reshoring, reindustrialisation, US, China, location theory, manufacturing, economy, society, Trump, election, growth, productivity, land prices, employment, shipping
Port Canaveral, US. (Credit: CL Photographs/Flickr)

The United States was once a country renowned for its manufacturing capabilities but it experienced a decline in its manufacturing sector after 1980. A significant beneficiary following this decline was China, which absorbed approximately 2.4 million US manufacturing jobs. However, since 2010, the potential for reindustrialisation in the United States has been frequently discussed, mainly caused by the reshoring of US industry from foreign countries, particularly China.

From an economic point of view, the most advantageous time for US industry was after World War Two. During the course of the war, over 17 million new civilian jobs were created which caused an improvement in industrial productivity (Goodwin, 1992). Moreover, the US was the only major industrialised country not severely damaged by the impacts of the war (Sirkin et al., 2011). As a result, the US emerged as the world’s primary superpower and accounted for approximately 40% of manufactured goods worldwide in the early 1950s. But US industrial dominance was short-lived. Years of recovery in other war-torn countries, along with the rise of low-cost manufacturing countries, led to the loss of the United States’ monopolistic position as a global manufacturing superpower (De Felice, Petrillo, and Silvestri, 2015). Additionally, the oil crisis of 1973 and the 1981-82 recession can be seen as starting points for the deindustrialisation of US industry. Over 2,700 factories were closed in 1982, resulting in the loss of over 1.2 million jobs across the country.

After 1979, China gradually grew in terms of economic power following the introduction of modern economic reforms, which opened doors for foreign trade and investment in China. Following the removal of the trade restrictions, more foreign direct investment was attracted to China (Morrison, 2013). China experienced another major economic boost after becoming a member of the World Trade Organization (WTO) in 2001, which resulted in further trade liberalisation via falling taxes and an expansion of scope for foreign investors and companies. The rapid rise of China as a manufacturing powerhouse had a major effect on US manufacturing plants.

However, after 2010, signs of possible reindustrialisation have been seen. The main causes for reshoring and initiation of the reindustrialisation process can be seen in the closing of cost gaps between the US and China (Abbasi et al., 2014). Besides the fact general cost advantages have been shrinking for years, fracking is another recent development which is seen to have initiated reindustrialisation within the US and attracted a reshoring of manufacturing. The recent innovation of extracting shale gas, which is done on a mass scale in the US, has caused a change in global gas markets and caused a reduction of the domestic prices of oil and gas. The Economist (2013) has said that the low price of energy has had a positive influence on the manufacturing industry and reported forecasts that approximately another one million jobs within the manufacturing sector will be created as firms establish new manufacturing plants.

According to location theory, there are several factors that contribute to the reshoring of US firms from China.

Employment and the number of firms in the manufacturing sector

The idea of an initiation of reindustrialisation within the US is supported by the growing number of employees in the manufacturing sector. After a low point, in March 2010, with approximately 11.4 million employees, the number had increased to 12.6 million by April 2018. As per the Reshoring Initiative, reshored jobs, which include jobs resulting from foreign direct investment between 2010 to 2016, predominantly come from China (79,540 jobs), Germany (54,306 jobs), and Japan (35,292 jobs). In addition, in 2017, combined reshoring and FDI-related announcements created 171,000 jobs together with an extra 67,000 in the period between 2010 and 2016. The 171,000 jobs created are equivalent to 90% of the total of 189,000 jobs created in 2017. In 2017, the total number of manufacturing jobs due to reshoring since 2010 reached 576,000. The huge increase is mostly based on the expectancy of greater US competitiveness due to lower corporate tax rates and regulatory cuts following the 2016 election. The figure below shows the total number of individuals employed within the US manufacturing sector from January 2010 to April 2018 (in thousands).

Source: Data from the U.S. Bureau of Labor Statistics; figure by the present author.

Distinguishing between US firms according to size (large firms with more than 500 employees and small firms with less than 500 employees) reveals that during the 2010–2015 period, the number of small businesses declined by approximately 2.84% while the number of large businesses increased by 10.55%. In numerical terms, the number of small firms dropped from 255,213 to 247,961 (-7,252) and the number of big firms increased from 3,449 to 3,813 (364). Therefore, the reshoring trend alone was not enough to compensate for the declining number of small domestic firms and has thus not yet been able to initiate a complete revitalisation of the manufacturing sector.

Land costs, raw material costs, and labour costs

Land cost is determined by the value of land per square meter. Since 2011, land costs in China have exceeded US costs. The rapid growth of China caused a difference of $318.36 in the land cost per square meter in 2014. Additionally, US firms which are located in China and mainly manufacturing for the US market are heavily dependent on strategic locations near the Chinese coast, which are more expensive than average. In China, centres of agglomeration like Beijing and the coastal regions have the most expensive land. Prices of land in the middle and western parts of the country are relatively cheaper. But coastal cities offer faster shipping for firms manufacturing for the US market. The low costs of land in other parts of China are not of value to firms producing for the US market. Locating in the US allows more flexibility in location decisions and thus harbours potential for even greater cost advantages.

In regards to raw material costs, the US is able to be a profitable location for firms due to low prices of oil, coal, and gas since large-scale fracking in the US stirred up the oil and gas markets. To add to this, in comparison with Chinawhich depends heavily on coal for energy productionthe US has switched from coal to natural gas as its main source of energy production. Because of the low price of gas, the US is capable of generating electricity at a much lower cost than China, which ultimately influences the price of electricity for the industrial firms. While prices in China have soared in the last ten years, prices in the US have remained fairly stable (based on the United States Energy Information Administration, 2016). However, it is important to remember that the prices of oil and gas are not likely to remain this low because fracking is more expensive than conventional drilling and is only profitable when the output is sold at a reasonable price, which is around US$60 (or above) per barrel (Cunningham, 2018).

Nevertheless, the recent reductions in the prices of oil and gas within the US have encouraged the industrialisation process, especially for energy-intensive firms. Firms that are dependent on critical raw materials are likely to stay back in China because it is the world’s biggest source of critical raw materials and has frequently imposed export restrictions to favour the domestic manufacturing sector (Humphries, 2015).

Labour costs seems to be the only factor that is still attractive in China, in contrast to land and raw material costs. The hourly wage in the manufacturing sector in China increased from US$1.10 to US$4.30 from 2006 to 2016. The hourly wage in the US manufacturing sector during the same period increased from US$20.96 to US$26.00 according to the Chinese National Bureau of Statistics and the Bureau of Labour Statistics in the US. In terms of the percentage growth rates of wages in the US and China, Chinese wage rose yearly by an average of 14.89% for this period, whereas in the US, wages increased by 2.18% per year on average. Assuming the same growth rates in the future, Chinese wages could increase by 75% by 2025 and thus encourage more reshoring for US firms.

The agglomeration effect

On a national scale, China is yet to be on par with the US but is rapidly gaining ground. This can be evaluated by the urban population of China, which showed a rapid increase from 29.10% of the total population in 1993 to 58.20% by 2017, and also by the number of listed domestic firms, which increased from 122 to 3,485 during the same period. In the US, the urban population increased from 76.49% to 83.4% of the total population, whereas total listed domestic firms decreased from 6,912 to 4,336 (World Bank, 2017). Despite China’s rapid growth, spatial concentration, which is a major indicator for agglomeration economies, is significantly higher in the US. The World Bank discovered that the ten largest metropolitan areas in the US contributed approximately 38% of GDP, where as in China it was 19%. Hence, the effect of agglomeration in furthering the reshoring process.

Transportation cost

The price of intermodal US freight has increased over time and motivated local manufacturing to prevent long distance transportation from US ports to final destinations. Also, recent trends in the exchange rate have contributed to the reindustrialisation process. In 2005, China switched from a fixed to a floating exchange rate regime. Following this, the currency has been revalued frequently, changing from 8.28 to 6.05 CNY/USD in January 2014. But after January 2014, the Yuan was devalued to 6.81 in December 2016. Despite the recent trend for devaluation, the change to a managed floating exchange rate has mitigated China’s comparative cost advantage over the United States, but the Yuan is still undervalued by more than 10%.

Beside ‘promoting’ factors, two factors can be identified which have a rather contrasting picture in terms of their influence on the reindustrialisation process: (i) business incentives; the Chinese government is able to provide a more investor-friendly business climate than the US government. A lower corporate income tax and the scope of Special Economic Zones (SEZs), which touch on laws, taxation, finance, regulations, labour, customs and other aspects, offer a broad and combined range of incentives. In the US, a high corporate income tax rate, foreign trade zones (which exempt companies only from customs obligations), and other minor state-based individual business incentives with lower economic scope than SEZs dominate the country. Therefore, the overall business climate in the US has a weakening influence on the reindustrialisation process; (ii) international ocean shipping costs, which have fallen and theoretically allowed companies to set up production plants wherever they want without fearing that high shipping costs might reduce their profit margins.

 

Behrooz Gharleghi

Senior Researcher in Economics, Dialogue of Civilizations Research Institute

 

A longer version of this article will be published in the International Journal of Business and Globalisation in the near future.

 

References

Abbasi, S. M., Belhadjali, M., and Whaley, G. L. (2014). USA Reshoring: A Review of the Literature. Competition Forum, 12(1), 22–24.

Cunningham, N. (2018). U.S. Shale Drillers To Become Profitable For The First Time. Oil price.com. Retrieved from https://oilprice.com/Energy/Crude-Oil/US-Shale-Drillers-To-Become-Profitable-For-The-First-Time.html.

De Felice, F., Petrillo, A., and Silvestri, A. (2015). Offshoring: Relocation of production processes towards low-cost countries through the project management & process reengineering performance model. Business Process Management Journal21(2), 379–402.

Goodwin, D. (1992). The Way We Won: America’s Economic Breakthrough During World War II. The American Prospect. Retrieved from http://prospect.org/article/way-we-won-americas-economic-breakthrough-during-world-war-ii.

Humphries, M. (2015). China’s Mineral Industry and U.S. Access to Strategic and Critical Minerals: Issues for Congress. Congressional Research Service, 7-5700.

Morrison, W. M. (2013). China’s Economic Rise: History, Trends, Challenges, and Implications for the United State. Congressional Research Service, RL33534.

Sirkin, H., Zinser, M., and Hohner, D. (2011). Made in America, Again: Why Manufacturing Will Return to the U.S. Boston Consulting Group. Retrieved from https://www.bcg.com/documents/file84471.pdf.

 

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Behrooz Gharleghi
Behrooz Gharleghi has had several academic positions. He worked as an associate professor at the Faculty of Business and Management, Asia Pacific University of Technology and Innovation, Malaysia, from 2013 to 2018 and he served as the head of the Graduate School of Business at the university for 2017. He is currently an affiliate research professor at the CENTRUM Católica Graduate Business School, Pontificia Universidad Católica Del Peru. He has been a senior lecturer of Business and Economics at the Asia Pacific University of Technology and Innovation, Malaysia, a lecturer at Linton University College, Malaysia, and a lecturer at Payame-Noor University, Iran. He has published several articles in the area of financial economics, monetary economics, business, and management. He has led on and collaborated in various internal and external research projects, especially from the Malaysian Ministry of Higher Education. Recently he received the 'Outstanding Researcher in Economics' award from the Venus International Foundation's 'Venus International Research Awards' in India in October 2017. He holds a PhD in Economics from the Universiti Kebangsaan, Malaysia, a Master’s degree in Economic Sciences from Azad University, Iran, and a Bachelor’s degree in Economics from Ashrafi/Isfahan University, Iran.