U.S. Manufacturing Poised to Benefit in Pandemic’s Wake

May 14, 2020
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Author: Glenn Hunter

When the coronavirus pandemic broke out, one of the many things we learned was how dependent the U.S. has become on imports of foreign-made medical devices and pharmaceuticals, much of them from China. China is the world’s No. 1 supplier of ibuprofen, for example. The country also produces most of the U.S. supply for N95 face masks and disposable gloves. Parts for ventilators used by COVID-19 patients also come from China, and crucial antibiotics that are used to treat secondary infections caused by the virus rely on active ingredients from China as well.

COVID-19 has made the U.S. aware of its dependency on China for manufactured pharmaceuticals.

Shortages of these products have led to calls by U.S. politicians to start making these critical supplies domestically. According to the Coalition for a Prosperous America, reshoring pharmaceuticals and medical equipment to the U.S. would not only reduce dependence on foreign sources, but add a total of 1.1 million good-paying jobs and $254 billion to GDP. Without some assistance from Washington, D.C., though, don’t hold your breath waiting for it to happen on a large scale. The decades-long push for lower costs through globalization has resulted in a system of interlocking overseas supply chains. Rather than owning their own goods-producing factories in China, most U.S. companies ranging from Lowes and Apple to Nike and Walmart have contracted the work out to specialized firms there. The resulting supply-chain lines are so entrenched and intertwined, it will take time to disrupt them.

But some in Washington are trying. In April, White House National Economic Council Director Larry Kudlow said the federal government should “literally pay the moving costs” of any American company that wants to leave China and return to the U.S. A bipartisan bill introduced in March by U.S. Sen. Marsha Blackburn, R-Tenn., and Sen. Bob Menendez, D-N.J., would steer pharmaceutical production away from China to the U.S. And earlier in May, Trump administration officials told Reuters they were considering tax incentives and reshoring subsidies to lure manufacturing away from China.

A Trade Dispute and Coronavirus Reduce Prior Impressive Job Gains

U.S. manufacturing could use the boost. In April, the sector employed 11.48 million workers, down from 12.82 million workers in March, according to the Bureau of Labor Statistics. The job losses due to COVID-19 sent the manufacturing unemployment rate skyrocketing to 13.2%, up from 4.2% the month before. The nonprofit Institute for Supply Management said only two of the manufacturing subsectors reported growth in April: paper products; and food, beverage and tobacco products. The April decline capped several quarters of ho-hum performance by the sector, after it added an impressive 499,000 jobs during President Donald Trump’s first 30 months in office. Prior to the pandemic, manufacturing’s recent tepid patch had been chalked up to ongoing trade tensions between the U.S. and China, resulting in the U.S. president imposing tariffs to rebalance the relationship.

There were indications that the get-tough tactic was working. According to the 2019 Reshoring Index by Kearney, a global manufacturing consulting firm, companies were exiting China at a record pace even before the pandemic. Kearney’s seventh annual Reshoring Index showed a “dramatic reversal” of a five-year trend, as imports to the U.S. from 14 low-cost Asian countries plummeted when compared to domestic American manufacturing’s gross output. Kearney said the contraction was due mainly to imports from China, which decreased 17% because of the trade war.

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The owner of the children’s apparel company, OshKosh B’gosh, has begun sourcing more of its goods in the U.S., for example. Polaris, which makes ATVs and snowmobiles, planned to shift $30 million of machine parts from China to U.S. suppliers. Last August, Home Depot Executive Vice President Ted Decker told investors, “I’m not aware of a single supplier who is not moving some form of manufacturing outside of China. We have suppliers moving production to Taiwan, to Vietnam … and even back into the United States.”

Brian Goldner, CEO of toymaker Hasbro, said Hasbro has been moving its business away from China for several years. “We’re seeing great opportunities in Vietnam, India and other territories like Mexico,” Goldner told CNBC last September. “We’ve doing even more in the U.S. We brought Play-Doh back to the U.S. last year.”

For cost-conscious companies, one big impediment to the continuing trend is the relative cost of labor in the U.S. While Barclays says manufacturing workers in China made $4.12 an hour, average hourly earnings for a U.S. worker in the sector in April were $29.11. Other roadblocks include America’s relatively high production costs and a shortage of skilled manufacturing labor, as more and more baby boomers retire. The Manufacturing Institute says as many as 2.4 million manufacturing jobs could go unfilled by 2028.

Upskilling and reskilling programs could put a dent in that projection, though, especially given the newly unemployed levels of blue-collar workers who may be looking to enter a different, higher-paying field in the wake of the pandemic. Combined with the push to remove manufacturing and production from overseas dependencies and the pending government-help initiatives, American manufacturing could be in for something of a revival, if not a full-blown renaissance.