The U.S. is at the start of a manufacturing renaissance that will generate two to three million jobs and provide $100 billion of added economic growth over this decade. This renaissance is being sparked by a trend that is both remarkable and rational.
What's remarkable is that manufacturers are starting to bring back jobs to the U.S. that just a few years ago they exported to China. What's rational is that they are doing so not out of some dewy-eyed patriotism but because it makes economic sense.
Wages in China are rising so rapidly that the insourcing vs. outsourcing calculus has changed. In 2000, U.S. wages were almost 22 times larger than those in China. By 2015, U.S. wages will be only four times larger. Adjusted for productivity, the differential shrinks even more. In the Yangzi River Delta, the epicenter of China's skilled manufacturing workforce, the effective wage rate will be about 61 percent of U.S. wages in 2015.
At those levels, it makes sense to return manufacturing of a wide range of goods , with moderate levels of labor content and high logistics costs, to the U.S. For an automotive part, where labor contributes one quarter of total cost, the total cost advantage for China shrivels to less than 10 percent.
Ten percent is a key threshold. When you factor in the risks and realities of doing business in China--weak intellectual property protection and rule of law, long lead times, and lack of proximity to key customers, among others--companies are willing to bring manufacturing back when the cost difference is in the single digits.
Within the next three or four years, that threshold will be crossed for seven key categories of goods: computers and electronics; appliances and electrical equipment; transportation goods; plastics and rubber; machinery; furniture; and fabricated metals. These goods account for about two-thirds of the annual $325 billion in imports from China.
The upcoming insourcing revolution is not just about rising wages in China but also the often-unheralded productivity of the U.S. The U.S. economy is 33 percent more productive than Japan and 25 percent more productive than Germany. This helps explain why Siemens is exporting gas power turbines, made in the U.S., to Saudi Arabia and Toyota has announced it would export cars made in Kentucky and Indiana to South Korea.
Economics is driving insourcing but government policy can facilitate it. Here are seven helpful steps that the U.S. government can take to create good jobs for our children and ensure the long-term success of the economy.
First, adjust tax policy to favor insourcing rather than outsourcing by providing a targeted tax credit for job creation in the U.S. and for the repatriation of funds to the U.S. that foster job creation. U.S. Senator Richard Blumenthal has proposed legislation to create tax credits for re-shoring.
Second, level the playing field by addressing key trade-agreement violations and insisting on stronger IP protection and an end to currency management by the Chinese government.
Third, secure and train critical talent: retain foreign students by issuing six-month green cards in selected disciplines that become permanent upon employment; subsidize job training for new and expanded manufacturing facilities; and create "vocational colleges" that combine liberal arts education with training in such trades as welding, plumbing, electrical, and computer-assisted manufacturing.
Fourth, rethink regulations that impair competitiveness without corresponding benefit.
Fifth, facilitate the creation of industry clusters -- such as Silicon Valley or, in an earlier era, Detroit -- that bring together competitors, suppliers, schools, and talent to create a winning ecosystem.
Sixth, encourage foreign manufacturers to locate facilities in the U.S., the largest domestic market and one of the lowest-cost in the developed world.
Seventh, change the perception that China is low cost and the U.S. is high cost and uncompetitive. Companies should "do the math" rather than just assume China is cheaper.
More than any major economy, the U.S. responds quickly to threats. We do not curl up in a ball or complain. We adapt and we thrive. We faced down a similar threat from Japan in the 1970s and 1980s, and we are doing it again.
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