Going where labor is cheapest is a veritable axiom of successful production. For years, this has meant exporting labor and therefore jobs to other nations. Of course, a major bone of contention in this year’s election is the alleged “stealing” of jobs from Americans by other countries.
But could there be a shift in the now-well-established outsourcing of jobs to foreigners? Recent data suggests a surprising and substantial shift. This article will give you a crash course in this new chapter in America’s economic future.
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What Exactly is Influencing This Shift?
The practice of American-based companies moving production from other countries to the United States is called reshoring. Other companies, most based in Europe and Asia, are also taking advantage of cheaper production costs in the United States.
Researchers are discovering that it’s becoming increasingly less expensive to manufacture here in the States, particularly in three major areas—electricity, labor, and natural gas.
A widened productivity gap—one growing wider—between the U.S. and other nations is because labor is actually cheaper here than other places. These costs are nearly twenty percent higher in Italy, sixteen in Germany and France, ten in Japan, and eight in the U.K.
This is largely due to higher flexibility for U.S. companies to adapt to changing conditions; in other developed nations such as Germany, government-enforced costs for closing a company run into the millions of dollars due to intricate rules regulating severance, retraining employees, and keeping workers on in some cases for over a year after notification of layoffs (depending on seniority) while the company negotiates layoff terms.
The U.S. does not share some of these highly regulated requirements, which means costs for company adaptation are significantly lower.
America’s extensive, if controversial, use of fracking to access natural gas and oil deposits has also contributed to lower manufacturing costs. An abundance of natural gases means they’re cheaper, which means a considerable competitive edge for U.S, based industries—natural gas costs in other countries are several times higher, and their reserves are far smaller than ours.
All of this is important because natural gas is a key component in both the manufacture of many products (including things like paper, primary metals, and synthetic textiles) and a major source of electricity through gas-fired power plants. This means an abundance of cheap natural gas will make electricity costs far lower in the U.S than in other nations. (They are nearly 140 percent higher in Japan, and over ninety percent in the U.K.)
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What Does This Look Like Practically?
These factors lead to the following interesting developments:
- Petrochemical conglomerate Sasol invested over eight billion dollars last year in the construction of a new ethane cracker in Louisiana, to take advantage of natural gas resources there.
- Keer Group, a China-based maker of yarn, poured $218 million into building a factory in South Carolina. An Indian yarn company is also building a factory in Georgia.
- Toyota is building sedans and minivans in Indiana and Kentucky, then exporting them to South Korea.
- One company is building gas turbines in North Carolina that will help construct a power plant in Saudi Arabia.
- Brooks Brothers opened a plant in Massachusetts and has moved about seventy percent of its suit production there. American Apparel is also moving some of its production to the States.
- Michelin has shifted some of its tire production to South Carolina.
- Other Chinese companies are basing or expanding operations in Minnesota and Michigan.
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Some companies enjoy our proximity to places like Mexico, whose factories will take their products (like yarn) and make them into fabric and clothing to be sold in American retail stores. Others also appreciate the many tax breaks and subsidies that local governments give to companies operating in their jurisdictions.
A quickly-developing economy in China means its factory wages are rising, and so have development and production costs for things like electricity, land, energy, and much else. Some estimate their wages have risen nearly 200 percent in the last decade, while ours have risen less than thirty—and natural gas costs have plummeted by 25 percent.
Of course, manufacturing that is relocating here tends to be highly-automated; most companies still rely on cheap labor from Vietnam and other less-developed nations to produce labor-intensive products. But that doesn’t mask or take away from changes in other countries as well as our own that make many kinds of production far more viable here than elsewhere.
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What Does this Mean for America?
- It means our ability to export products to other nations has and will continue to rise significantly. Some project us to actually take financial gains from other high-export nations that rise to the tens of billions of dollars.
- It means that the combination of exporting and the domestic creation of items that would have been otherwise imported could create as many as 1.2 million factory jobs and another 1.9 to 3.5 million jobs in retail, transport, and logistics.
- It means international shipping costs could decrease, though other factors (distance between locations, technology, efficiency, etc.) could continue to allow other nations to ship more cheaply or about the same as us.
- It means the U.S. unemployment rate could drop by several points.
- It means we are particularly poised to exponentially increase in exports in several major industries, including computer and electronic products, machinery, transportation, chemicals, and coal products—which account for approximately $13 trillion, or 75 percent, of total global exports. (Some estimates indicate as much as a seven percent cost advantage over Japan in machinery manufacturing, four percent over Italy in natural gas, and far lower costs in transportation production than Japan, Germany, France, and Italy.)
While China continues to be a leader in some respects in inexpensive manufacturing, when adjusting for various other expenses, it may make more economic sense to make more U.S.-sold products also U.S.-produced ones.
Image via http://www.electronicproducts.com/
Conclusion: Where to from Here?
Experts continue to assure manufacturers to be wise and judicious about production. The global economy is a funny and fragile thing, as are the people that make it effective. As such, unforeseen changes and unexpected plummets in currency value, new or more restrictive government regulations, sudden bankruptcy, and the cost of testing and refining new technologies can lend an ever-present state of flux and plasticity to the global market.
This means the old cliché about not putting all of one’s eggs in one basket still holds true. Diversification of investment and interests, while not foolproof, provides needed stability and security. Still, statistics and data from as recent as last year indicate a surprising but steadily growing plummet in costs for U.S-based production—one of such durability and persistence that it would be naive for manufacturers, regardless of location, to not consider basing some production within the United States. Failure to integrate this new data could leave companies and nations vulnerable to economic disadvantage.
It is very likely that if the trend of less-costly U.S. based production combined with rising costs in once-impervious export nations continues, within our lifetimes we may see nothing short of a manufacturing and economic revival within the United States.