| || ||Kip Beckman |
Principal Research Associate,
The movement of manufacturing jobs from the United States to low-cost countries around the world has been an unfortunate development for many manufacturing workers over the last three decades or so. While low cost manufacturing imports have benefited U.S. consumers, this has provided manufacturing workers with little comfort as they watched their high-paying jobs disappear for good. However, the trend is starting to slowly change as a result of recent developments in the world economy.
The cost of shipping a standard 40-foot container from Asia to East Coast ports in the United States has close to tripled since 2000 and could potentially double again if world oil prices were to soar $200 a barrel. According to the Wall Street Journal, transportation costs at current levels are equivalent to a 9 per cent tariff on products transported to U.S. ports, compared to the equivalent of only 3 per cent in the early 2000s when oil was trading at around $20 per barrel.
Rising transportation costs are just part of a global trend that has seen the cost of manufacturing soar as costs for materials including steel and resins rise sharply. The cost of manufacturing in low-cost countries like China has steadily increased as workers demand higher wages while, at the same time, the government has started to enforce tougher environmental standards. The Chinese yuan has appreciated against the U.S. dollar, albeit at a pace slower than U.S. officials would like, and this factor has also increased the costs of Chinese manufactured products in U.S. markets.
Emerson, a St. Louis-based manufacturer of electrical equipment, recently moved some of its production from Asia to Mexico and even back to the United States in order to offset rising transportation costs by being closer to its North American customers. The company’s broader strategy is to eventually regionalize production and manufacture as much as possible within the region of the world where its products are sold. The company started to draw up plans for this new strategy when oil prices approached $100 per barrel.
Shifting production closer to the domestic market won’t eliminate all of the difficulties associated with soaring transportation costs. Manufacturers must contend with large surcharges on shipments by rail and truck within the United States. Also, already-congested domestic transportation systems may be unable to cope with a sudden rise in demand from manufacturers moving more of their output and raw materials via U.S. rails and highways. Moreover, in certain industries with high value to weight ratios, including electronics, the benefits attributable to production in Asia will continue to surpass the negative effect of higher transportation costs. Electronics firms are currently located within close proximity to each other in Asia and thereby gain major economic benefits from being located near to one another.
Another difficult that will be encountered when/if manufacturers decide to return some of their production to the domestic market is that much of the basic infrastructure required to support many industries has simply disappeared over the years. This includes suppliers specializing in producing parts or repairing machines. The other unfortunate reality for the U.S. manufacturing sector is that every job returning home due to higher transportation costs is more than offset by job losses in auto and housing material manufacturers. Manufacturers have shed jobs at a pace of 41,000 per month since the beginning of 2008.
Nevertheless, despite difficulties with suppliers and infrastructure, some manufacturers will still find it profitable to shift production back to the domestic market. Craftmaster Furniture in North Carolina recently changed its strategy of shifting production to China. Savings of 15 per cent realized by having sofas assembled in North Carolina with kits of fabric pre-cut in China have dwindled to 7 per cent due to higher transportation costs. When savings drop below 15 per cent, it becomes difficult to justify production in China where delivery to the U.S. market takes as much as twelve weeks. Higher transportation costs are especially hard for manufacturers of low value added products since the cheaper a product, the more significant transportation costs become in the final price. This could explain why Chinese exports of low value-added, “freight sensitive” goods are currently declining for the first time in a decade.