Nearshoring Has Potential, But Hype About Onshoring (Back to America) Is Nonsense
June 20 2012 by Jim Tompkins
The paranoia that surrounds China manufacturing often surfaces in the notion that manufacturing is coming back to the U.S. For example, a recent report released by the Boston Consulting Group (BCG) titled, “U.S. Manufacturing Nears the Tipping Point: Which Industries and how much?” asserts that the U.S. economy is becoming more competitive, and in addition to rising costs in China, American could create two to three million jobs and $100 billion in yearly output by 2015, according to a BCG press release.
While it’s true that American manufacturing is on the rebound, there is less here than meets the eye. Here’s why. The economic value of manufacturing, just like agriculture and every other sector, is not based on how many people are employed in the sector. Instead, it is based on the contribution from that sector to the country’s GDP and standard of living.
According to a recent Federal Reserve report, 88.5 percent of US consumer spending is on American-made goods and services. Just 2.7 percent of the US personal consumption expenditures go to Chinese-made goods and services. In March of 2012, the ISM manufacturing index indicated expansion for the 32nd consecutive month. US manufacturers produce $3.4 trillion worth of goods annually, nearly three-quarters of which is consumed in the US. Moreover, the US exports $1.3 trillion worth of goods per year, mainly to Europe, Canada and Mexico; this is even further evidence of our robust manufacturing sector.
So not only is US manufacturing doing fine, but competitiveness has actually been improving. True, many U.S. factories have closed and a lot of jobs were lost. But the well-paying jobs were not lost to China. These jobs were casualties of automation and/or more efficient production methods right here in the U.S. In fact, manufacturing output today is up 8 percent over the pre-recession peak.
Innovation is the Driver
Those who dig into the facts soon discover that the US remains the world’s most productive large economy and the biggest market for sophisticated goods and services. And in turn, this stimulates innovation and attracts investment. Despite the political avocation of “declinism” and concerns about the future, the US remains the world’s most competitive economy.
Why? It is driven by market forces. It rewards innovation. It protects intellectual property. It has trustworthy institutions that minimize corruption and cronyism. The economics of manufacturing will continue to evolve. And as oil prices increase, so too will transportation costs. Therefore, it is likely that nearshoring will occur in several industries in which transportation costs are significant (appliances, machinery, furniture, fabricated metals, etc). In these cases, nearshoring may result in manufacturing returning to our hemisphere, but not to the US. Instead, manufacturing is more likely to go to Latin America.
If manufacturing does return to the US, it will not come as a result of transportation costs, but rather as a result of innovations in product design and/or process creativity that allow for higher levels of automation and productivity.
This may be contrary to received wisdom but expect:
- Net manufacturing wages will not converge for US and China in year 2015.
- Companies are not treating outsourcing decisions lightly. Companies are just not making their outsourcing decisions based on wage rates.
Global Economy, Global Supply Chains
We exist in a global economy with global supply chains. The world is interdependent. It is good when countries increase their standards of living, as this offers us all more consumers to buy our products.
It is beneficial when we export low paying jobs and replace them with higher paying jobs (per the well-known economic principle of “Creative Destruction”). This results in an increase in the quality of life for everyone globally when lower paying jobs are destroyed and higher paying jobs are created.
Whenever oil prices rise, there is a surge of articles suggesting that jobs that were moved offshore will return. It is clear that there may be considerable benefits from nearshoring in certain circumstances. These benefits include flexibility, agility, making things where you sell them, lead times, inventory, intellectual property protection, and energy costs.
As with all supply chain considerations – such as costs, customer requirements, competitive positioning and market shifts – sourcing is a decision that should be reviewed on a regular basis. I do see certain industries shifting production closer to the customer. And in the case of the US, this may drive some production to Latin America.
But there is no significant movement to onshore (bringing manufacturing from China back to the US). This topic may be interesting fodder for politicians and inexperienced business people to discuss, but when production leaves China, the huge majority will go to the next low-cost country. And it will not be the US.
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