How Wages, Taxes, and American Value are Reshoring…

How Wages, Taxes, and American Value are Reshoring…

Aug 24, 2017

“How Wages, Taxes, and American Value are Reshoring US Manufacturing Jobs”

By Paul Carlson, CliftonLarsonAllen

The flow of American manufacturing jobs overseas has peaked and is now reversing as U.S. companies find more than just economic reasons to bring them back home.

Over the past few decades, the United States has lost as many as 4 million manufacturing jobs to foreign nations as companies look for ways to reduce costs. But the overseas manufacturing landscape is changing significantly.

The emerging market wage difference that existed when the decision was made to offshore manufacturing is now dwindling, and in the past few years the costs of production have been increasing. This, in turn, has led to a growing number of companies reshoring — bringing manufacturing back to the United States.

Catch the reshoring wave

According to the 2016 Reshoring Report from the Reshoring Initiative — an organization working to return manufacturing jobs to the United States — more jobs are returning to the United States than are going abroad.

“We publish this data annually to show companies that their peers are successfully reshoring and that they should reevaluate their sourcing and siting decisions,” says Harry Moser, founder and president of the Reshoring Initiative, in a May 15, 2017, statement. “With 3 to 4 million manufacturing jobs still offshore, as measured by our $500 billion annual trade deficit, there is potential for much more growth.”

The report found that 77,000 new reshoring and foreign direct investment (FDI) manufacturing jobs were created in 2016. This is a 500 percent increase from the low of 2000 – 2003, when only 12,000 jobs were created on average annually. Overall, it is estimated that a net 25,000 new jobs were created in 2016.

Jobs are returning from Asia

Most of the jobs being reshored are from Asian countries, where 138,450 jobs have already been brought back to the United States. Of those jobs, most came from China. During the 2010 to 2016 timeframe, China accounted for approximately 60 percent of all manufacturing jobs created by reshoring and FDI. One of the biggest reasons for this trend is the shrinking wage benefit in China. Since 2001, the hourly Chinese manufacturing has risen by approximately 12 percent a year on average. With the manufacturing wage gap shrinking, low-wage southern states are now in a stronger competitive position.

In addition to the shrinking wage gap, other factors such as high quality, manufacturing proximity, lower lead times, and proposed tax legislation present influences that can produce overall lower total cost than foreign sourcing.

The costs and benefits of “made in America”

According to a recently conducted Reuters/Ipsos poll, 70 percent of respondents believe that it is “very important” or “somewhat important” to buy products that are American made. That same poll, which surveyed approximately 2,800 adults, also found that participants believe that the highest quality cars and clothing are made in the United States.

On the whole, the survey showed that 37 percent of respondents are not willing to pay a premium for American quality. Of those surveyed, 63 percent noted that they would pay from 5 to 100 percent more for goods manufactured in the United States. Durable goods are much more likely to absorb the premium price.

Quality and proximity are also a valued metric of the supply chain. Excess and obsolete inventory is one of the biggest risks for manufacturers. U.S. manufacturers are more agile and can respond to customer demands faster than foreign competitors. Take, for example, AMES Companies Inc., a domestic manufacturer of home and garden tools. In a recent interview with Reuters, AMES President Mark Taylor noted that when spring comes early, the company can quickly ship goods to stores — something that importers with longer order lead times struggle to do.

A new tax and regulatory environment

During his campaign, President Donald Trump ran on a “pro-business” platform that included proposed legislation aimed at lower taxes and a less burdensome regulatory environment. In an interview on the iTreasurer website, Moser says some of the jobs that were reshored in 2016 were due to Trump’s campaign promises.

“To a significant extent, it’s companies saying, ‘It looks like [President Trump] is going to make this a better place to manufacture by lowering taxes, easing regulation and other factors, and he’s going to make it worse to offshore production,’” Moser commented.

The proposed tax legislation would decrease the top corporate tax rate from 35 percent to 20 percent, making it more competitive with other countries. Also included in this proposal was a border tax adjustment aimed at encouraging companies to make goods in the United States. The tax, in effect, discourages imports and subsidizes exports. While it is uncertain at this point whether this will ever be implemented, it could play a role in the decision whether or not to reshore manufacturing.

How we can help

Deciding whether to make a product here or overseas is a significant decision point for many manufacturers, one that is being scrutinized more intensely than ever. The choice to reshore production should be made only after examining many key factors besides price (i.e., brand image, proximity to customers, duties, freight, taxes, lead times, and inventory levels). Our global business professionals can help you analyze all of these issues so you can fully understand the financial impacts of bringing American jobs back home.

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