One of the hottest topics among people interested in either international trade or manufacturing is the apparent trend in backshoring: moving manufacturing back to the United States from abroad. This is exactly the opposite of the offshoring trend that took hold more than 20 years ago and resulted in the movement of production of many familiar products from the United States to lower-cost countries.
As backshoring has become more evident, many commentators have related it to two other popular topics. These are President Obama’s initiative to double United States exports, and the level of manufacturing employment in the United States.
The common refrain is that backshoring is part and parcel of export expansion, and in turn, will lead to a rise in manufacturing employment. However, a closer look at backshoring, as well as developments in U.S. manufacturing, indicate that backshoring is unlikely to drive a dramatic increase in manufacturing employment or a decrease in the unemployment rate.
The rationale for linking backshoring, export increases, and manufacturing employment is clear. After all, if more products are made in the United States, we would expect some of them to be exported to other countries. Thus, workers will be needed to build or process the goods and components that are backshored and then exported. This is accurate to one extent, however, it misses some of the important factors in sourcing decisions that are driving backshoring.
Increased manufacturing in the United States, followed by an increase in exports, are worthwhile goals.
While much commentary has been focused on rising wages in China as a reason to backshore production of particular products, rising Chinese wages are only one part of the backshoring story. Other important considerations include the ability to dramatically cut lead times necessary to supply customers in the United States, and concerns regarding fuel and transportation costs over the long term. However, the consideration that likely will impact the manufacturing employment picture revolves around U.S. manufacturing efficiencies.
As the Federal Reserve Bank of St. Louis noted in a January/February 2013 article, efficiency gains in U.S. manufacturing have led to a scenario in which there are dramatic gains in manufacturing output with essentially unchanged employment. Anyone who has been in an American manufacturing facility that has received substantial investment has seen the phenomenon first hand.
Processes are highly automated, requiring very few employees for actual production work. In fact, it is common to see as many people operating forklifts to move materials as operators ostensibly making the goods. In this environment, products that are not subject to labor-intensive processes are very good candidates for backshoring.
Ultimately, this manufacturing model likely will result in a much slower rise in manufacturing employment as compared to manufacturing output. Consequently, today, gross employment is no longer an appropriate measure the success of the U.S. manufacturing sector in the United States.
Although these trends and the U.S. manufacturing model likely will not dramatically increase U.S. manufacturing employment, this could result in the doubling of export volume in line with President Obama's export schedule.
To be sure, increased manufacturing in the United States, followed by an increase in exports, are worthwhile goals. Even the relatively small number of jobs in a modern manufacturing facility are better than no new jobs. Even highly efficient manufacturing facilities require support and attendant jobs. Thus, it is clear that manufacturing employment is a deeply flawed proxy for manufacturing health.
Importantly, the belief that backshoring will result in higher employee costs is flawed. The St. Louis Fed article noted above indicates that U.S. manufacturing has a higher capital-to-labor ratio than nonfarm, and nonmanufacturing sectors of the economy, and generates a higher return of capital than many other industries, including high-tech, mining, utilities, and construction sectors. These numbers imply that, for at least some products that can be manufactured in highly automated environments, backshoring may be more profitable than low-cost manufacturing environments.
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