It’s been a long time since the US has been widely appreciated as a good place for multinational companies to locate new manufacturing plants. Chinese labor is cheap, and emerging markets are increasingly efficient, so why should a global automaker or technology giant choose to manufacture in the US?
The answer is because the US has dramatically improved its cost advantage versus industrialized countries, and has narrowed the gap with emerging markets as well.This explains why we’ve recently seen US giants such as Ford and GM start planning to move some production back to the US, while Bridgestone of Japan and Continental of Germany both unveiled plans for major investments in South Carolina.
Over more than a decade, US manufacturing has steadily improved its productivity, driven by increased use of new technologies and restrained wage growth. The cost advantage is even greater when accounting for fluctuations in the US dollar (Display).
Of course, labor costs in the US are still higher than in emerging economies. But the gap in the labor cost disadvantage has narrowed due to fast wage growth in many emerging-market countries and a decline in the labor content of manufacturing. Fast-rising logistics costs—including transportation, taxes, tariffs and duties—have also worked in favor of the US.
I’ve been observing the relative improvements in US cost benefits for a while, and I thought the cost benefits would translate into a massive wave of investment toward the US. Yet even after a spurt of US-bound investments last year and the recently announced moves, the shift in manufacturing investment hasn’t materialized as quickly as I expected.
But I still think there’s fertile ground for more manufacturing to shift toward the US—and in some cases back to the US—given the huge scale of outsourcing over the past decade. Since the late 1990s, US multinationals have gone from having a $40 billion surplus with their majority-owned affiliates abroad to having a $50 billion deficit today. As a remedy to this situation, we would expect many companies to consider relocating production back to the US, especially as the cost benefits of manufacturing overseas diminish.
Non-US companies also have plenty to gain by setting up local manufacturing to serve their American customers, instead of importing from a parent company overseas.
The difficult economic environment these days is probably not helping to promote a big shift in manufacturing investment trends. But I think an even bigger obstacle is Washington’s unwillingness to provide welcoming conditions for direct investment. Today, the US corporate tax rate is among the highest of OECD countries. It’s about time that politicians realize that an attractive tax regime is just as important as a cost-efficient private sector for rehabilitating US manufacturing prowess.
Joseph G. Carson is US Economist and Director—Global Economic Research at AllianceBernstein.