Maureen Doherty, U.S. Dept of Labor, Bureau of Labor Statistics
Reclassifying manufacturers that outsource isn't as simple as it may first appear.

Manufacturers Agenda: Will Some Offshore Production Be Counted as US-Based?

Aug. 1, 2014
    A proposal to reclassify manufacturers that rely on outsourcing threatens to turn trade, employment and other economic reports upside-down.

That's what will happen if we adopt the recommendations of the Economic Classification Policy Committee (ECPC). The group has proposed changes to how it classifies outsourcing in the North American Industry Classification System (NAICS). With the recommendations, some manufactured goods made in overseas factories owned by American companies will be classified as having been made in the U.S.

If that's not weird enough, manufactured goods that U.S.-based "factoryless goods producers" (FGPs) contract to have made offshore by a "manufacturing service provider" (MSP) and imported back to the U.S. will be classified as services -- not goods -- imports. In essence, the offshore company is providing the "service" of making the goods. If the MSP is located in the U.S., the MSP will be classified as a manufacturer, but the goods it produces will be classified as services.

Confused? That's just the beginning -- and it all almost sounds rational when you read the ECPC's recommendation.

I heartily endorse a review of the classification system. Dramatic changes over the past quarter century in how manufacturing businesses operate are not appropriately accounted for in the current approach. It is inaccurate to classify FGPs, which control goods production, as wholesalers, which do not control production. Indeed, IndustryWeek includes FGPs in the IndustryWeek US 500 and IndustryWeek 50 Best U.S. Manufacturers lists. We do so because we view manufacturing not just as production, but as a business whose strategy entails other important functions -- product design and engineering, finance, supply chain, etc. We celebrate the diversity of strategies U.S. manufacturers employ to become more competitive in a global market.In
dustryWeek is sympathetic to the arguments that only enterprises which actually own production should be classified as manufacturers. Production is a critical function that is undervalued -- and how it is measured matters. Under no circumstance should offshore production by U.S.-owned firms count as U.S.-based production, rather than as imports. Nor should offshore production count as a service. People who believe in manufacturing's importance to a nation's economy ought to be concerned about these proposed changes. I also sympathize with the ECPC's rationale, which attempts to fit the new guidelines into a myriad alphabet-soup of other U.S. and international measures. But the logic required leads to contortions that turn logic upside down. Dare I invoke Orwell?

The Controversial Proposal to Reclassify Outsourcers
Get Both Sides of the Debate from Around the Web

Finally, in making these proposed changes, the ECPC seems to be ignoring the elephant in the room that it purports to address: outsourcing and offshoring. Their proposed changes would have the convenient (for some) effect of further burying the negative economic consequences of some offshore outsourcing practices. For good measure, it also would magically improve U.S. trade imbalances. I can understand why some smell the taint of politics.

There must be a better way. Let's find it.

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