Reshoring of production activities to the U.S. presents an economic opportunity, particularly for the Heartland. Economic development professionals and policymakers can use import substitution and supply chain gap analysis to identify industries for which reshoring is appropriate.

There is some evidence that the era of moving manufacturing and production operations overseas may be ending. Our recently released report, Reshoring America: Can the Heartland Lead the Way?, makes the argument that the global pandemic has intensified factors that may make U.S.-based production not just competitive but more profitable than overseas locations. The industrial assets of the Heartland, including transportation networks, available power and water, coupled with a legacy of hard-working laborers, training facilities and proximity to suppliers and North American consumers, make a compelling case for locating production activity in America’s middle. However, not everything can or will be produced in the United States, which begs the question: which industries or products make the most sense to reshore?

Several factors will impact the decision to relocate production activities:

• Production Costs:  Factors which directly impact production costs, like wages, availability of inputs, and energy, still matter; however, the weight that these factors play in understanding a firm’s costs of production have changed due to trends in automation, new materials, rapidly changing consumer preferences, among others.

• Federal Priorities:  Are the products under scrutiny prioritized by federal legislation, regulation or necessity, such as the executive orders issued by President Biden calling for increased domestic production of goods and resilient supply chains?

• Available Supply:  Is the supply of products concentrated in such a way that leaves United States businesses vulnerable to price manipulation or unnecessary supply shortages?

• Quality:  Are existing overseas products inferior or insufficient for U.S. products and applications? Or, is the quality of overseas products highly variable?

• Enforcing Rights:  Are intellectual property rights compromised or difficult to enforce overseas?

Products in one or more of these categories may be good candidates for reshoring consideration. There are a couple of additional strategies that states and economic development professionals can employ to identify prospective industries to target for reshoring: import substitution and supply chain gap filling. Once an industry is identified, economic development professionals and corporate leaders alike should be prepared to analyze the factors influencing their industry and assess the situation for themselves.

Import substitution identifies products/sectors that are currently imported in large volume and finds ways of supplying those products from domestic suppliers (through the expansion of existing production or establishing a new firm) or innovating new technology or materials domestically. While import substitution often means connecting an existing producer with a potential buyer, it can also help a producer recognize new markets or applications for their products.

Alternatively, policymakers could identify products for which little or no production exists domestically or for which supplies are otherwise constrained. Filling a so-called supply chain gap often stems from innovation, where a new firm, process or material creates an opportunity for globally competitive production. Craft distilleries that produced hand sanitizer during the global pandemic represent one application of this concept, where producers were able to address a temporary shortage using their existing equipment. 

Even before the COVID-19 pandemic, global costs were shifting in such a way as to increase the competitiveness of U.S.-produced goods. Labor costs were already rising in the developing world. There was a growing awareness of the costs associated with unstable governments and regulations, particularly those associated with intellectual property rights. The pandemic has not only exacerbated these trends, but also exposed the potential for supply chain disruption. The pandemic also accelerated e-commerce and automation adoption to minimize virus transmission between workers and consumers. These trends have increased firms’ scrutiny of reshoring production activities in the U.S., as they may skew the overall costs of production (including mitigated supply disruptions, stable government and regulatory environment, etc.) in favor of domestic locations.

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