The (High) Cost of Manufacturing in America

The United States is one of the most expensive places on earth to manufacture products. Here's why.

U.S. manufacturers were hammered in the recent "Great Recession." While the economy as a whole contracted 5.1% between December 2007 and June 2009, the manufacturing economy fell by more than 20%. And although its sharp rebound during the initial phase of the recovery provided enough steam to keep a struggling U.S. recovery from backsliding, the factory sector -- affected by the myriad challenges that have arisen in 2011 -- will, by the end of this year, likely have clawed only halfway back to its prerecession peak.

The good news is that a growing number of policymakers recognize the significant role the sector plays and have started talking about ways to reinvigorate manufacturing on these shores. But political talk is cheap, and worse, it can serve as a mere smokescreen. While American politicians point to all sorts of challenges facing manufacturing today, they rarely focus on the factors they can most readily influence. The factors they, in fact, have in many ways been responsible for creating. The factors that make the United States one of the most expensive places on earth to make a product.

This fall, MAPI, in conjunction with NAM's Manufacturing Institute, undertook an analysis of production costs in the United States relative to its top nine trading partners. We published an initial groundbreaking report documenting these underlying structural costs in 2003, and again in 2006 and 2008. This latest effort by MAPI economist Jeremy Leonard has found that despite the talk, little has changed over the past decade. In fact, the climate has worsened.

We found that structural costs -- corporate tax rates, employee benefits, tort litigation, regulatory compliance and energy -- are continuing to slowly eat away at the ability of U.S. manufacturers to compete effectively in the global marketplace. While manufacturers face a host of challenges, the data demonstrate that domestically imposed costs -- by commission or omission of government -- further undermine our ability to compete by adding at least 20% to the cost of making stuff in this country.

U.S. policymakers may pay lip service about the need to build a better business climate for manufacturers, but they've allowed these underlying cost pressures to undercut U.S. manufacturing competitiveness. What's especially frustrating in Leonard's findings is that if it weren't for these structural nonproduction costs, American manufacturers would enjoy a cost advantage over virtually all of their industrial competitors -- and would have costs on par with such middle-income trading partners as South Korea.

The single most significant drag on manufacturing competitiveness is the United States' high corporate tax rate -- an average federal-state statutory rate of 40% that has not changed in decades. By "standing in place" while other countries reduce their own tax rates, the United States continues falling behind. On a trade-weighted basis, the U.S. rate is 8.6 percentage points higher than its nine largest trading partners, a substantial deterioration from the 7.8 percentage-point differential in 2008 and the 5.6 percentage-point differential in 2003. This represents the single most important piece of the total structural cost burden on U.S. manufacturers. Only Japanese manufacturers endure a higher corporate rate, while those producing goods in Taiwan, South Korea and China enjoy significantly lower rates than U.S. manufacturers.

The next largest cost burden on U.S. manufacturers comes in the form of employee benefits -- health care costs and pensions, primarily. While fiscal pressures overseas on publicly funded health systems have over the past decade narrowed the gap between the social insurance costs borne by U.S. and overseas manufacturers, Leonard's most recent analysis shows that gap increasing again. Employee-benefit costs in the United States today are 5.7 percentage points higher than those of the nine largest trading partners, compared with 3.6 percentage points in 2008, a reflection of price increases for health care services and insurance premiums well in excess of overall inflation. As a percent of manufacturing compensation, health care costs have risen from 7.2% in 2001 to 9.2% in 2007 to 9.7% this year. All this even before the Affordable Care Act, which promises to increase prices for companies even more, takes full effect.

In addition, the cost disadvantage with our major trading partners in tort costs is 1.6 percentage points, and in pollution-abatement costs is 1.8 percentage points. Only in the area of energy costs did MAPI and NAM find a cost advantage for U.S. manufacturers, of just under one percentage point.

If ever there were a wake-up call for U.S. policymakers about the costs they continue to impose on U.S. manufacturers, this is it.

Stephen Gold is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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