In the world of international trade, there seems to be a fixation for words with the suffix “-shoring”: nearshoring, reshoring, offshoring, and onshoring (to name a few). While some of these terms might seem new to you, it is quite likely you’ve heard at least one of them before. Moreso since, in recent years, political discourse in the United States has taken to serious discussions about international supply chains and their over reliance on certain countries. Moreso since, in recent years, political discourse in the United States has taken to serious discussions about international supply chains and their over reliance on certain countries. But why are these words so prevalent and why do they matter?

Why This Fuss About “-shoring”?

Before we discuss the differences across these words, it is important to look at their similarities. When experts use terms related to “-shoring,” they are often discussing the location of factories for a company’s supply chain. Starting in the 20th century, there has been a trend for companies to break down their manufacturing process into smaller segments they can locate strategically in different cities, states, and even countries. Metaphorically speaking, one could say companies are looking for new shores on which to set up shop (and thus explaining the suffix that is so prevalent).

Albeit imperfect, the best metric to measure the impact of reshoring is to look at Foreign Direct Investment (FDI) which gathers the total capital that foreign nationals have placed in companies or projects in a given country. For most of history, the amount of FDI remained fairly insignificant, below a couple of billion USD for the entire planet. But around the change of the millenia—and most prominently after the 2008 financial crisis—, companies began to set eyes on building part of their supply chains elsewhere.

Total FDI Worldwide (1970-2022)

(Data from The World Bank)

The logic behind these “-shoring” terms is rather simple. Companies can gain significant advantages by way of cost reductions by placing their assembly lines elsewhere.  Some of these reductions can come from finding better talent in a given area which, in turn, increases efficiency, accessing lower labor costs, or decreasing overall tax burdens by virtue of laws specific to a given city, state, or country. If, for example, a state were to offer tax credits for companies focusing on a particular sector of manufacturing, it might make sense for businesses to relocate their supply chains to that state to lower tax payments and, in turn, increase profits. A similar logic applies to lower labor costs, and increased efficiency.

What Is Offshoring

Chronologically, the first of these “-shoring” words to develop was “offshoring,” as all other terms are played on this initial term. Broadly speaking, offshoring refers to the process by which a company takes a section of their supply chain and locates it in a foreign country. Importantly, offshoring always implies an international perspective.

The practice became extremely popular in the mid-twentieth century, as a post-WWII global structure favored international trade as a means to link countries together through economic ties. As companies began to expand globally, they noticed the ample possibilities to reduce costs by locating at least parts of their supply chain in other regions of the world. It was also a time of general optimism and friendliness, as nations began to negotiate the first free trade agreements to lower tariffs and encourage trade, such as the North American Free Trade Agreement (NAFTA) or the European Union (EU).

Offshoring thus became a prominent phenomenon in the biggest countries across the world and, to this day, continues to be a common practice.

Offshoring vs Reshoring - Differences Explained

In recent years, there has been a constant discussion in financial markets about replacing offshoring with other alternatives. This is due to the considerable costs of establishing a company in a different country as well as enormous risks from potential supply chain disruptions. By locating part of a manufacturing process abroad, a company becomes reliant on trade routes and is subject to tariffs that would likely change in contexts of low political stability. While the original logic behind offshoring remains true—i.e., to increase profits by entering a market with lower labor costs—it often neglects these additional costs or sources of geopolitical risks.

Recently, these heightened costs have been illustrated by two global trends that pushed the United States, a key player in international commerce, to reconsider its bullish bet on offshoring. The first came in the form of heightened tensions with China, the country’s main trade partner, as exhibited by the Trump administration's Trade War with the country. By increasing tariffs to goods imported from China, the United States government effectively raised the cost of companies which had offshored part of their supply chains to the country. The second hurdle came from the COVID-19 pandemic, which disrupted international trade, causing multiple supply chain processes previously located abroad, to be stopped by the spread of the virus. At the same time, as most of Asia began to close its doors because of the pandemic, various companies became painfully aware of their reliance on foreign factories for the production of a key element for most electronics: the semiconductor chip. Given an external shock of this magnitude, the entire supply of crucial parts threatened to be disrupted.

In a global context that has grown hesitant towards offshoring as a practice, two key alternatives have emerged. Both are meant at increasing the overall safety of companies by building supply chain resiliency.The first of them, nearshoring, refers to the practice of relocating a part of a company’s supply chain to a country closer to the desired market of a good. Importantly, this still requires to place part of a supply chain abroad and requires some degree of experience dealing with a new country—albeit, given geographic proximity, there are likely cultural affinities that reduce cultural friction.

The second practice is commonly referred to as “reshoring” and is the clear opposite to offshoring. The key idea is to bring back to a country the parts of the manufacturing process that were previously offshored. Through a reshoring initiative, a country will reduce most potential risks that would come with international commerce. At the same time, it would eliminate all costs from having to understand a new market and finding local talent to operate their production. 

Reshoring Example

Given heightened tensions between the United States and China, a number of American tech companies have begun to set their eyes on bringing back key parts of their manufacturing to their home country. Moreso after the COVID-19 pandemic disrupted global supplies of semiconductors and other essential chips to the United States as international commerce was stalled and countries began closing their doors to restrain the spread of the virus. Not to mention that roughly 60% of the world’s semiconductors are produced by Taiwan alone, which has been a constant source of tension with the Chinese government.

From this complex scenario, we find one of the clearest examples of a reshoring initiative. US electronics manufacturer, Apple, recently announced a plan to lessen their reliance on China in the short and long term by first investing in neighboring countries and then sourcing a large portion of their chips from a  40 billion USD factory in Arizona. The factory itself will be built by Taiwan Semiconductor Manufacturing Co., but will have Apple as its largest client.

By bringing back a part of their manufacturing, Apple will avoid large geopolitical risks that could emerge from a potential escalation between the United States and China. At the same time, the company will significantly lower shipping costs and have a substantial contribution to the U.S. economy, Much remains to be seen about this particular example but, thus far, it offers an initial guidance as to how reshoring could influence some of the most powerful companies in the world.

Is nearshoring better than reshoring or offshoring?

Whether a company chooses to nearshore or reshore a part of its production is a question that is highly context dependent. However, there are some common trends that are already present in available surveys to industry experts. 

Perhaps theoretically, there is a large appeal to the idea of reshoring/onshoring. At least, in part, it is similar to one of the drivers pushing nearshoring to the public sphere today: by locating the entirety of a manufacturing process within a single country, a company can avoid any potential disruptions stemming from international trade; even if, by nearshoring, they had decreased those risks significantly. At the same time, a company would avoid paying international tariffs and circumvent the need for region-specific knowhow.

In fact, a recent survey by Morgan Stanley found that a majority of C-suite executives aspire to have reshoring/onshoring as their key strategy in years to come, showing a clear desire to bring factories home. The trend was more significant in C-Suite executives of domestic companies, but a similar pattern is prevalent in the leaders of transnational and multinational corporations.

Morgan Stanley: Most likely approach to adopt in supply chain in the next 3-5 years

(Data from Morgan Stanley)

But even if a CEO desires to bring a factory back to its original country, it might be forgoing immense benefits stemming from nearshoring. By locating their production closer to their desired country, they could also obtain significant increases in profits from lower labor costs and benefits of free trade agreements. And, although shipping costs might be higher than if located inside of a common country, they would also remain far lower than previous offspring practices.

Given the above, a recent survey from McKinsey found that the interest for regionalizing supply chains had nearly doubled in the span of a year—although, it still remains below 50% of all executives interviewed. 

MicKinsey: Most Likely Approach to Adopt in Supply Chain in the Next 3-5 Years

(Data from McKinsey & Company) 

It is impossible to give an answer that would apply to all companies. Depending on the structure of their supply chain, the industries they focus on, and even their own strategic interests, their answers might vary. But, as international trends stir away from offshoring, one cannot deny the appeal of nearshoring and reshoring alike.