Reshoring refers to the process of bringing back manufacturing and production activities to a company’s home country after previously outsourcing these operations abroad.
For decades, many companies have offshored their manufacturing to countries with lower labour costs, such as China, India, and Vietnam, to reduce expenses. However, reshoring signifies a reversal of this trend, motivated by various economic, strategic, and political factors.
Key drivers of reshoring
There are several reasons why companies and governments have shifted towards reshoring:
- Supply chain resilience: Global supply chains have proven to be vulnerable to disruptions caused by events such as the COVID-19 pandemic, trade disputes, or natural disasters. Bringing production closer to home can reduce these risks and ensure greater control over critical supplies.
- National security concerns: In industries like defence and technology, maintaining domestic production of key components is crucial for safeguarding national interests. Outsourcing manufacturing to foreign countries can pose potential risks, especially when it involves sectors vital to a nation’s security and competitiveness.
- Government incentives and policies: Many governments are actively encouraging reshoring by offering financial incentives, grants, or tax breaks. These policies aim to revitalise domestic manufacturing sectors, create jobs, and reduce dependency on foreign suppliers for essential goods.
- Technological advancements: Automation and advanced manufacturing technologies have made it possible for companies to produce goods more cost-effectively at home. With reduced reliance on cheap labour, reshoring has become more economically viable in certain industries.
The US CHIPS Act: reshoring in action
The United States has been a prominent example of a country focusing on reshoring. One of its most significant recent moves has been through the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, passed in 2022. This legislation aimed to address the nation’s reliance on foreign-produced semiconductors, an industry vital to modern technology, from smartphones to military systems.
Why the US needs to reshore semiconductor production
Semiconductors are the building blocks of almost all electronic devices. In recent years, a global semiconductor shortage highlighted the dangers of overreliance on foreign supply chains, particularly in Asia, where Taiwan and South Korea dominate production. Disruptions in the global supply of semiconductors have affected everything from automotive manufacturing to consumer electronics, leading to delays, cost increases, and reduced productivity.
Moreover, semiconductors are crucial to national security. With the growing demand for chips in defence systems, communications networks, and advanced technologies like artificial intelligence, the US government became increasingly concerned about potential vulnerabilities if it continued to depend on foreign manufacturers.
The US CHIPS Act explained
The CHIPS Act represents the US government’s response to these challenges. It provided over $52 billion in subsidies and tax incentives to support the domestic production of semiconductors. The Act aimed to encourage companies to build semiconductor fabrication plants (fabs) on US soil, reducing reliance on foreign suppliers and mitigating risks to national security and economic stability.
The key goals of the CHIPS Act included:
- Increased domestic production: The Act aimed to bolster the US’s semiconductor manufacturing capabilities by incentivising both American and foreign companies to invest in US-based facilities.
- Strengthened supply chains: By reshoring semiconductor production, the US hoped to create a more resilient and secure supply chain, capable of withstanding future disruptions.
- Job creation: With new semiconductor fabs expected to spring up across the country, the CHIPS Act sought to create thousands of high-skilled jobs in advanced manufacturing and research and development.
Early results and long-term impact
As a direct result of the CHIPS Act, several major companies, such as Intel, Samsung, and Taiwan Semiconductor Manufacturing Company (TSMC), announced plans to build or expand semiconductor facilities in the US. These investments marked significant progress toward reshoring critical manufacturing capabilities. However, reshoring does not happen overnight. Building semiconductor fabs is a complex, time-consuming, and capital-intensive process, so the full impact of the CHIPS Act is expected to materialise over the coming years.
In the long term, reshoring efforts like the CHIPS Act could significantly reduce US dependency on foreign semiconductor producers, enhance national security, and create a more robust domestic manufacturing base. Additionally, it may inspire other nations to follow suit, further shifting the global manufacturing landscape.
Conclusion
Reshoring reflects the growing desire of nations to reclaim control over their production capabilities, mitigate supply chain risks, and strengthen national security. The US CHIPS Act is a prime example of how government policy can encourage reshoring in critical industries. While reshoring presents challenges, such as higher production costs, the potential benefits—such as supply chain resilience, job creation, and enhanced security—make it an appealing strategy for countries looking to safeguard their economic and strategic interests in an increasingly unpredictable world.
