It cer­tainly isn't a man­u­fac­tur­ers' rush to the US

The Pak Banker - - OPINION - Justin Fox

AF­TER a bru­tal pe­riod of down­siz­ing and re­or­gan­is­ing, the US man­u­fac­tur­ing sec­tor has be­come the most com­pet­i­tive in the world. Out­put per worker is higher than in any other ma­jor man­u­fac­tur­ing coun­try. Labour costs per unit of out­put are lower than in Brazil, Canada and Ger­many, and only slightly higher than in China. What's more, writes Gre­gory Daco of Ox­ford Eco­nom­ics in the new re­port from which the above facts are taken, "the US is 'gifted' with a sta­ble reg­u­la­tory frame­work, a flex­i­ble labour mar­ket, low en­ergy costs and ac­cess to a large do­mes­tic mar­ket".

So that's great! Time for a man­u­fac­tur­ing re­nais­sance, right? Well, maybe, even­tu­ally. But - and Daco notes this in his re­port - there are few signs of it ac­tu­ally hap­pen­ing yet.

Yes, there are the al­most 900,000 man­u­fac­tur­ing jobs added in the US since early 2010. But it's im­por­tant to see that for what it is - a mod­est re­bound af­ter a spec­tac­u­lar col­lapse: There has also been a big de­cline in the trade deficit, from 5.6 per cent of gross do­mes­tic prod­uct in 2006 to 3 per cent in 2015. But that turns out to be a prod­uct of an in­crease in the trade sur­plus in ser­vices and the huge boom in do­mes­tic oil pro­duc­tion and ac­com­pa­ny­ing fall in global oil prices.

Strip out petroleum and petroleum prod- ucts, in fact, and the trade deficit in goods is only down a lit­tle from its peak, and has grown markedly over the past two years. This seems like a good spot to men­tion that run­ning a trade deficit isn't nec­es­sar­ily a bad thing.

The growth in the deficit in 2014 and 2015 is due in part to the strength of the US econ­omy - faster growth than in other ma­jor economies and a strength­en­ing dol­lar have led to more im­ports and fewer ex­ports.

Still, you'd think that if there were a big re­turn to man­u­fac­tur­ing in the US afoot - "reshoring" is the term of art - it would be mak­ing it­self more ap­par­ent in the data. Con­sider, for ex­am­ple, trade in cap­i­tal goods. While, the US has been im­port­ing more cars and con­sumer goods than it ex­ports for many decades, cap­i­tal goods - aero­planes, med­i­cal equip­ment, semi­con­duc­tors and so on - have long been an area of com­par­a­tive strength. Not so much any­more. Again, one can find tem­po­rary fac­tors in­creas­ing this deficit. The US is usu­ally a big net ex­porter of oil-drilling, min­ing and con­struc­tion ma­chin­ery, and re­cently de­mand for such equip­ment has plum­meted ( sorry, Cater­pil­lar!). That de­mand will re­turn some­day, pre­sum­ably.

There re­ally aren't many tan­gi­ble signs, though, of a larger shift in man­u­fac­tur­ing ac­tiv­ity back to the US. The Bos­ton Con­sult­ing Group, which has done as much as any or­gan­i­sa­tion to pop­u­larise the idea of restor­ing man­u­fac­tur­ing af­ter years of off­shoring to China and else­where, re­ported in De­cem­ber that a grow­ing num­ber of ex­ec­u­tives sur­veyed say they are mov­ing pro­duc­tion back to the US from China or at least think­ing about it.

But ri­val con­sult­ing firm A.T. Kear­ney put out its own re­port in De­cem­ber as­sert­ing that "the reshoring phe­nom­e­non ap­pears to have been more a one-off aber­ra­tion than an in­ex­orable trend."

Why isn't reshoring tak­ing off? Daco, of Ox­ford Eco­nom­ics, said that such shifts don't hap­pen overnight. "It takes quite a bit of time for a com­pany to mod­ify its sup­ply chain," he said. He also noted that "nearshoring" to Mex­ico, where unit labour costs are still sub­stan­tially lower than in the US, re­mains pop­u­lar. A.T. Kear­ney, in its reshoring re­port, said that in­dus­tries try­ing to avoid ris­ing labour costs in China have been mov­ing pro­duc­tion to other Asian coun­tries, not to the US - and that that's prob­a­bly not go­ing to change soon.

The coun­tries of South and South­east Asia - even af­ter In­dia is taken out of the equa­tion - have labour forces that run into the hun­dreds of millions of work­ers, so the grad­ual shift of cer­tain in­dus­tries to other Asian low-cost coun­tries is likely to con­tinue.

This ex­plains why cloth­ing and fur­ni­ture mak­ing, for ex­am­ple, are un­likely to re­turn to the US in a big way. But in cap­i­tal-goods man­u­fac­tur­ing, labour costs mat­ter less than tech­nol­ogy and the ex­is­tence of a lo­cal ecosys­tem of sup­pli­ers, con­sul­tants and skilled work­ers that can take a while to put to­gether. In their rush to off­shore, then, US man­u­fac­tur­ers may have per­ma­nently de­stroyed their abil­ity to make cer­tain prod­ucts here.

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