Over the past 20 years, the boom in offshoring drove the U.S. goods trade deficit up by $640 billion a year, costing the U.S. 3-4 million manufacturing jobs. But one study revealed that 60% of offshoring decisions used only rudimentary cost calculations, typically just price or labor costs and ignored other costs such as freight, duty, carrying cost of inventory, delivery and impact on innovation.
Advanced manufacturing now helps level the global playing field. First, the number of labor hours per unit of output is reduced. Second, the gap in the labor cost per hour shrinks. For example, a highly skilled robot engineer in China makes 1/3 to 1/2 of American pay, and not the small fraction (5% or 10%) of the low-skilled Chinese workers. In addition, acquiring capital equipment is more expensive in China because of China’s value-added tax of 13% or 17% on imports. Fortunately, the U.S. can have automation and more jobs as it reshores.
The availability of a skilled workforce is essential for bringing jobs back, ranking second among the reasons given by U.S. and foreign companies moving jobs back or creating new manufacturing jobs here. When companies reshored and failed to find the needed workforce, the transition was painful. The good news is that the bleeding of manufacturing jobs to offshore has stopped. Reshoring balanced offshoring in both 2014 and 2015. In comparison, in 2000-2003 the U.S. lost a net 200,000 manufacturing jobs a year to offshoring.
Classroom discussion questions:
- Explain the TCO concept.
- Why is reshoring more feasible now than a decade ago?