How Red Tape Hamstrings ‘Reshoring’

Editors’ Note: MarketMinder doesn’t make individual security recommendations. The below merely represent a broader theme we wish to highlight.

Eight-plus months after Liberation Day, while markets have long since moved on, tariffs remain a divisive topic. Even as households and businesses continue reckoning with higher costs and extra import hassle, some continue arguing tariffs have silver linings: the potential “reshoring” of manufacturing being a big one. Some say this will be a big driver of US growth, while others see potential fruit in investing for reshoring. To us, both seem very hasty. For one, stocks care more about earnings, period, than where something is made, and made-in-the-USA isn’t always the most profitable choice. And two, given how long it takes to navigate the permitting process and other challenges, a near-term reshoring boom looks unlikely.

This week, The New York Times showed this with a great deep dive into the efforts to build semiconductor foundries in the Phoenix, Arizona area, a bipartisan push dating back years and years. It focused on the travails of two chipmakers, Amkor and Taiwan Semiconductor Manufacturing Company (TSMC), showing the litany of challenges they have faced getting plants built despite having billions of dollars’ worth of public and private investment lined up. For those of you with a subscription, the whole piece (complete with a video and photo essay) is well worth a read. But let us highlight some key snippets here to show just some of the roadblocks to construction—or as the Times’ headline put it, “18,000 Reasons It’s So Hard to Build a Chip Factory in America.”

One big reason: While Americans broadly seem to favor having more manufacturing capacity, just as our society broadly agrees there is a housing shortage, few seem to want that construction happening in their proverbial backyard. Local opposition is fierce. Consider the efforts of one resident: “Last year, she learned that Amkor Technology was planning to construct a so-called advanced semiconductor packaging plant nearby. It would assemble chips made by TSMC. She and other residents were horrified. They envisioned tractor-trailers bearing toxic chemicals and a massive draw on scarce local water. They mobilized in opposition. They won. Amkor moved to another site.”^[i]

When plants do get built, staffing is another challenge. Skilled US workers command higher pay than their international peers, enjoy strong labor protections and have particular expectations for work-life balance and other cultural factors. All sow the seeds of potential conflict with management teams based overseas and used to their country’s way of doing things. The article presents several anecdotal examples of this. It also details the challenge of finding workers in the first place, as the factories’ machinery is complex. “Installing that equipment, and getting it to work properly, requires people with specialized training and experience. Two years ago, TSMC acknowledged that it was having trouble finding local people who knew how to do it. The company brought in more than 500 experienced workers from Taiwan. Local unions accused TSMC of breaching the spirit and rules of its federal subsidies. They urged immigration authorities to block visas for the Taiwanese workers. The company resolved the conflict by committing to show preference to American workers. But labor disputes have continued.”^[ii]

But perhaps the biggest challenge is permitting. When TSMC builds a factory in Taiwan, it is fast and easy. One permit from a single central authority, and an industrial zone ready to greet it with open arms. Zip bam boom—done. That is not how it goes in the US, where major projects generally need state and municipal approval, with numerous agencies and interests weighing in. “‘Every step requires a permit, and after the permit is approved, it takes at least twice as long as in Taiwan,’ TSMC’s chief executive and chairman, C.C. Wei, said this year at National Taiwan University. The company was required to gain permits from city and county authorities to comply with state and federal regulations. In many instances, regulations for its industry did not exist at the local level, so TSMC had to convene a team of experts to craft its own language and gain approvals. ‘We ended up establishing 18,000 rules, which cost us $35 million,’ Mr. Wei said.”^[iii]

Now, this isn’t about companies wanting to run roughshod over endangered wildlife or pave paradise to put up a parking lot. The article does a good job of showing how these companies want to complement the local communities and make a good-faith effort to have a small footprint. For instance, given Phoenix is in a desert climate where water is scarce, residents are logically concerned by how water-intensive chipmaking is. TSMC plans to address this by constructing a waste-water treatment plant to recycle the water it consumes.

Rather, the stumbling block is how extensive and confusing all the red tape is: “Over decades, the United States has used regulation to reduce air and water pollution, while enhancing workplace safety. Yet bureaucracies have grown around those rules, often in incoherent fashion. ‘Some of the main issues that hold back U.S. manufacturing have very little to do with substantive environmental standards,’ said Thomas Hochman, director of infrastructure policy at the Foundation for American Innovation, a Silicon Valley-aligned research organization. He cited the National Environmental Policy Act, which directs federal agencies to consider and evaluate the impacts of projects but does not compel action. ‘It does not say, “You cannot pollute X,”’ Mr. Hochman said. ‘It does not say, “You cannot discharge Y.” It says, “You need to do paperwork.”’”^[iv]

The good news is that these efforts are proceeding, if glacially. But these plants were greenlit back during the Biden Administration, after the CHIPS Act was passed. They have a head start and aren’t motivated by tariffs. The question facing America now is whether other international businesses, seeing these challenges and knowing tariffs could be canceled by the Supreme Court or a future administration, will see reshoring as worth the high costs and hassle. Perhaps some will. Some probably won’t. But it all looks too far out, slow and riddled with unknowns to be an investment or economic driver in the near term.