But the economics underpinning this trend appear to be reversing and it presents the UK with a once-in-a-generation opportunity. In an EY report released earlier this week, we estimate that reshoring could bring £15.3bn of GDP to the UK economy, equating to 315,000 jobs, if the right conditions exist.
While increasing wages in developing countries are eroding their labour cost advantage, there are many more factors driving business to choose British shores. The desire to guarantee quality and the imperative to reduce time to market are increasingly important drivers of location.
During discussions with international and UK companies, I hear common themes as to why they choose the UK as a place to base their operations. There are established and sophisticated supply chains and infrastructure to support production from transportation, factory facilities and reliable energy supplies. The UK remains a key access point for an expanding EU market of 500m people and many leaders rate the “Made in Britain” brand as being vital to their businesses. Not forgetting the access to a skilled and educated workforce which drives innovation.
The top five regions of the UK that are likely to benefit the most from reshoring are the North West, South East, West Midlands, Yorkshire and the Humber, and East Midlands. The attractiveness of the North West in this context would go some way to addressing the so called north-south divide and add further weight and strength to the significance of the “Northern Powerhouse” vision.
Although the cost advantages of producing goods in the developing world are lessening, wages are still significantly below those in the UK, therefore it is unlikely that reshoring will occur across the board. However, there are certain sectors that could see a high proportion of activity reshored, given the right incentives.
Those businesses that do relocate to the UK will predominantly be capital intensive sectors such as aerospace, defence, automotive, petroleum products and clothing, serving the European market. They will be businesses where quality and brand are important and consequently the supply of a highly skilled workforce is imperative. When firms do choose to reshore to the UK, they will tend to cluster in regions that best serve their business, in close proximity to key suppliers, infrastructure and an able workforce.
However, reshoring industry and jobs back to the UK is not guaranteed. The UK is not the only country vying for reshoring investment; competition from other developed countries such as the US, Germany and France, and markets in Eastern Europe puts the opportunity at risk. Government and business must work together to provide the correct framework so that the advantages of moving production to the UK can be realised.
While steps have been taken to make the UK more attractive to businesses looking to reshore, such as reducing the headline rate of corporation tax to the joint lowest in the G20, providing competitive reliefs for innovative and high tech industries, and UKTI’s “Britain is Great” campaign, more can be done. It is worth noting that manufacturing is more sensitive to tax policy on capital allowances, business rates and employment taxes.
Beyond the positive effects on employment and GDP, the research also reveals the wider benefit that reshoring could bring, helping to rebalance the UK’s economy between regions and sectors.
Re-shoring is a growing trend that has the potential to bring significant advantages to the UK economy. By supporting those sectors which offer the greatest return from reshoring in terms of employment and GDP, the UK will have a far more balanced, healthy and robust economy where consumers, manufacturers, service businesses and other sectors are pulling in the same direction.
This will lead to a more sustainable economy which is better able to weather future global shocks, helping set the UK on a path to where it is not only competing but winning in the race for global growth.
Mark Gregory is chief economist at EY