US Developing Fund to Support Reshoring, though Concerns it Would Reward Offshoring

A growing percentage of companies are said to be considering a change to China sourcing strategies.

Soon, the US government may subsidize the effort.

Supply Chain Digest Says... Some wonder why the US should subsidize companies that moved sourcing offshore. What do you say? Click here to send us your comments Click here to see reader feedback

According to a report from Reuters this week, companies that move operations or key suppliers out of China may be eligible for tax breaks, less onerous rules, and even carefully structured subsidies.

In fact, Reuters says development of such as plan is well underway, and includes the idea of a "reshoring fund" that will be seeded with $25 billion and will push US companies to drastically revamp their China sourcing strategies.

While Donald Trump won the 2016 election in large measure by promising to bring US manufacturing jobs back home, getting out of China is hard for many companies for a variety of reasons, notably the supply chain ecosystems that are now in place throughout China.

Earlier this week, for example, Kerry Logistics group managing director William Ma Wing-kai said it can take 3-5 years to exit China. In an interview with the South China Morning Post, Ma added that "China's role is unlikely to be reduced rapidly."

But the coronavirus crisis may be an important new catalyst, especially with revelation about how much US manufacturing sectors such as pharmaceuticals and food are depending on Chinese supply. The move to change that scenario in pharma and food may bleed into other sectors.

Last week, Trump signed an executive order that gave a US overseas investment agency new powers to help manufacturers in the United States. The goal, Trump said, is to "produce everything America needs for ourselves and then export to the world, and that includes medicines."

Reuters reports that both Republicans and Democrats are crafting bills to decrease US reliance on China-made products in key areas.

For example, Senator Lindsey Graham is expected to soon issue a new bill mandating pharma supply chains move back to the US.

Senator Marco Rubio introduced a bill May 10 that would bar sale of some sensitive goods to China, and raise taxes on US companies' Chinese profits.

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The $25 billion fund being discussed would be designed for companies that make so-called "essential goods" to move production home, not only for finished goods but all the supplies and ingredients that go into them, sources told Reuters.

But some conservatives worry this is a form of "industrial policy" they generally oppose. Others wonder why the US should subsidize companies that moved sourcing offshore.

"Internally some are questioning why we should be providing funds to companies that have left in recent years," Reuters reports.

But is seems as if the idea might be appealing to President Trump as a move on top of tariffs to increase manufacturing in the US. Though such subsidies will cause problems for the US in the World Trade Organization, those such actions typically take years to play out.

White House economic adviser Larry Kudlow has talked publicly about using tax incentives instead to prod U.S. companies to move some manufacturing home.

The State Department, meanwhile, is working with other agencies and foreign governments to diversify American supply chains from China. "This includes returning manufacturing to the United States and expanding our base of international manufacturing partners," said a spokesperson.

SCDigest also notes that Japan has already done something similar, launching a 243.5 billion yen stimulus package to help Japanese companies move production out of China.

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