Industryweek 13625 Reshoring Promo Final

Waiting for Onshoring

July 19, 2013
To paraphrase Mark Twain, the reports of manufacturing’s renewal are premature, at best. 

To listen to most discussions of U.S. manufacturing these days one would not be faulted for believing that we have turned the ship of decline around, that production jobs are coming back and that the on-shoring good times are finally here.

We see this optimistic theme almost daily. In a recent article in The Atlantic, entitled “Comeback: Why the Future of Industry is In America,” Charles Fishman argues that the outsourcing wave is largely over and now U.S. companies, exemplified by GE’s appliance division doing more work in the U.S., are seeing the light and moving work back home.

Ryan Galloway writes in Forbes that “For the first time in decades, the future of American manufacturing looks promising.”  And of course the Boston Consulting Group’s Hal Sirkin, who started all this talk about manufacturing reshoring, writes that when it comes to manufacturing locating in America, “the math these days is starting to work in America's favor again.”

But to paraphrase Mark Twain, the reports of manufacturing’s renewal are premature, at best.  

Let’s start with data on inflation-adjusted trends in manufacturing value added. Bureau of Economic Analysis (BEA) data at the three-digit NAICS level are available only through 2011. According to BEA, from 2007 (the year before the Great Recession) to 2011, real GDP increased by 1%, but with the exception of the computers and electronics industry, real value added declined in every major industrial sector; from a 31% decline in furniture to a 1.5% decline in machinery.

Surely motor vehicles must be up, though, given the Big Three’s comeback. In fact, real output in motor vehicles was 28% below 2007 levels.

Surely chemicals must be up given the fracking revolution and decline of natural gas prices. In fact, real output in chemicals was 15% below 2007 levels. 

Only NAICS 334, computers and electronic equipment, was up, by 44%.

But as ITIF showed in its report Worse Than the Great Depression, this is due to the particular and misleading way BEA measures output, attributing “Moore’s law” improvements in computer processing speed and storage to actual production output. In other words, when a computer doubles in processing power and storage in two years, BEA data indicate that industry output doubled.

2012 data are only available for non-durables (this includes industries like chemicals, plastics, foods, printing, etc.) and durables (e.g., transportation equipment, machinery, primary metals) as major groups.

The trends here are better, but hardly indicative of a reshoring tsunami. Non-durable goods’ real output in 2012 was still 10% below 2007 levels.

Durable goods are up 8%, but all of this increase and more is due to the NAICS 334 overstatement. Taking out NAICS 334 (by using the presumably lower 2011 value added levels) the real value added of durables was actually 3.5% lower in 2012 than it was 2007.

Going Beyond the Rhetoric

So why is the reshoring reality lagging behind the rhetoric?

To be sure, Chinese wages are rising somewhat, their undervalued currency is up a tad, and U.S. energy costs, principally natural gas, are down. But as we point out in Innovation Economics: The Race for Global Advantage, the U.S. still faces serious challenges.

And we see that reflected in our growing trade deficit. According to the BEA, the quarterly trade deficit in goods is 22% higher than it was in the first quarter of 2010.

Even in appliances, which Fishman’s piece points to as a reshoring success, the trade deficit (in household and kitchen appliances and other household goods) has grown even faster, up by 34%. In fact, the Census Bureau reported that May’s non-petroleum trade deficit was the highest since September, 2007 ($41.6 billion).  And let’s be clear: if significant reshoring is going on, by definition it will mean a lower, not a higher, trade deficit in goods.

The trade deficit is the clear manifestation of a larger problem, the continued decline of U.S. competitiveness. The reasons for this decline are unfortunately numerous. Our corporate tax rate is the highest in the world, and the effective tax rate for manufacturers is the highest of most of our competitors.

In addition, companies and the federal government have not kept up with investments in R&D and worker training.

Also, the U.S. government has failed to develop a comprehensive manufacturing strategy that can rival those of many of our competitors, including Germany, South Korea and Japan.

In fact, compared to other nations, our government has done little to develop any policies to help U.S. manufacturers become more competitive. This is in large part, as I have pointed out, because leading U.S. manufacturing associations, including the National Association of Manufacturers (NAM), think that government is the problem and not the solution.

Meanwhile, a growing number of nations are embracing rampant “innovation mercantilism” to unfairly win in manufacturing, including IP theft and forced localization policies that require U.S. manufacturers to produce locally if they want to sell into local markets. It used to be that China was the major mercantilist scofflaw. Now it has been joined by many other nations, including Argentina, Brazil and India.

This points to the biggest problem with the reshoring narrative: it breeds complacency. If the rebound is happening, Washington can continue to ignore manufacturing and not put in place needed policies like the Administration’s proposal for a National Network of Manufacturing Innovation,  ITIF’s proposal for a series of Manufacturing Universities, lower effective corporate taxes, and real action against foreign innovation mercantilism, including trade secret theft and counterfeit goods.

So let’s all stop talking about reshoring and instead talk about what Washington and the private sector need to start doing to really revive U.S. manufacturing competitiveness.

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