Fact Sheet on
Manufacturing Competition

The United States is at a distinct cost disadvantage in the global competition for production of manufactured goods—especially in relation to China.
Members of the National Association of Manufacturers, Metals Service Center Institute and Precision Metalforming Association met April 19 in a Town Hall Meeting designed to rally support for two bills in the House and Senate (see sidebar on legislation).

The issues that negatively affect American manufacturers and the industries that sell them raw materials range from disparities in currency valuations and tariffs to regulatory and legal expenses.

Stephen Gold, vice president and executive director of the National Association of Manufacturers, Washington, D.C., discussed the good news first—that manufacturing still has a place in the U.S. economy. Of the $2.4 trillion in annual manufacturing inputs, 80 percent originate from domestic sources; of $1.3 trillion in annual consumer purchases—fuel, vehicles, food, pharmaceuticals, etc.—75 percent of the products are sourced domestically; and of the $600 billion spent per year on housing and capital goods, 67 percent is spent on domestically manufactured goods.

“We still have a vibrant economy, and in terms of the value of output, we still have the largest manufacturing sector in the world,” Gold said. “Our goal is to make sure it stays that way.

“Intellectual capital—which has been a competitive advantage for the United States for many generations—can be created anywhere now and transported instantaneously almost anywhere else. It remains one of America’s great competitive advantages, allowing us to be one of the most innovative societies in the world. We want to keep the intellectual capital here and create the next technological evolution,” he said.

However, manufacturing employment has suffered. From 2000 to 2003, during the manufacturing recession, the rest of the U.S. economy gained 2.5 million jobs while the manufacturing sector lost 2.7 million jobs.

Meanwhile, said Gold, “a large and growing number of our members are seeing either a moderate or a significant shortage—today or in the near future—of skilled workers. It’s not just IT workers, engineers or scientists; it’s machinists, production workers, craft workers. This is serious because manufacturing in the 21st century is high-tech. If we cannot get skilled workers with technical knowledge and capabilities to run our operations, our problems will mount,” Gold said.

He discussed non-production costs faced by U.S. manufacturers, vs. America’s major trading partners. Germany has the highest labor costs per hour worked, followed by the United States, United Kingdom, Canada and France. Mexico and China are at the low end of the labor cost scale.
NAM also cites high regulatory costs on manufacturing in America as a disadvantage, comparing its $8,000 bill for U.S. federal regulatory costs per employee with $3,500 for the retail and wholesale trade and $2,000 for the services sector.

High energy and raw material costs are also taking a toll—especially when compared to the very modest 4 percent rise in finished product prices realized last year. NAM members reported that in 2004, they saw cost hikes of 65 percent for certain metals, such as copper and nickel; a 53 percent increase in natural gas; a 47 percent increase in steel; a 30 percent increase in petroleum; and a 12 percent increase in iron ore.

China’s voracious appetite for raw materials was a contributing factor, but Gold also charged the U.S. government with failure to address energy-related issues.

NAM also compared the corporate tax burden of various industrialized nations. Germany, Japan, the United States and Belgium have the highest tax burden, all above 30 percent and closer to 40 percent.

The United States, Germany and France face the highest legal costs. The U.S. cost of tort litigation, as a percentage of manufacturing output, is at 4.5 percent. U.S. companies spend almost $250 billion on tort costs, Gold said, adding that it equals 2.25 percent of U.S. GDP. “That is being siphoned away from research and development, innovation, from investments in labor and capital equipment.”

The bilateral trade deficit with China has seen a 25 percent increase each year, on average, over the past four years. In 2004, the U.S. manufacturing trade deficit with China was 34 percent; with the European Union, 21 percent; and with NAFTA partners Canada and Mexico, 5 percent.

In 2001, the U.S. exported $19 billion worth of goods to China vs. $102 billion worth of goods imported from China, an $83 billion difference. By 2004, the imbalance increased dramatically: the U.S. exported $35 billion worth of goods to China and imported $197 million of Chinese goods, a difference of $162 billion.

Dr. Joseph A. Massey, director of the Center for International Business and professor at the Tuck School of Business at Dartmouth College, also presented statistics on shifts in global competition, focusing on China.

Manufacturing accounts for 44 percent of China’s gross domestic product, 90 percent of its exports, 85 percent of its imports and 70 percent of inbound investments. In 2003, China accounted for more than 60 percent of the growth in world trade. Last year, China overtook Japan to become the world’s largest exporter and surpassed the United States as the top export market for Japanese goods.

William E. Gaskin, president and secretary of the Precision Metalforming Association, Independence, Ohio, said the U.S. and Canadian metal forming industry’s growth trend has been flat. Due to the manufacturing recession in 2001, 36 percent of PMA member companies experienced losses, compared with 28 percent reporting losses in 2002 and 33 percent who lost money in 2003. By contrast, Gaskin said, 75 percent of American companies operating in China made money.

More recently, although shipping levels have been on a slightly upward trend, incoming orders started to dip in March. Just the same, PMA members said they expect to increase their capital spending by 8 percent this year, to an average of nearly $650,000.

“Your primary customers for flat-rolled metals are having a tough time. The key issue for us is the steel [price]. When you start intervening in markets, there are downstream consequences and upstream consequences that impact a lot of people,” Gaskin said.

As recently as March, 83 percent of surveyed PMA members reported experiencing some disruption in their businesses due to late arrivals of steel shipments.