Date: Thursday, June 17th, 2021
Companies are unlikely to reshore their supply chains from Asia to North America between now and 2025 due to high production costs, concerns about the business climate in Mexico, and fears of the loss of access to close-by markets of billions of consumers, according to a report released Wednesday by the Economist Intelligence Unit (EIU), the business intelligence operation of London-Based The Economist Group.
The conclusion goes against the widely held belief that businesses selling into North American markets would shift their supply chains from Asia in an effort to counter the massive and continuing supply chain disruptions caused by the COVID-19 pandemic. However, the EIU report said that as pandemic-related concerns fade with more people getting vaccinated and countries reopening, the emphasis on business resiliency that was a key discussion point during 2020 and in the early part of 2021 will fade with it.
Andrew Viteritti, the EIU’s commerce and regulations lead, said in a Wednesday interview that most multinational firms with long-standing Asian operations will return to their pre-COVID-19 behavior of basing supply chain decisions on operational cost-effectiveness and maximum revenue opportunities rather than on the need to establish supply chain redundancies. This means, for the most part, a continued reliance on low-cost Asian production, Viteritti said.
Shifting production and distribution operations thousands of miles is a costly and complex investment, and relocating supply chains to North America would deprive businesses of cost-effective means of penetrating Asian markets with consumers possessing more disposable income than ever before, Viteritti said.
Production of critical supplies like personal protective equipment and medical supplies may be reshored for national security and public health reasons, Viteritti said. However, the notion that businesses will leave Asia in droves is far-fetched, he said. The return to the status quo is likely to become clear once the current supply chain disruptions, largely a byproduct of the pandemic, begin to dissipate and supply-demand scales return to balance, he said.
Ironically, the report was accompanied by a chart that projected Canada and the United States as the highest-performing countries through 2025 across seven metrics of international business. Canada and the U.S. had the highest and second-highest overall scores, respectively, among 11 countries analyzed by the EIU. China ranked eighth overall.
North America boasts a deeply integrated marketplace, a large free trade area, short-distance travel times and new opportunities for policy integration under the United States-Mexico-Canada Agreement (USMCA) on trade, Viteritti said. Still, those qualities won’t be enough to move the reshoring needle in a substantial way through mid-decade, he said.
In particular, worries about Mexico will prevent North America from becoming a realistic substitute for reliable and established Asian production, according to the report. With the exception of the category of “foreign trade and exchange controls” where it scored very high, Mexico scored poor to slightly above average across the other six EIU metrics. It ranked ninth overall among the 11 nations surveyed.
Mexico’s lowest reading came in the category of “political effectiveness,” a reflection of market concerns that Mexico is adopting a more protectionist stance toward international trade. The country also scored low in the category of “private enterprise policy,” which may reflect an adversarial approach to business in general. Mexico’s labor costs are lower than in the U.S. and Canada, though it is an open question as to whether that will be enough to encourage foreign investment in the continent.
Other concerns are the ongoing bilateral squabbles between the U.S. and Canada, and whether President Joe Biden’s push to encourage purchases of U.S.-made goods squares with foreign firms’ desire for truly free and open markets, the report said.
The EIU builds its intelligence model from a broad array of data sources. Created in 1946, it is one of the world’s most respected business intelligence operations.