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 percent of actual U.S. manufacturing output, or five 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 10 trading partners. Less dependence on imports reduces costs and risks related to distance: freight, delivery, inventory, etc. Additionally, it lowers country-specific costs and risks, including rising wages, IP risk, political instability and more.
Companies with local supply chains fare 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 toward balancing the trade deficit by doubling the rate at which we reshore, bringing offshored jobs back to the United States and nurturing a business environment that attracts more foreign direct investment.Doing the Math
Since 2010, the rate of offshoring slowed from approximately 200,000 jobs each year to about 100,000 annually. 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 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, which results in importing less, than exporting more because of the costs or friction of about 15 percent associated with exporting or importing. U.S. products are, on average, about 30 percent more competitive here than exported to, Asia, for example.
Figure 1 uses China as an example. Reducing imports is a larger target since imports are about 40 percent higher in value and about 100 percent 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 percent each year) and declining economic and industrial resilience, however, suggest 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, such as Total Cost of Ownership in sourcing and siting decisions. These actions will drive reshoring, which will, in turn, increase capacity utilization above 80 percent, 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 high-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.
Increasing high-paying manufacturing jobs in the United States can be a critical factor in recovery from pandemic-induced unemployment.Environmental
The benefits can also be felt on the environment, which is becoming an increasingly important factor in all business decisions. 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 high-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 percent for 20 years and drive increases in productivity and manufacturing employment, two key factors in increasing manufacturing output and economic growth.Resiliency
The United States was producing an estimated 10 percent of its 2019 PPE 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 30 times in a few months. That’s 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 percent 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 percent increase in production would dramatically reduce dependencies.Product Mix
As Figure 2 shows, reshoring is enabling a higher percentage of higher-tech product production than current U.S. manufacturing, thus improving our product mix.
Phasing up production over 20 years will allow for incremental and sustained skilled workforce recruitment and capital investment. Right now, the United States’ largest trade surpluses are in aircraft and spacecraft. Europe and China will not accept our getting 100 percent of those markets.
I propose that, rather than becoming even more specialized in aerospace and defense, the U.S. should become less dependent in other products, such as medical, appliances and machinery. In essential products, we should get our production up to at least 50 percent of annual consumption. Strengthen OEM assembly and the supply chain. Make manufacturing, once again, the career of choice for smart, aggressive youth. Harry Moser is the founder of the Reshoring Initiative. The text of this article first appeared at IMTS.com. More on the Reshoring Initiative can be found at www.reshorenow.org.