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Canopy Commentary - Return of Manufacturing

Canopy Commentary - Return of Manufacturing

April 20, 2022

 Some economists have suggested that the global economy made a significant shift due to the rippling effects of the ongoing pandemic, which exposed some of the risks in the way that manufacturing has been conducted for the past 20 years.  At issue is globalization, which can be broadly defined as wealthy countries in North America and Europe applying their technology but outsourcing the manual part of their assembly to low-cost labor markets like China and Mexico. 

The most visible impact of this arrangement was the loss of manufacturing jobs in high-labor-cost countries like America and in Europe.  In the U.S., there were 19.6 million manufacturing jobs in 1979, compared with 12.6 million now.  This, in turn, gave companies the power to squeeze salaries across the economy—which is most visible in the dramatic decline in private sector unionization.  Union workers represented 24% of payrolls in 1973; today that figure is 6.1%.

When Covid hit, the complicated supply chains that made globalization possible either collapsed or were significantly disrupted, and then came Russia’s invasion of Ukraine.  A chip maker can achieve a significant savings by outsourcing assembly to Taiwan, where workers make about 66% of what they would in the U.S.  However, it becomes a bigger expense if the delivery of the finished chips is delayed or disrupted.

The shift that is quietly becoming an economic topic of conversation is not about the end of globalization, but instead a movement to bring manufacturing back from Asia closer to home, to Mexico or to some of the U.S. states hardest hit by the movement to outsource manufacturing.  Workers in North America can expect to be in higher demand and be paid more than they have been in recent decades.  While this will cause prices to go up, it will protect U.S. and European manufacturing from sudden, painful disruptions in their supply chains.