Proposing a Goal for U.S. Manufacturing Success
The future state of U.S. manufacturing depends substantially on our success in reducing, rather than further increasing, our approximately $800 billion goods trade deficit, excluding petroleum. That deficit, after adjustment for price differences, equals about 40% of actual U.S. manufacturing output, 5 million manufacturing jobs at current U.S. productivity levels. With a diverse and educated workforce, abundant natural resources, top technology, and the world’s largest GDP, the United States can be less dependent on imports than other countries, but we currently have trade deficits with nine of our top 10 trading partners. Less dependence on imports reduces costs and risks related to distance—freight, delivery, inventory, etc. and country-specific costs and risks—rising wages, IP risk, political instability, etc. Companies with local supply chains fair better against disruption. Stanley Black & Decker reported no increase in costs and “much less impact from the coronavirus than would have been the case if it had remained in China.” In an interview with CNBC, John Quincey, CEO of Coca-Cola said plant shutdowns were limited to “just a couple of places.” He credited the good outcome to local production of Coke’s soft drinks.
We can make great strides toward balancing the trade deficit by doubling the rate at which we reshore, i.e. bring offshored (sourcing shifted from the U.S. to another country) jobs back to the United States and nurturing a business environment that attracts more FDI (foreign direct investment). Following, I discuss the potential benefits of reshoring.
Doing the Math
Since 2010, the rate of offshoring slowed from approximately 200,000 jobs each year to about 100,000 each year. Over the same period, the rate of reshoring increased from approximately 6,000 jobs each year to about 150,000 each year, resulting in a net gain of approximately 50,000 jobs each year. While this is a promising start, at this rate it would take close to 100 years to close the current 5 million-job deficits. Achieving an average increase of 250,000 net jobs each year would balance the $800 billion/year goods trade deficit in just 20 years. Here is the math:
- Maintain the current rate of offshoring at about 100,000 jobs each year.
- Double the rate of reshoring and FDI to about 300,000 jobs each year.
- Increase the rate of exports (U.S. shipments to foreign customers) to provide about 50,000 jobs each year. (Every $1 billion in new exports of American goods supports more than 6,000 additional jobs here at home, the same ratio as for reduced imports.)
Importing less and exporting more are the only ways to grow manufacturing at a given level of GDP and goods consumption. We can have much more of an impact focusing on reshoring (importing less) than exporting more because of the costs or “friction” of about 15% associated with exporting or importing. U.S. products are, on average, about 30% more competitive here than exported to, e.g. Asia. Figure 1 uses China as an example. Reducing imports is a larger target since imports are about 40% higher in value and about 100% higher in volume or weight. The idea is gaining popularity among U.S. consumers at the same time countries implement more regulatory and structural barriers to protect their home markets.
Economists in academia have long espoused a general position that the United States should make no effort to change market outcomes. If other countries want to sell products at much lower prices, the United States is enriched by buying instead of making. Others have stated that it makes no economic difference whether we make computer chips or potato chips. Forty years of stagnant median-incomes (about 0.6% each year) and declining economic and industrial resilience, however, suggest that the United States should consider more proactive measures.
Success in balancing the manufacturing trade deficit within the next 20 years will depend on government actions that increase the price competitiveness of U.S. manufacturing and corporations implementing more rapid automation, skilled workforce training, and greater use of strategic tools like TCO in sourcing and siting decisions. These actions will drive reshoring, which will, in turn, increase capacity utilization above 80%, and drive automation investment and workforce recruitment.
Benefits of Success
Increasing reshoring of U.S. manufacturing can have a wide-ranging impact on many other national challenges. For example, reshoring will bring to urban communities well-paying jobs, which can be a critical factor in balancing economic inequality. Reintroducing good job opportunities into rural areas would help reverse the damage done by trade-related job loss at the heart of the opioid epidemic. An increase in manufacturing will strengthen overall workforce training and recruitment.
Increasing well-paying manufacturing jobs in the United States can be a critical factor in recovery from COVID-19 pandemic-induced unemployment.
Offshoring’s impact on the world environment has been significant. Moving manufacturing to developing countries drives higher carbon emissions and other pollution due to reliance on fossil fuels and less efficient power generation modalities. Manufacturing goods far away from their ultimate sale and use location results in commensurately higher transportation-related emissions. In addition to lowering emissions, less shipping reduces the global quantity and types of packaging and its associated waste. Furthermore, the less environmentally responsible locations will have added incentive to achieve higher environmental standards sooner as they lose business to the environmentally-conscious United States.
Increasing well-paying manufacturing jobs in the United States can be a critical factor in supporting recovery from COVID-19 pandemic-induced unemployment. More tax revenue from greater economic activity could help offset spending on stimulus programs and reduce budget deficits. Strengthening U.S. manufacturing through reshoring could increase capital investment by about 20% for 20 years and drive increases in productivity and manufacturing employment, two key factors in increasing manufacturing output and economy growth.
The United States was producing an estimated 10% of its 2019 PPE (Personal Protection Equipment) requirements. Then in 2020 the pandemic struck and demand increased three-fold and foreign sources stopped shipping. U.S. factories would have had to increase output 30X in a few months. Obviously impossible. A key consideration, therefore, is what level of production is necessary to be resilient to potential threats? I propose that, for most products, the U.S. should produce at least 50% of what it consumes and essentially all of what it needs for defense. If we cut our manufacturing trade deficit to zero, the resulting 40% increase in production would dramatically reduce dependencies.
Reshoring is enabling a higher percentage of higher-tech product production than current U.S. manufacturing, thus improving our product mix (Fig. 2).
Phasing up production over 20 years will allow for incremental and sustained skilled workforce recruitment and capital investment. U.S. largest trade surpluses are now in aircraft and spacecraft. Europe and China will not accept our getting 100% of those markets. I propose that, rather than becoming even more specialized in aerospace and defense, we become less dependent in other products, e.g. medical, appliances and machinery. In essential products, get our annual production up to at least 50% of annual consumption. Strengthen both OEM assembly and the supply chain. Make manufacturing, once again, the career of choice for smart, aggressive youth.
Offshoring to China and elsewhere has cost approximately 5 million U.S. manufacturing jobs, contributed to wage erosion, and had a dramatic and negative effect on workers and the economy. For example, for every 100 jobs lost in manufacturing, about 700 indirect jobs are lost, but the same number of lost retail jobs equals just about 120 indirect jobs lost. So, the shuttering of an automotive factory would have a greater economic impact than the closure of a retail organization of the same size. As the United States reevaluates manufacturing, sourcing, and purchase decisions, due to tariff and pandemic-induced supply chain turmoil, we should consider the wide-ranging advantages of collaborative partnerships.
Work is now flowing out of China, primarily to Southeast Asia. Here’s an opportunity for expanded cooperation via the United States-Mexico-Canada (USMCA) trade agreement to shift work from offshore to nearshore in North America.
Canada’s political stability, similarities to U.S. laws and culture, geographic proximity, favorable currency exchange rates, and technology savvy make them a good nearshoring choice. Mexico offers wage rates similar to China’s, minimal tariffs, low travel and freight costs, quick delivery, close technical support, and a large, underutilized workforce.
The trade relationship between the three trade partners makes it important to consider Canada’s and Mexico’s trade deficits with Asia along with the United States. At the Forum & Expo Mexico Industrial Parks in Monterrey in September 2016, I urged Mexico to focus more on reducing its trade deficit with China and less on increasing its trade surplus with the United States. Table 1 outlines how the three countries could benefit from increasing our partnerships.
From the U.S. perspective, Mexico and Canada provide greater partnership advantages than manufacturing in Asian countries. Forty percent of the value in product shipped from Mexico to the United States is U.S. content and 25% shipped from Canada is U.S. content. In contrast, only about 4% of the value of product shipped from China to the United States is U.S. content. United States policy changes can shift work from Asian countries to the United States and as much as possible of the rest to Canada and Mexico.
For example, Wisconsin-based Evco Plastics has been adding generally lower skill jobs in its Mexican plastic parts plants, teaching additional skills (“upskilling”) in its U.S. plants, and downsizing in China. U.S. supplied raw materials account for 60% of costs in the Mexican plants and only 15% in the Chinese plants.
United States and All Allies
The United States is considering rolling out an alliance called the “Economic Prosperity Network,” that would include like-minded countries, organizations, and businesses. This venture has the aim of working with U.S. companies to move jobs to U.S.-friendly countries like Australia, India, Japan, New Zealand, South Korea, and Vietnam, if they are unable to reshore into the United States.
The United States can build consensus with other developed nations that have similar concerns about Chinese trade. The EU, Japan, and United States have all publicly discussed decreasing trade dependency on China. The countries can collaborate and coordinate efforts to convince China to play by the World Trade Organization (WTO) rules.
The interests of the United States and our key allies are similar: both want to address unfair Chinese trade practices. Working in a collaborative partnership, we could file complaints about unfair practices and develop new rules for areas not covered well by the WTO rules. Together we can be more effective by leveraging our collective strengths. On this theme, on August 16, 2020, the Trump administration announced, “Back to the Americas,” a program to attract manufacturing from Asia to the Americas.
Companies, Suppliers, Employees, and Communities
Like the United States does internationally with our allies, likewise should companies, employees, suppliers, and communities collaborate to form partnerships that benefit all stakeholders.
OEMs and suppliers must cooperate to achieve the benefits of local operation: resilience, engineering, manufacturing and communicating easily to optimize product and process. Clusters of three or four U.S.-based companies that, in aggregate, buy from and sell to each other, shortening supply chains so that more of the content is sourced domestically from cluster partners. On incremental sales, in theory, each company gives up some margin but picks up volume. Ask the domestic supply chain to share the margin reduction on the incremental volume. Company earnings would be flat or improved.
Employees, suppliers, community, and the company’s home market would all be strengthened.
Companies should strive to eliminate silos. Dr. W. Edwards Deming, American engineer and leading management expert in the field of quality, offered 14 key principles for management to follow to significantly improve the effectiveness of a business or organization. Deming’s ninth key principle recommends collaboration: “Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.”
Companies should eliminate silos by integrating planning and development with technology, fostering collaboration from the C-suite to the factory floor.
Job shop salespeople are often told by procurement departments “the higher warranty and inventory costs from offshoring are not part of my budget.” Creating partnerships within the company by using TCO will help ensure that the needs of all departments are taken into account. Partnerships with other manufacturing technology suppliers can be beneficial as well. Challenge each other to develop solutions to reshoring challenges, and then invest in those solutions
Deming’s 4th principle deals with sourcing decisions: “End the practice of awarding business based on price tag. Instead, minimize total cost.”
Federal, state and local governments can be good partners too. The federal government allocated billions of dollars to encourage reshoring. The U.S. International Development Finance Corporation (DFC), created in 2019, is one of the best sources of this funding. DFC partners with the private sector to finance solutions to critical challenges, investing in the energy, healthcare, critical infrastructure, and technology sectors. DFC also provides financing for small businesses and women entrepreneurs to create jobs in emerging markets.
Rhode Island is developing an aggressive reshoring program. The partnership includes the Rhode Island Commerce Corporation working with OEMs, the state Manufacturing Enterprise Partnership (MEP) working with suppliers, the Rhode Island Manufacturers Association (RIMA) engaging with the companies, and the Chafee Center for International Business at Bryant University supporting via data analysis, and the Reshoring Initiative.
To make a dent in the reshoring movement, it’s going to take all stakeholders doing their parts not just for themselves but also for the good of the whole. The Business Roundtable (BRT), a Washington, D.C.-based nonprofit recently redefined its statement of purpose to promote “an economy that serves all Americans.” On August 19, 2019, BRT released a new “Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.” The revised statement diverges from “shareholder primacy” toward an inclusive commitment to all stakeholders.
The Reshoring Initiative is currently partnering with individual companies, MEPs in Illinois, Cleveland and Dayton, Ohio, Maryland, New York, and Rhode Island; and with economic development organizations (EDOs) to drive local reshoring. Ask your local MEP or EDO to become partners.
Import Substitution Program (ISP): The ISP was created to convince and facilitate importing companies to source more domestically.
The Supply Chain Gaps Program (SCG) was designed to identify and fill U.S. supply chain gaps. The Reshoring Initiative has developed a list of targeted supply chain gaps and product categories where there is a large volume of imports but no or minimal domestic production.
The Reshoring Initiative works with companies, economic development organizations (EDOs), and Manufacturing Extension Partnerships (MEPs) to fill the gaps. The free online Total Cost of Ownership Estimator will more accurately determine the real profit and loss impact of reshoring or offshoring. After doing the math, most companies will decide to bring some work back. For help, contact Harry Moser at email@example.com.
This article first appeared on IMTS.com, the website for IMTS — The International Manufacturing Technology Show, owned and operated by AMT — The Association For Manufacturing Technology.