CPA Reshoring Index Shows Manufacturing Import Penetration Hit New Low in Q1 2020

December 10, 2020

By Steven L. Byers, PhD, and Jeff Ferry

The CPA Reshoring Index (CRI) rose to +173 in the first quarter of 2020, indicating that US manufacturers gained 1.73 percentage points of market share in the US market for manufactured goods. Import penetration in US manufacturing in the first quarter fell to 28.9%, its lowest level since 2014. The growth in US producers’ share is a short-term result of the COVID pandemic suppressing foreign manufacturing and international shipping early this year. In the second quarter of this year, the US manufacturing sector gave back some of those initial gains. The Reshoring Index registered -45 and import penetration rose to 29.4%. Data for the third quarter is not available until early next year. Annual data on the CPA Reshoring Index is discussed in our Working Paper last June, launching the Index.

The CPA Reshoring Index measures the success of the US manufacturing sector in meeting US demand for manufactured goods. It does not measure reshoring of specific companies or factories. Instead, it measures the share of US manufacturing demand met by US suppliers compared with the share met by foreign suppliers, i.e., imports. In 2002, import penetration in US manufactures was 22.7%. Last year it was 30.6%. Those eight points of lost market share are worth some $500 billion to the US economy. The good news is that import penetration peaked in the fourth quarter of 2017 at 31.9% and the latest data shows improvement of two and a half percentage points. As the world emerges from the COVID pandemic in 2021, it will be important to see if the US domestic manufacturing sector can continue the trend of taking share from importers.

It is often claimed by those who want to promote exports that “95% of the world lives outside US borders” or the “US accounts for only 24% of global GDP.” While true, those statements put the emphasis on the wrong markets.  The US domestic market for manufactured goods last year was worth $7.06 trillion, five times the size of US manufacturing exports, worth $1.37 trillion last year.  Every percentage point of the domestic market that US manufacturers can reclaim will add $71 billion to US manufacturing output. It would require a 5% increase in our manufactured exports to deliver the same $71 billion of additional output. Furthermore, strategically, nations that succeed in world markets tend to start off by dominating their own home market first. As a nation that is trying to recover broad and deep losses in domestic manufacturing market share, our emphasis should be on our home market.

Since 2002, the US has lost domestic market share to imports in every single one of the 19 manufacturing sub-sectors except one relatively small sub-sector (paper products). Last year, the US ran a trade deficit in every one of the 19 sub-sectors except three: petroleum products, printing products, and other transportation equipment (mainly aerospace). The US remains the second largest manufacturing nation in the world. But it is highly unusual for a manufacturing power to have so few manufacturing sectors in which it does not dominate its home market.

Based entirely on federal government data, the CPA Reshoring Index measures import penetration into US manufacturing as the ratio between manufacturing imports and manufacturing consumption, where consumption is defined as US manufacturing production less exports plus imports. All data is in current US dollars, to avoid distortions due to price adjustments or other alterations to the original government data. The Reshoring Index itself is calculated as the difference between the current import penetration figure and the previous period’s import penetration, measured in basis points (hundredths of a percentage point). For example, the Reshoring Index in Q1 2020 was 173, reflecting the fall in import penetration from 30.7% in Q4 2019 to 28.9% in Q1 2020. In Q2, the CRI was -45 as domestic industry gave back some of those gains and import penetration rose to 29.4%.

Figure 1 shows the quarterly Reshoring Index, with strong gain in the first quarter of this year followed by the loss of share in the second quarter. Figure 2 shows the annual Reshoring Index, with a strong gain in 2019, due in large part to the impact of tariffs on manufactured imports, as discussed in our previous Working Paper.

Figure 1: Strong Reshoring Index in Q1 showed US manufacturers regaining market share in the US market. They gave back some gains in Q2 2020.

Figure 2: Import penetration in manufacturing and four subsectors peaked in 2017. US manufacturers have since regained some share, but import penetration remains high, at 29.4% in Q2 2020.

In the first two quarters of this year, domestic industry scored some large gains in key manufacturing sub-sectors. In Q2, in the motor vehicles sector, domestic industry raised its share to 75.2%, reducing import penetration to just 24.8% (see Figure 3). That is the lowest level of import penetration in the sector since the data begins in 2002. In machinery, import penetration fell to 36.6%, its lowest level since 2013. In computers and electronics, import penetration fell to 61.9% in Q2, its lowest level in ten years.

On the other hand, import penetration in primary metals surged by more than 20 points to reach 55.0% in Q2. This was driven entirely by nonferrous metals. Steel imports continued at the low levels achieved after the imposition of the 2018 tariffs.

Figure 3: Import penetration in manufacturing and four subsectors peaked in 2017. US manufacturers have since regained some share, but import penetration remains high, at 29.4% in Q2 2020.

The generally low import figures so far this year reflect distortions in the market caused by the COVID crisis. Early this year, manufacturing in China and other Asian countries was halted by the pandemic. While production resumed in the second quarter, shipping delays and the unavailability of containers restricted imports into the US market. Some of these problems still persist although they are declining as Asian exporters are paying high shipping prices to gain access to containers. China recently reported a trade surplus of $460 billion for the first eleven months of 2020, up 21% from the corresponding figure in 2019. China’s exports have risen much faster than its imports in recent months as western production is still reduced by the COVID crisis. However, US data on goods trade with China suggests that even with a surge in imports in the last two months of this year, US goods imports from China and the US goods trade deficit with China will be smaller in 2020 than they were in 2019.

We would expect the Reshoring Index to be negative in the last two quarters of this year as manufacturing import penetration edges back over 30%.

The extent of reshoring, i.e. regaining share for domestic producers in 2021 will depend on the speed and depth of the economic rebound from the pandemic in different countries, relative national growth rates, and the policies of the incoming Biden administration. Many ideas within Biden’s “Build Back Better” platform hold the potential to support the rebuilding of the domestic manufacturing sector. But the details of how they are implemented will be crucial.