emerging as a production choice to fulfill worldwide demand — thanks, in part, to its large roster of countries that qualify for duty-free exports, in addition to the aforementioned reasons.

Although these are two very specific examples, they highlight some of the issues and intricacies related to nearshoring and reshoring. Technology could be a game changer that shifts production closer to home, but it is in different stages of adoption within different industries — with some capital-intensive industries, such as automotive, at the forefront of technological advancements and automation adoption, and others, such as apparel, lagging far behind.

Going back to our initial example of personal protective equipment, the recently signed memorandum of agreement between the Pentagon and the U.S. International Development Finance Corp., which supports domestic production capabilities, could increase the domestic production of key medical and pharmaceutical supplies over time. Any such increase in production can only be sustained, however, if unit production costs are comparable to low-cost sourcing alternatives.

What does this mean for commercial real estate and, specifically, the manufacturing subsector? Although reshoring and/or nearshoring may not materialize for many industries in the near term, an expansion in comparative-advantage industries could create demand for new manufacturing structures over time, and subsequently drive demand for logistics facilities tied to the potential increase in production. In addition, functional obsolescence — a potentially overlooked reason — could be a key driver of future industrial demand. More than half of the national manufacturing stock is more than 50 years old and, although these structures are long-lived, there might be instances when a manufacturer may forego the option of retrofitting an existing building and consider building new instead, which has the potential to boost demand for this subsector.

In conclusion, the forces of globalization set in motion over the past several decades are, perhaps, challenging to untangle in the near term. Longer term, however, with a concerted policy response and commensurate investment in comparative-advantage industries, nearshoring and reshoring could emerge as viable options for domestic manufacturers.

TJ Parker is managing director, real estate research, at Barings.