Rebuilding and Reshoring: Proposing a Goal for U.S. Manufacturing Success
Category: Supply Chain • Feb 1, 2021
The future state of U.S. manufacturing depends substantially on our success in reducing, rather than further increasing, our approximately $800 billion goods trade deficit, excluding petroleum. That deficit, after adjustment for price differences, equals about 40% of actual U.S. manufacturing output, 5 million manufacturing jobs at current U.S. productivity levels. With a diverse and educated workforce, abundant natural resources, top technology, and the world’s largest GDP, the United States can be less dependent on imports than other countries, but we currently have trade deficits with nine of our top ten trading partners. Less dependence on imports reduces costs and risks related to distance: freight, delivery, inventory, etc. and country-specific costs and risks: rising wages, IP risk, political instability, etc. Companies with local supply chains fair better against disruption. Stanley Black & Decker reported no increase in costs and “much less impact from the coronavirus than would have been the case if it had remained in China.” In an interview with CNBC, John Quincey, CEO of Coca-Cola said plant shutdowns were limited to “just a couple of places.” He credited the good outcome to local production of Coke’s soft drinks.
We can make great strides towards balancing the trade deficit by doubling the rate at which we reshore, i.e. bring offshored (sourcing shifted from the U.S. to another country) jobs back to the United States and nurturing a business environment that attracts more FDI (foreign direct investment)[i]. Below we discuss the potential benefits of reshoring.
Doing the math
Since 2010, the rate of offshoring slowed from approximately 200,000 jobs each year to about 100,000 each year. Over the same period, the rate of reshoring increased from approximately 6,000 jobs each year to about 150,000 each year, resulting in a net gain of approximately 50,000 jobs each year. While this is a promising start, at this rate it would take close to 100 years to close the current 5 million-job deficits. Achieving an average increase of 250,000 net jobs each year would balance the $800 billion/year goods trade deficit in just 20 years. Here is the math:
- Maintain the current rate of offshoring at about 100,000 jobs each year
- Double the rate of reshoring and FDI to about 300,000 jobs each year.
- Increase the rate of exports (U.S. shipments to foreign customers) to provide about 50,000 jobs each year. (Every $1 billion in new exports of American goods supports more than 6,000 additional jobs here at home, the same ratio as for reduced imports.)
Importing less and exporting more are the only ways to grow manufacturing at a given level of GDP and goods consumption. We can have much more of an impact focusing on reshoring (importing less) than exporting more because of the costs or “friction” of about 15% associated with exporting or importing. U.S. products are, on average, about 30% more competitive here than exported to, e.g. Asia. Figure 1 uses China as an example. Reducing imports is a larger target since imports are about 40% higher in value and about 100% higher in volume or weight. The idea is gaining popularity among U.S. consumers at the same time countries implement more regulatory and structural barriers to protect their home markets.
Economists in academia have long espoused a general position that the United States should make no effort to change market outcomes. If other countries want to sell products at much lower prices, the United States is enriched by buying instead of making. Others have stated that it makes no economic difference whether we make computer chips or potato chips. Forty years of stagnant median-incomes (about 0.6% each year[ii]) and declining economic and industrial resilience however, suggest that the United States should consider more proactive measures.
Success in balancing the manufacturing trade deficit within the next 20 years will depend on government actions that increase the price competitiveness of U.S. manufacturing and corporations implementing more rapid automation, skilled workforce training, and greater use of strategic tools, like TCO in sourcing and siting decisions. These actions will drive reshoring, which will, in turn, increase capacity utilization[iii] above 80%, and drive automation investment and workforce recruitment.
Benefits of success
Increasing reshoring of U.S. manufacturing can have a wide-ranging impact on many other national challenges. For example, reshoring will bring to urban communities well-paying jobs which can be a critical factor in balancing economic inequality. Reintroducing good job opportunities into rural areas would help reverse the damage done by trade-related job loss at the heart of the opioid epidemic. An increase in manufacturing will strengthen overall workforce training and recruitment.
Offshoring’s impact on the world environment has been significant. Moving manufacturing to developing countries drives higher carbon emissions and other pollution due to reliance on fossil fuels and less efficient power generation modalities. Manufacturing goods far away from their ultimate sale and use location results in commensurately higher transportation-related emissions. In addition to lowering emissions, less shipping reduces the global quantity and types of packaging and its associated waste. Furthermore, the less environmentally responsible locations will have added incentive to achieve higher environmental standards sooner as they lose business to the environmentally-conscious United States.
Increasing well-paying manufacturing jobs in the United States can be a critical factor in supporting recovery from COVID-19 pandemic-induced unemployment. More tax revenue from greater economic activity could help offset spending on stimulus programs and reduce budget deficits. . Strengthening U.S. manufacturing through reshoring could increase capital investment by about 20% for twenty years and drive increases in productivity and manufacturing employment, two key factors in increasing manufacturing output and economy growth.
The United States was producing an estimated 10% of its 2019 PPE (Personal Protection Equipment) requirements. Then in 2020 the pandemic struck and demand increased three-fold and foreign sources stopped shipping. U.S. factories would have had to increase output 30X in a few months. Obviously impossible. A key consideration, therefore, is what level of production is necessary to be resilient to potential threats? I propose that, for most products, the U.S. should produce at least 50% of what it consumes and essentially all of what it needs for defense. If we cut our manufacturing trade deficit to zero, the resulting 40% increase in production would dramatically reduce dependencies.
Reshoring is enabling a higher percentage of higher-tech product production than current U.S. manufacturing, thus improving our product mix. Figure 2.
Phasing up production over twenty years will allow for incremental and sustained skilled workforce recruitment and capital investment. U.S. largest trade surpluses are now in aircraft and spacecraft[iv]. Europe and China will not accept our getting 100% of those markets. I propose that, rather than becoming even more specialized in aerospace and defense, become less dependent in other products, e.g. medical, appliances and machinery. In essential products, get our annual production up to at least 50% of annual consumption. Strengthen both OEM assembly and the supply chain. Make manufacturing, once again, the career of choice for smart, aggressive youth.
In other articles in our series, for example, “REBUILDING AND RESHORING: COLLABORATIVE PARTNERSHIPS” we outline steps that can be taken to reduce our $800 billion annual goods trade deficit and make the United States more self-sufficient. The Reshoring Initiative® works with companies, economic development organizations (EDOs), and Manufacturing Extension Partnerships (MEPs) to fill the gaps. The free online Total Cost of Ownership Estimator® will more accurately determine the real profit and loss impact of reshoring or offshoring. After doing the math, most companies will decide to bring some work back. For help, contact me, Harry Moser at firstname.lastname@example.org.
Rebuilding the Supply Chain
Whether you are an advanced manufacturer, job shop owner, or OEM, you are in the midst of your own supply chain challenges, uncertainties, and questions. In an extraordinary effort to support you, AMT and IMTS are dedicating signiﬁcant staff and ﬁnancial resources to help you rethink, reengage, and reestablish supply chains. Visit http://www.imts.com/SupplyChain to learn more!
[i] In the rest of the article “reshoring” includes FDI.
[iii] The output actually produced with the available resources as a percentage of the potential output that can be produced if capacity were fully used.
[iv] U.S. International Trade Commission.