Coupled with a worldwide trend away from globalization in recent years—one spurred by “populist antipathy toward free trade”
and epitomized by the U.S.-China trade war
—the pandemic has accelerated a shift toward the “re-shoring” of supply chains by companies around the globe, BofA analysts say.
But with emerging markets like China having entrenched themselves as pivotal to the global supply chain, it’s clear that re-shoring away from such markets is a costly proposition. In fact, BofA analysts have put a price tag on what it would cost for all foreign, non-Chinese firms to repatriate their manufacturing operations currently in China: $1 trillion over a five-year period. (To put that in context: The companies on Fortune’s Global 500
generated $33.3 trillion in revenue and $2.1 trillion in profit in 2019.)
Such expenditures (which would not include the shift of manufacturing intended for consumption within China) would be “significant, but not prohibitive” to companies’ bottom lines, according to BofA. While free cash flow margins and return on equity would take a hit in the near term, there would be positive “multiplier effects on the broader economy”—including new jobs and higher wages for domestic workers, greater spending on research and development, more tax revenues, and the development of new “industrial clusters” within developed countries.
The $1 trillion figure, the analysts note, does not include the higher operating costs that would be associated with doing business in more developed markets, which “could act as a drag on margins.” And industries with “structurally higher returns,” like tech and health care, would have an easier time absorbing the necessary expenditures than others with “more muted cash flows,” which would likely have to resort to external financing sources to fund their restructurings.
But companies would likely be able to count on help from policymakers—such as tax breaks, subsidies, low-cost loans—to “offset higher costs associated with re-shoring” in the interest of boosting their domestic economics.
The BofA analysts focus primarily on companies and countries outside of China, rather than on China itself. But they do note in passing that the impact on the world’s second-largest economy could be significant. Foreign-company exports, the BofA report estimates, represent 40% of all Chinese exports and about 7% of China’s GDP. China in recent years has made concerted efforts to focus its economy less on trade, and more on goods and services for domestic consumption