Is the US moving toward a future of “zero net offshoring” for manufacturing?

Increasing competition from manufacturers abroad has led many  to conclude that manufacturing industries have no place in a relatively high wage, knowledge-driven economy like that of the United States. Others contend that manufacturing will be the key to reestablishing prosperity and bringing high paying jobs back to the United States. Various plans have been put forward for cooperation between businesses, governments, and organizations that will spur investment, production, and innovation at home, while boosting exports abroad.

Experts disagree on whether America has lost its edge in manufacturing merely due to emerging foreign competitors or due to a combination of foreign competition and domestic policies that stifle manufacturing efficiency. A certain amount of outsourcing assembly or production of inputs is expected due to specialization, but the real blow to American manufacturing came as final goods production moved overseas. Benefits have accrued to consumers due to lower prices for foreign manufactured goods, although these benefits must be weighed against the costs of lower employment and income in America. Profits are often higher for offshored businesses, but these profits are often accompanied by unforeseen transaction costs. Offshoring can also ensure access in emerging markets.

The Manufacturing Institute reports that US policy towards taxing and regulating businesses has exacerbated the movement of companies overseas, and that changes could be made to promote the “re-shoring movement”. Their studies estimate that, “it is 20 percent more expensive to manufacture in the United States than it is among out major trading partners, excluding the cost of labor” and “the regulatory burden on manufacturers is equivalent to an 11 percent tax on their businesses.”  The statutory and effective corporate tax rates, at 40.0% and 34.6% respectively, are among the highest in the world. These structural costs disadvantage American manufacturers and encourage offshoring.

President Obama’s State of the Union address and a recent white paper outline a plan to remedy some of these issues, although the success of any proposal in today’s fiscal climate is uncertain. The plan calls for the creation of fifteen Manufacturing Innovation Institutes to attract R&D funding and speed the process from basic research to product development. It encourages states and cities to offer incentives to companies that will produce in America, lowers the corporate tax rate for manufacturers to 25%, and provides tax credits for clean energy research and production. Additionally, opening markets through trade agreements such as the Trans-Pacific Partnership and proposed talks with the European Union could either lead to a manufacturing boost, or encourage even more production to move overseas depending on the markets’ reaction and the language of the agreements.

Although offshoring is a rational choice for many businesses to cut costs, the combination of hidden costs to foreign production, rising foreign labor costs, complex supply chains, and business-friendly policy changes may serve to reverse some offshoring. The nascent re-shoring movement is a testament to this fact, and strong economic trends are making such moves more desirable. If policy does not hamper these developments the US could see “zero net offshoring” in the near future, where businesses make decisions about where to locate production facilities based on a more level assessment of costs and benefits.

Posted by: Ben Copper

Sources: Manufacturing.net, The Manufacturing Institute, White House press release, The Economist

Photo Credit: courtesy of flickr user The U.S. National Archives

Offshoring to the United States

Offshoring and re-shoring have been staples of the U.S. manufacturing vocabulary for the past decade, but there hasn’t been a lot of discussion about other countries offshoring to the United States. Chinese conglomerates have begun to shift their production and manufacturing to the United States. The incentive is this: in China, companies that export products to the United States at ridiculously low prices are subject to anti-dumping tariffs because the U.S. believes that the products are being sold at a price lower than what it cost to make them, which creates an unfair advantage in the marketplace. If a Chinese company manufactures their product here in the United States, it is a domestic product and is not subject to the same regulations. Raymond Cheng, CEO of one Hong-Kong consulting firms, noted that “it’s a tactical advantage to be next door to your biggest client,” which is just what the Chinese companies are looking for. In addition to avoiding tariffs, opening a plant in the United States saves money on transportation and fuel. Cheng continued to point out that “it’s a natural evolution that as Chinese companies grow into global brands, they will come to the U.S., the largest consumer in the world.”

Chinese manufacturers have been launching U.S. facilities for the past five years, which has been a relief for some states that are desperate for revenue and jobs. The China-based Golden Dragon Precise Copper Tube Group Inc., the world’s largest producer of copper tubing (used in air conditioning, refrigeration, and automobiles), has begun work on a $100 million plant in Alabama. The facility is expected to create 300 jobs upon opening in 2014. The facility’s location is strategic, since Golden Dragon’s largest customer is Houston-based Goodman Manufacturing.

Daniel Rosen, a China expert and partner at Rhodium Group, cites past examples of overseas companies setting up shop in the United States. Specifically, Japanese companies in the 1980s – for some of the same reasons. “Today, there are more than 700,000 Americans working for Japanese affiliates in the United States.” Offshoring to the United States might be an unexpected move, but Chinese companies will be creating local jobs and saving themselves money.

Posted by: Devon Thorsell

Source: CNN Money

Photo credit Factory in Inner Mongolia courtesy of flickr user Bert van Dijk