Can the US Become a Magnet for Manufacturing?

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).

US Manufacturing Unit Labor Costs Relative to 14 Competitors

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.

 

 

 

Joseph G. Carson

Joseph G. Carson joined AB in 2001. He oversees the Gobal Economic Research group, which provides economic analysis for the firm, and has primary responsibility for economic and interest-rate analysis of the US. Previously, he was chief economist of the Americas for UBS Warburg . Over the years, he has also served as the chief US economist at Deutsche Bank, as chief economist at Chemical Bank and Dean Witter, and as senior economist at Merrill Lynch. Carson began his professional career in 1977 as a staff economist in the US Department of Commerce and represented the department at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. Early in his career, he also held a variety of roles at General Motors. Carson was named to the Institutional Investor All-Star Team for Fixed Income while at Deutsche Bank, He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Location: New York

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