Sharing different stages of the manufacturing process with producers in different countries has many benefits. For example, it can result in lower manufacturing costs while increasing your level of global competitiveness.

Importantly, this process can help retain jobs that would have been lost due to competition and even grow them in capital-intensive manufacturing, product development, design, and marketing related activities here in the United States. During periods of slow economic growth, these advantages are worth considering.

Production Sharing Is Catching On

Production sharing, also known as co-production or cross-border manufacturing, allows firms anywhere in the world to complement each others’ strengths by providing access to unique technology, raw materials, specialized intermediate inputs or labor skills in a way that creates greater product value.

As a result, the number of firms engaging in cross-border manufacturing is on the rise. In fact, it involves more than $800 billion or at least 30% of total manufacturing trade annually, according to The World Bank report, Just How Big Is Global Production Sharing? And the growing interdependence of countries utilizing this strategy is also evident since trade in components and parts has been growing considerably faster than trade in finished products.

Chapter 98 of the Tariff Code May Help

Production sharing is sometimes the only viable strategy available to make your products more competitive here and abroad. Under the U.S. production sharing Harmonized Tariff Schedule provision 9802 (tariff classification 9802.00.60 - 9802. 00.90), U.S. materials assembled, processed or improved abroad can be shipped back to the U.S. incurring duty only on the foreign labor and non-U.S.-made materials. As such, these imports — which often contain substantial U.S. content — are more price competitive than other imports with no U.S. content, and are subject to lower Customs duties.

But the benefits of production sharing are not always understood. In the late 1980s, the U.S. International Trade Commission (ITC) conducted a survey of 900 U.S. firms that co-produced utilizing Chapter 98. When asked what they would do if this provision was eliminated, respondents indicated that they would increase reliance on foreign-made parts or suffer a loss of U.S. market share to foreign competitors not using U.S.-made components. Their responses, ranked according to frequency, were:

• Turn to foreign suppliers of components;
• Discontinue producing labor-intensive products and import them from East Asia;
• Move all manufacturing to Asia;
• Cut back U.S. production and target a market niche not threatened by imports; or
• Go out of business.

These options are poor alternatives to production sharing, especially since the strategy is responsible for generating new jobs and retaining those that would have been lost due to intense foreign competition, says the ITC.

North American Production Sharing Strong

In 2000, Mexico and Canada were the leading U.S. co-production partners. Mexico was a destination for labor-intensive operations, while Canada contributed mainly in auto production. The result: a greater level of North American productivity and competitiveness.

According to Ralph Watkins, Chief, Miscellaneous Manufactures Branch, ITC, Mexican assembly plant co-production exports to the United States amounted to $127 billion in 2000. This represented 86% of total Mexican exports to the U.S. And of this, 62% or $79 billion was comprised of U.S. components.

The chief exports to the United States from these production sharing (maquiladora) facilities were motor vehicles, $19.3 billion; auto parts, $10 billion; apparel, $8.6 billion; color televisions, $7.9 billion; telecommunications equipment, $7.7 billion; and computer equipment, $7.2 billion. However, only a portion of these goods entered the U.S. under the production sharing Harmonized Tariff Schedule provision 9802. The majority of goods entered the United States under NAFTA provisions.

U.S.-Asian/European Co-Production Thriving

The largest U.S. production sharing partners in 2000, following Canada and Mexico and measured by U.S. imports under provision 9802, were (in billions):

• Japan, $17.9
• Germany, $9.8
• Dominican Republic, $2.7
• Philippines, $2.1
• Sweden, $2.0
• United Kingdom, $1.9
• Honduras, $1.8
• Malaysia, $1.6
• South Korea, $1.4

Japan and German Partners Rank 3rd and 4th

In 2000, Japan and Germany ranked as the third and fourth largest sources of U.S. co-produced imports entering the U.S. under provision 9802. Major U.S. co-produced goods imported from Japan included transportation equipment, $17.4 billion; electronic products, $223.6 million; and machinery and equipment, $191.4 million. U.S. content was 2.6%, 36.5%, and 4.5%, respectively.

The primary goods co-produced with Germany and imported in the U.S. under provision 9802 included transportation equipment, $9.8 billion; machinery and equipment, $38 million; and electronic products, $21 million. U.S. content was 1%, 25%, and 49%, respectively.

Non-U.S. Production Sharing Well Underway

Companies in Japan, Korea, and Taiwan co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines primarily to reduce their labor costs. In the European Union (EU), most co-production involves apparel, auto parts, and electronic products, and it occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production also is taking place in Northern Africa.

As a result of its growing use, production sharing for many companies has become a necessary strategy used just to keep up as opposed to achieving a competitive advantage.

Conduct Sound Research Before Engaging in Cross-Border Manufacturing

While co-production has allowed many producers to cut costs, improve technology, and increase their level of competitiveness, not all have benefitted. Some companies have invested in foreign-based production sharing facilities only to find unexpectedly low levels of productivity, excessively high turnover, poor infrastructure, and a corrupt legal system. Consequently, many of these firms have abandoned their efforts.

To successfully engage in production sharing, it’s essential to fully understand your co-production partner’s needs, culture and environment. And if you intend to import the finished goods into the United States, make certain you know the U.S. tariff codes under which you will operate.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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