“How has this happened, and will this trend continue?”
A decade ago, when the country was only beginning to dig out from the Great Recession, the idea of “reshoring” American jobs seemed more aspirational than anything. In recent history, many nearby companies had previously moved manufacturing operations and jobs overseas in search of lower production costs. But as we started to move forward from the economic crash, we began to see a trend of reshoring for American manufacturers. Since 2010, there has been a documented increase in reshoring as well as an upturn in foreign direct investment (FDI) into the United States. What seemed aspirational at the time has become a reality thanks to a changing business climate and strategic business planning from our native manufacturers.
The question everyone is asking is, “How has this happened, and will this trend continue?”
The driving force for this change is that a number of business environmental factors have improved. Minimal wage costs in countries such as China once motivated American job makers to move production overseas in order to remain competitive in the global market. In recent years, those costs have increased, and now American companies are taking another look at their options. Added to that is the high risk of intellectual theft overseas—patent protection is more rigid in the U.S., and many companies have found it more beneficial to bring jobs back home.
Then there is the “Made in America” factor, which can indeed demand a higher price here in the states. Not to mention, with factories in America now highly invested in technological advancements and state–of–the–art automation systems, products made in America not only demand a higher price but may also see a reduction in cost due to less labor intensive production.
Lastly, there is e-commerce, and the rapid speed at which customers are receiving service—this has added tremendous pressure on companies to perform quickly and efficiently. When the modern customer can get any product delivered to their home in under a week with a click of a button, manufacturers have learned that staying local is the best way to meet their customers’ needs. These changes in the landscape have helped incentivize business owners to return jobs to the U.S.
The second half of the reshoring success story is increased help from the federal government in encouraging the return of these jobs. The Tax Cuts and Jobs Act (TCJA) in 2017 brought a monumental change to the American business world, starting foremost with the reduced corporate income tax rate from 35% to 21%. This provided a powerful reshoring incentive and has helped in making it less costly to do business in America as a corporation.
Next is the §965 transition tax, a one-time reduction in the tax rate for cash taken from overseas business and brought back to America. This led to an influx of cash during the 2018 tax year, which has allowed for more internal investment within American borders, including here in the northeast. Other tax regime changes have made it less attractive to leave money in foreign entities that would otherwise come home. Collectively, these changes should have an effect not only on the way we do business abroad but also right here at home.
Finally, there is the Foreign Derived Intangible Income deduction (FDII), a deduction now available to American businesses who produce products in the United States and export them to customers in foreign countries. The calculation of this deduction can vary depending on the makeup of a corporation, but for a business with the right structure, this deduction can have a significant effect on the tax bill at the end of the year—making reshoring even more attractive.
In 2010, many manufacturers were still fighting to keep their heads above water in the wake of economic crisis, but the success we have seen in reshoring is a testament to what American companies were able to do by adapting to the global economy and redoubling efforts to ensure that “Made in America” means more than ever. This, along with recent added tax incentives, has made it safe to assume we will continue to see trends in reshoring as well as continued investment from foreign companies. If we can continue on this path, we are likely to see an improving manufacturing landscape right here in our backyard.