The on­shoring myth

Financial Mirror (Cyprus) - - FRONT PAGE -

The decade that pre­ceded the 2008 fi­nan­cial cri­sis was marked by mas­sive global trade im­bal­ances, as the United States ran large bi­lat­eral deficits, es­pe­cially with China. Since the cri­sis reached its nadir, these im­bal­ances have been partly re­versed, with Amer­ica’s trade deficit, as a share of GDP, de­clin­ing from its 2006 peak of 5.5% to 3.4% in 2012, and China’s sur­plus shrink­ing from 7.7% to 2.8% over the same pe­riod. But is this a tem­po­rary ad­just­ment, or is long-term re­bal­anc­ing at hand?

Many have cited as ev­i­dence of more durable re­bal­anc­ing the “on­shoring” of US man­u­fac­tur­ing that had pre­vi­ously re­lo­cated to emerg­ing mar­kets. Ap­ple, for ex­am­ple, has es­tab­lished new plants in Texas and Ari­zona, and Gen­eral Elec­tric plans to move pro­duc­tion of its wash­ing ma­chines and re­frig­er­a­tors to Ken­tucky.

Sev­eral in­di­ca­tors sug­gest that, af­ter decades of sec­u­lar de­cline, Amer­ica’s man­u­fac­tur­ing com­pet­i­tive­ness is in­deed on the rise. While la­bor costs have in­creased in de­vel­op­ing coun­tries, they have re­mained rel­a­tively sta­ble in the US. In fact, the real ef­fec­tive ex­change rate (REER), ad­justed by US man­u­fac­tur­ing unit la­bor costs, has de­pre­ci­ated by 30% since 2001, and by 17% since 2005, sug­gest­ing a rapid ero­sion of emerg­ing mar­kets’ low-cost ad­van­tage – and giv­ing Amer­ica’s com­pet­i­tive­ness a sub­stan­tial boost.

More­over, the shale-gas revo­lu­tion in the US that took off in 2007-2008 prom­ises to re­duce en­ergy costs con­sid­er­ably. And Amer­ica’s share of world man­u­fac­tur­ing ex­ports, which de­clined by 4.5 per­cent­age points from 2000 to 2008, has sta­bi­lized – and even in­creased by 0.35 per­cent­age points in 2012. Upon closer in­spec­tion, how­ever, the data for 1999-2012 present lit­tle ev­i­dence of sig­nif­i­cant on­shoring of US man­u­fac­tur­ing. For starters, the share of US do­mes­tic de­mand for man­u­fac­tures that is met by im­ports has shown no sign of re­ver­sal. In fact, the off­shoring of man­u­fac­tur­ing in­creased by 9%.

This trend holds even for those sec­tors dom­i­nated by im­ports from China, where la­bor costs are on the rise. In­deed, for sec­tors in which Chi­nese im­ports ac­counted for at least 40% of de­mand in 2011, the im­port share has in­creased at a faster pace than it has for man­u­fac­tur­ing over­all.

Fur­ther­more, if rel­a­tive la­bor costs are an im­por­tant driver of Amer­ica’s terms of trade (the rel­a­tive price of ex­ports in terms of im­ports), more la­bor-in­ten­sive sec­tors should have ex­pe­ri­enced a larger de­cline. But the data pro­vide lit­tle ev­i­dence of this.

The only solid ev­i­dence of an in­crease in US com­pet­i­tive­ness stems from the sharp rise in out­put of shale gas. In­dus­tries with large en­ergy re­quire­ments, like chem­i­cal man­u­fac­tur­ing, have ex­pe­ri­enced a much smaller in­crease in im­port share than less en­ergy-in­ten­sive in­dus­tries like com­put­ers and elec­tronic prod­ucts. This sug­gests that en­ergy-in­ten­sive sec­tors are more likely to ex­pe­ri­ence on­shoring.

More broadly, the data on US do­mes­tic pro­duc­tion seem to be in­con­sis­tent with the be­hav­ior of the REER and its sug­ges­tion of a sig­nif­i­cant in­crease in com­pet­i­tive­ness. To a large ex­tent, this dis­crep­ancy re­flects a low and de­layed ex­change-rate pass-through into US im­port prices, linked to Amer­ica’s unique ad­van­tage of hav­ing more than 90% of its im­ported goods priced in its own cur­rency, with dol­lar prices re­main­ing un­changed for ten months at a time. Even con­di­tional on prices be­ing rene­go­ti­ated, the pass-through is quite low, with a 10% de­pre­ci­a­tion of the dol­lar ap­pear­ing as a cu­mu­la­tive 3% in­crease in im­port prices af­ter two years. The dis­con­nect be­tween Amer­ica’s terms of trade and the far more volatile REER is also con­sis­tent with low and de­layed ex­chang­er­ate pass-through.

The ev­i­dence

is

clear:

Claims

that

man­u­fac­tur­ing

is re­turn­ing to the US sim­ply do not hold wa­ter. Of course, given that the in­crease in emerg­ing economies’ la­bor costs and the de­cline in Amer­i­can en­ergy prices are re­cent de­vel­op­ments, im­port shares could be­gin to de­cline in a few years. But, with that out­come far from cer­tain, the US can­not rely on a rapid in­crease in man­u­fac­tur­ing com­pet­i­tive­ness to un­der­pin its eco­nomic re­cov­ery.

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