Reshoring the US manufacturing industry

The US is said to be going through a period of reshoring, which could lead to renewed American prosperity

Once one of the industrial centres of the world, the US has since lost out to other countries. A new drive to bring operations back to US shores is now underway  

America was originally thought of as the perfect place for an agrarian society composed of small-time farmers. Thomas Jefferson imagined the US, upon its founding, to be a republic made up of individual property owning farmers known as yeoman. This ideal was central to the republican liberty the country’s founding fathers thought themselves to have secured. Yet it was not meant to be. Within its first 100 years of existence the United States became the preeminent industrial power in the world, with one of the world’s most prosperous workforces. America and industry became synonymous. Following its rapid catch up with Britain in the late 19th century, the US became one of the centres of world manufacturing.

Key to America in the 20th century, manufacturing defined how the country viewed itself and how it related to the rest of the world. The well-paid industrial union jobs of the mid 20th century provided a comfortable wage, allowing US citizens to live in historically unrivalled mass prosperity. US industry in the post-war era allowed the dream to be lived up to. Throughout US history, manufacturing has often been seen as the back-bone of the nation’s prosperity. Now, however, industrial America is widely seen to be a thing of the past. In the popular American TV show The Wire, one of the general themes throughout is that the illicit drug trade thrives in the hollowed-out, post-industrial cities of America. Though the series focused on Baltimore, the same is true of Detroit, once considered the core of US manufacturing.

US reshoring Fig 2

Indeed, there exists an idea in American politics that the US is no longer the industrial power it once was. There is a general sense, orthodoxy even, that the US no longer has the manufacturing base it did, contributing to its stagnating prosperity and frozen wages. The term ‘offshoring’, in reference to American firms relocating production abroad, became a political buzzword in the late 20th century. Globalisation was said to be dispersing American industry. Now however, the opposite is said to be taking place. There is increased talk about industry returning to American – known as ‘reshoring’ (see Fig. 2). Throughout US history, industry has often been seen as providing the back-bone of the nation’s prosperity – suggesting perhaps the US is also on the cusp on a new bout of prosperity.

Bringing trade home
In 2011, the Boston Consulting Group released a study titled Made in America, Again. The paper argued many goods manufactured abroad for American consumers would once again be made in the US. They argued 2015 would be the tipping point of such a trend. According to Michelle Comerford from the publication Trade and Industry Development, “the global economic indicators that led the Boston Consulting Group to predict a shift of manufacturing operations from China to the US, otherwise known as ‘reshoring’, are seemingly coming to fruition”.

The study forecasted that a number of industrial production sectors would see investment return to the shores of the States. The sort of products said to be seeing their manufacturing return included transport goods, electronics and IT goods, heavy machinery, synthetic materials such as plastic and rubber, and white goods such as appliances, electrical goods and furniture.

There is a general sense… that the US no longer has the manufacturing base it once did, contributing to its stagnating prosperity and frozen wages

One of the main reasons cited was that wages in China are on an upward trajectory (see Fig. 3). Of course China retains a comparative advantage in terms of labour costs, with average wages being around a 10th of American workers’. However, wages have risen, and when factored in with the rise of other costs such as transportation and logistics – as the goods in question produced are destined for US markets – the advantage is lost. Wages in China have risen rapidly since 2011, and show no sign of abetting, as the Communist Party of China adopts a plan of developing its internal market and reaching its stated target of becoming a middle-income country. As Comerford noted: “According to the National Bureau of Statistics in China, average yearly wages in manufacturing have increased by over 50 percent since 2011.”

When this rise is taken into account with other costs and liabilities of offshoring production, it becomes less economically rational to locate industry in the traditional low-waged areas of offshored production. For instance, as Comerfield wrote, the “costs to ship ocean freight from China to the US are higher than ever, with further rate hikes on the horizon. Delivery times also have been jeopardised by both natural and man-made risk factors. The longshoremen’s union strike at the Port of Los Angeles/Long Beach is the most recent example of delivery delay issues, which resulted in products stuck sitting on ships in the harbour for weeks while store shelves dwindled”. For companies with a primarily American consumer base, being closer to places of consumption allows quicker changes to reflect consumer behaviour and demand patterns. According to the Financial Times, some recent examples of companies announcing “plans to shift production from China to the US include K’Nex, the toy manufacturer, Trellis Earth Products, which makes bioplastic goods such as bags and utensils, and Handful, the bra manufacturer”.

A manufacturing factory in Lawrence, US. The US was once one of the world's foremost manufacturing powers
A manufacturing factory in Lawrence, US. The US was once one of the world’s foremost manufacturing powers

However, at the same time – despite Frank Sobotka’s opining of his country’s industrial demise – America has actually continued to ‘make stuff’. As an article in The Atlantic recently noted: “According to Martin Baily and Barry Bosworth of the Brookings Institution, for the past 50 years industrial production in the US has grown at the same rate or even faster than the economy as a whole. This means that contrary to conventional wisdom, manufacturing has not lost ground in terms of its importance in the US economy. Until 2011, when China inched slightly ahead, the US boasted the world’s largest manufacturing sector, and it continues to be an industrial powerhouse.” Much of the decline in manufacturing is localised in certain areas, while other areas have continued to expand.

Speaking to World Finance, radio host and editor of Left Business Observer Doug Henwood made a similar point. “US industrial production, as measured by the Federal Reserve’s index, is up 24 percent from the recession low, following a deep decline. It’s 12 percent above where it was in 2000, and 119 percent above where it was in 1980. Important sectors, like motor vehicles remain strong. Production is up 162 percent from the recession low, and 20 percent since 2000.”

Personally affected
Where the decline really has been in industry is within employment – not in actual output. As Henwood further explained: “The trend rate of growth [for employment in manufacturing] went negative in the early 1980s and has been ever since. Job losses in recessions have been savage, and growth in recoveries or expansions largely non-existent. Factory employment is 1.4 million, or about 10 percent, below where it was on the cusp of the Great Recession. It’s about five million below where it was in 2000, and in absolute terms about where it was in 1941, even though the workforce has quadrupled. It was about 30 percent of overall employment in 1950; it’s under nine percent today.” This has largely been the result of increased productivity and cost savings – part of which has been the export of some manufacturing jobs.

US reshoring Fig 3

This raises the question, then, of what the impact of this so-called reshoring effort will be on the US economy. Clearly, as the figures show, it won’t lead to a ‘revival’ in American manufacturing output, for output has not really suffered a decline. What America has seen, however, is a fall in the number of people employed in manufacturing jobs – perhaps then, as jobs are repatriated, it will lead to a revival of America’s previously prosperous industrial working class, as in the past. The Boston Consultancy Group has predicted the end of the decade will see potentially over one million new manufacturing jobs in the US. Indeed, if the past is anything to go by, bouts of industrial job creation in the US have coincided with increased American prosperity, particularly for those employed in manufacturing.

The story of American industrial might began in the post-Civil War era. With the slave society of the South defeated, the US began to rapidly industrialise. This era saw the widespread introduction of railroads, telegraph and telephone communications, and the internal combustion engine, the steam turbine and electricity – as a result, industry took off. Americans and immigrant labour, primarily from Europe, flocked to new centres of industry in the US, forming a new industrial work force.

Known as the Gilded Age, this was an era of rapid economic expansion. Between the 1870s and 1880s, the US expanded at a faster rate than any time in its history, in terms of output, with wages and capital formation. Between 1865 and 1898, coal output rose by 800 percent. In 1860, national wealth was $16bn; by 1900 it had grown to $88bn. By 1895, the US had surpassed Britain in industrial output. This was a time of prosperity for American workers.

Within its first 100 years of existence the United States become the preeminent industrial power in the world, with one of the world’s most prosperous workforces

According to James Livingston, Professor of History at Rutgers University, US workers were in a relatively strong position, allowing them to benefit from this new industrialisation, accruing higher incomes. “There were two moments in the post-Civil War history of the US when labour held its own against capital”, he told World Finance. “These were roughly between 1873 and 1896, and 1933 and 1973. In the first moment, income shares shifted away from capital, toward labour.” Despite myths of the era characterised by ‘robber barons’, much of the population saw meaningful improvements in their living standards, thanks to wage increase. According to Hugh Rockoff, wage growth for unskilled labour was nearly 1.5 percent annually.

As Livingston also noted, the period from the 1930s to the 1970s saw workers in a relatively strong position to extract higher wages from employers. A large part of this came from the industrial expansion the US saw after, and partially during, the Second World War. The post-war era was a time of unbridled prosperity and economic growth. A huge expansion in the defence sector and a self-perpetuating (for a time at least) dynamic between growing wages and growing consumer demand resulted in an expanding industrial centre for manufactured consumer goods, with firms such as Ford being archetypal.

Not on these shores
It might therefore seem that reshoring offers a new era of industrial production, and, if the past history of manufacturing expansions in the US is anything to go by, this could mean a new wave of prosperity is also about to reach the shores of the US along with repatriated jobs. This, however, seems not to be the case.

The very reason for the return of manufacturing to the US shows how it is perhaps unlikely to boost American prosperity, as past waves of industrial expansion have done. Although logistics costs and transport costs have played a role in firms deciding to relocate back to the US, the fact is that the US has become, in recent years by advanced economy standards, a low-waged economy.

The production line at the Ford factory in 1931, in Detroit, US
The production line at the Ford factory in 1931, in Detroit, US

Wages in the US have, for the most part, stagnated since the 1970s. According to Henwood, the fact is “that the US is a ‘low-wage’ country by first world standards. New hires in Mississippi auto plants can make less than Walmart workers. To European and Japanese manufacturers, the US has become a relatively low-wage country, which is why we’re seeing so many auto plants in the non-union[ised] South.” At the same time, he said, “state governments, like those of Mississippi and Tennessee, have showered so many subsidies on carmakers that their plants end up being practically free”.

As the publication Manufacturing noted, the US’ “23,914 reshored jobs — tracked mostly between 2010 and 2014 — were fuelled by South Carolina, whose 7,530 reshored jobs nearly doubled that of its closest rival… Each of the top five reshoring states, however, were located in the South. Texas saw 3,792 jobs returned from overseas, followed by Kentucky at 3,412 jobs, Georgia at 3,145 jobs and Tennessee at 3,137 jobs”.

Jobs may come, but they won’t be the high-waged union jobs of yesteryear. As Henwood concluded: “You could argue that having more manufacturing here has ancillary benefits – every new factory job, for example, can result in another job or two at suppliers. But manufacturing employment, though up, is growing at only about a third of the rate of overall employment, meaning its share of the job market continues to shrink – and its hourly wage advantage over service work has disappeared.”

Perhaps then, as jobs are repatriated, it will lead to a revival of America’s previously prosperous industrial working class

An uncertain homecoming
It is not clear how significant reshoring itself will be to the US economy. Clearly it is not something plucked out of thin air – the examples of firms returning exist. However, there are doubts over its true significance, with some citing relatively low numbers of firms returning. For instance, a study by Jim Rice, Deputy Director of MIT’s Center for Transportation and Logistics cast doubt on the extent of the rise in job repatriation and significance of reshoring. “In the majority of cases, the companies involved plan to invest in US-based production capacity; they have not actually made the move”, reported the Financial Times.

“The data indicates that there are relatively few published instances of reshoring”, the newspaper went on, citing Rice’s observation that, “even among reshoring projects that had gone ahead… some had produced only modest employment growth. One widely touted case – the return of some manufacturing of Wham-O Frisbees to California – had led to the setting up of a factory employing eight people”.

Livingstone concluded: “The repatriation of those jobs is a fool’s errand that cannot solve the problems of wage stagnation and income inequality. It won’t re-enfranchise the labour movement, either. Nothing can change the fact that output increases without larger inputs of labour or capital.” While America may see some new job creation from manufacturing, the idea of it returning to its glory days of highly paid industrial work for a large amount of the population is a little optimistic.

Reshoring is providing some jobs to more impoverished sectors in the South, but the sort of wages received are still part of America’s new reality of being a low-wage economy. The US continues to be an industrial powerhouse – it just doesn’t need so many residents working in one place. The solution to low and stagnating American wages must be sought elsewhere.