President Biden took quick action to follow through on a campaign promise to encourage consumers, companies and federal agencies to Buy American. The order aims to leverage federal purchasing power to strengthen U.S. manufacturing and federal contracting by redefining and clarifying what constitutes domestic goods.1 The order also narrowed the circumstances in which federal agencies can get exceptions and waivers to the requirements to buy U.S.-made products and created the position in the Office of Management and Budget to oversee stepped-up purchases of domestic goods.
As outlined during the campaign, Buy American will be a $700 billion initiative to support procurement ($400 billion) and R&D ($300 billion). This unprecedented level of support will bolster what has already been a clear trend – that, in our view, U.S. manufacturing is staging a comeback. The reemergence of American manufacturing has been years in the making; recently accelerated by political developments at home and around the world, the pandemic, the preferences of both consumers and investors, and technological innovation.
Geopolitical tensions have heightened
The trade war initially kicked off by President Trump was a major setback for globalization and continues to crescendo under the Biden administration. From July 2018 to August 2019, the United States announced tariffs on more than $550 billion worth of Chinese products, and China retaliated with tariffs on more than $185 billion of U.S. goods.2
The U.S. government’s concerns about China have extended beyond unfair trade practices and infringement on U.S. companies’ intellectual property rights. Suspicions about the close links Chinese companies may have to the Communist Chinese military raised worries about the impact on U.S. national security if these companies had unfettered access to American markets.
In a series of executive orders issued over the final months of his administration, President Trump banned transactions with eight Chinese software applications, including Ant Group’s Alipay mobile payment.3 Dozens of Chinese companies, including the chipmaker SMIC and drone manufacturer SZ DJI Technology, were put on a trade blacklist.4
Following up on a directive from President Trump, the New York Stock Exchange in January delisted three Chinese telecommunications companies, after a series of indecisiveness around whether or not to implement the decision, causing ambiguity across the investor community globally.5
The heightened geopolitical tensions are not limited to just U.S.-China relations6:
- In addition to the fragmentation of Europe, German Chancellor Angela Merkel is set to step down in 2021 after more than 15 years in power, leaving a leadership void in the EU which may jeopardize the area’s unity.
- China and India continue to clash regarding shared borders that could propel India to form an alliance in the Asia-Pacific region aimed to offset China as a rising power.
- Politics are intensifying around the distribution schedule of vaccines and prioritization of rich over poor countries.
- Plus many more across the globe
The move to globalization that has been occurring for decades – breaking down borders and forcing companies to compete in one large, open marketplace – now seems to be reversing itself. Deglobalization changes the dynamics for U.S. manufacturers considerably and, in our view, presents many opportunities for local companies to grow.
Deglobalization has support from the public and both political parties
President Trump was hardly alone in his desire to put restrictions on China and to retaliate against trade practices that many of China’s trading partners have viewed as unfair.
China is the biggest source of U.S. imports, accounting for 19% of all imports year-to-date through November 2020 according to the US Census Bureau, and both Republicans and Democrats in Congress have worked on bills to decrease the United States’ reliance on Chinese-made products prior to the presidential election.
The incoming U.S. Secretary of State Antony Blinken confirmed that “President Trump was right in taking a tougher approach to China” after co-signing a declaration that China is engaged in acts of genocide against the minority Muslim Uighur population. He confirmed that the U.S. “should be looking at making sure that we are not importing products that are made with forced labor from Xinjiang… we need to make sure that we’re also not exporting technologies and tools that could be useful to their repression. That’s one place to start” and ensured that self-ruled Taiwan must have the ability to defend itself, going on further to state that the obligation of the United States is “to demonstrate that the vision we have, the policies we pursue, and the way we do it, is much more effective in actually delivering for our people, as well as for people around the world, to make sure that our model is the one that carries the day.” 7
As the Harvard Business Review has noted, there is a protectionist element to President Biden’s Buy American plan as it looks to promote public-sector demand for U.S. products and encourage firms to bring their supply chains back to the United States, which is confirmed by Blinken’s commentary to date.8
Beyond just political agendas alone, popular support of decreasing reliance on China continues to grow. The Pew Research Center found that 66% of Americans have an unfavorable opinion of China, and 62% see the country as a major threat to Americans, at the highest level since 2005.9
While there is some expectation that Biden will look to alleviate certain tensions and be more collaborative than the previous administration, we do expect friction in the U.S.-China relationship to continue between the two countries moving forward by continuing to put pressure on intellectual theft and encouragement of more American firms to bring their supply chains back to the United States.
The pandemic accentuated the need for domestic production
The COVID-19 crisis highlighted the potential problems with relying on global supply chains. To quickly produce the ventilators that were needed to treat COVID-19 patients, General Motors in the early days of the crisis entered a joint venture with the U.S. firm Ventec Life Systems.10 But they quickly ran into a major problem. An Indian manufacturer that provided key parts for the ventilators was shut down because of the pandemic. Getting production back on track took a major effort that involved reorienting supply chains, retraining workers, and relying on 3D printers locally. With credit to the companies’ and their staffs’ ingenuity, their troubleshooting efforts worked, and they added 30,000 ventilators to the U.S. stockpile.
Overall, the pandemic proved to be especially challenging for the manufacturing sector, which employs 13 million workers in the U.S.11 While other types of businesses easily transitioned to a work-from-home environment, manufacturing is much more dependent on having workers onsite.
Lockdowns and mobility restrictions in various parts of the world also made it more difficult to move goods internationally, and some countries even restricted exports of essential goods, cutting off lifeline and exacerbating the magnitude of the pandemic in regions dependent on foreign production. The International Transport Forum projected that global transport volumes for 2020 were 36% below what they would have been without the virus.
The challenges posed by the pandemic forced companies to carefully reassess their operations and to rethink the cost and benefits of having global supply chains.
Focus on sustainability puts a premium on short supply chains
Quality, cost and efficiency have always been top priorities for manufacturers. Today, consumers and investors are also increasingly concerned about companies’ social practices and the impact of their operations on the environment.
The focus on sustainability is creating an entirely different mindset about how goods are manufactured and shipped. Transporting goods and supplies by plane, train, boat or truck demands considerable amounts of fuel, leading to an enormous carbon footprint caused by manufacturing and logistics. According to the International Transport Forum, international freight accounts for 30% of all transport-related carbon dioxide emissions, and 7% of all global emissions.
Increasingly, consumers and investors want to support companies whose products are sustainably sourced and manufactured. They are not looking only at operations, but also at the practices of their suppliers. It has become essential to have a supply chain that can be easily traced as green.
This emphasis on sustainability could help companies with shorter supply chains and increase the odds that U.S. companies will look for suppliers who are close to home.
Innovation has greatly reduced costs for U.S. manufacturing
The decline of American manufacturing began in the late 1970s, as companies faced increased competition from cheaper overseas markets. For decades, the emerging markets offered much less expensive labor, one of the costliest inputs of manufacturing. Today, technology – and particularly artificial intelligence – has made manufacturing much less reliant on human capital.
U.S. companies have had to embrace innovation to bring their overall labor costs down. At the same time, wages in China are growing at a rate in the mid-teens, while wage growth in developed markets is less than 3% annually.12 In what may still be a surprise to many, the advantages emerging markets had in providing lower overall labor costs is eroding, and disproportionately benefits markets that offer higher wages.
Current customer preferences also favor domestic manufacturing. Today, people want their products quickly and often personalized. The customization trend has taken hold with almost every type of product imaginable – from running shoes and iPad cases to dog gear and the surface material of bathroom tiles and sinks.13 Delivering products fast and in accordance with customer specifications is much easier when they are made domestically.
In recent years, the cost of meeting workplace safety regulations has also increased substantially, as has the expense of litigation that can result from workplace accidents. These costs are more manageable for companies that have higher percentages of robots than humans on their factory floors and in warehouses. It is another trend that is working in the favor of the U.S. manufacturers who have embraced innovation.
These positive changes undoubtedly explain why manufacturing industry executives, in a survey by the Boston Consulting Group, were confident that U.S. manufacturing will, even with the increased reliance on automation, create more jobs than they eliminate over the next five years. One company employing 20% of the previously required personnel domestically still creates more local jobs compared to accomplishing the same output with the entire staff abroad.14
Leverage federal purchasing power
Buoying U.S. companies throughout this crisis has been the government’s clear determination to provide support to companies and workers domestically. It started with the CARES Act, the $2.2 trillion economic stimulus legislation passed in March 2020, that was supplemented at the end of 2020 with the $900 billion COVID-19 relief measure that provided assistance to Americans, small businesses and industries most adversely affected by the pandemic. Now the Biden Administration and Democrats in Congress intend to deliver an additional $1.9 trillion relief package.
It is expected that Biden will continue to use federal contractor spending as a form of stimulus, supported by his announcement of a $400 billion investment of additional federal purchases of products made by American workers, set to benefit both federal contractors and American manufacturing.
Companies that align with Biden’s goals of developing resilient and environmentally friendly infrastructure, implementation of a rapid and efficient pandemic response, and strengthening the supply chain for critical medical supplies and for American businesses are well positioned to benefit. The effort is touted as the “largest mobilization of public investments in procurement, infrastructure and R&D since WWII”, and the first-time federal purchasing power has been aggressively used to promote U.S. national interests outside the context of war.15
A convenient way for investors to potentially participate in these trends
The Emles Made in America ETF (AMER) focuses on businesses with headquarters and manufacturing footprints in the United States. It is designed to help investors gain significant exposure to companies that stand to benefit from deglobalization and the growing importance of domestic manufacturing. The fund was developed and is overseen by a manager with a proven track record for bringing innovative strategies to investors.
Another Emles ETF that may stand to capitalize on the Buy American program, particularly with the requirements for federal agencies to focus on U.S. contractors and the commitment for additional federal spending. The Emles Federal Contractors ETF (FEDX) invests in companies that have higher exposure to U.S.-based federal contracts and thereby benefit from the predictable long-term revenue these contracts can provide.