Could fuel prices bring manufacturing back to the US?

Great Debates
#1

While there will be up and down fluctuations, the price of fuel, like the price of everything, is ultimately going nowhere but up.

Currently, a huge percentage of manufacturing of the goods that are purchased in the US is performed elsewhere. The reason often given is that the cost of manufacturing is less expensive in other countries than it is here.

But of course this is not quite the whole story. The cost of manufacturing PLUS shipping of raw materials and finished products is cheaper there than those costs are here.

As the cost of transportation rises, this equation could go through some changes.

The US is a large market. At what point would it make more economic sense to manufacture the products we buy in the US, in the US? How far away are we from such a time?

#2

Bump, because it’s a terrific question.

My understanding (and I think I’ve seen a cite of this recently, but can’t recall where) is that relative to other modes of transport, long-haul container shipping is really cheap. Some stuff goes by air, I suppose.

To the extent that those costs rise, both US exports and imports can be expected to fall relative to what they otherwise have been. This would mean an increase in manufactures and a decrease in production of comparative advantage services as the “technology” of making manufactures via international trade becomes more expensive.

Aside from the international margin costs - that is the difference between the (“free on board”) price that (say) Chinese exporters receive and the landed duty paid US price at the port gate - there is also the issue of energy intensity in production of the goods and the domestic margin services involved in facilitating transactions to the port (for exporters) and domestically. My strong guess is that US production generally is more energy intensive than production in China. That is, ignoring international transport costs, US industries would suffer a reduction in competitiveness due to increased energy prices.

But the effect on manufacturing (and maybe the overall effect) would depend on the relative energy intensities of manufacturing versus other sectors. To figure that out would require knowing about the intermediate input structure of the various sectors. A computable general equilibrium model (such as GTAP) would be the way to make a good guess.

For anyone wanting to think about this, I recommend thinking of the US current account deficit as fixed in the medium term (ie determined by US public and private saving and foreigners’ willingness to hold US assets).

So, the effect of increased international transport costs on US manufacturing is probably small, but positive (and the effect on US exportables equal and opposite). The effect on competiveness of increased energy costs is likely to be bad for US trade-oriented sectors.* How this pans out for manufacturing relative to other sectors is very difficult to say without a lot of work.

*Note that this is just bad in the narrow sense I’ve mentioned: competitiveness of certain sectors. To the extent that there are uncompensated externalities associated with energy use - and there is very good reason to think there are - increased energy costs may improve other parts of the economy

#3

The Chinese (or at least some of them) seem to be anticipating this possibility: Chinese company to open soy sauce plant in Georgia.

#4

Does this mean I have to learn Mandarin?

#5

This is one of those truisms I’d love to see explored. It actually seems to me that a large part of what we consume is made right here in the U.S.A., and that assumptions about the death of the Ameican industrial sector are a little exaggerated.

I’m not unaware that we import a lot of stuff from China, but what’s the actual percentage?

#6

Why would it be?

#7

As labor costs are also a critical factor in the exodus of manufacturers from the States, I’m guessing that transportation and energy costs could rise a lot higher before it would be cost effective to move all that manufacturing back to the U.S.

#8

My usually stellar Google-Fu is failing me on this one.

Here’s a Businessweek article on the subject from two years ago, which seems in line with your opinion.

I assume they mean in terms of dollar value, since I don’t know how else you’d measure it. They don’t seem to say, at first glance, where these numbers come from.

Still, it’s a pretty good article.

#9

My info might be 2 or 3 years out of date, but according to the book China Inc., The US manufacturing sector’s output has been growing quite steadily in the last few years, despite all the competition. Don’t confuse “employing less people” with “dying”.

#10

Another question in the same vein would be: How high do energy costs have to be before we stop shipping components outside the country to be assembled? Mexico does a lot of work like that. We ship the parts to them, they put it together, then ship it back. At what point is it cheaper to just employ people here to do the same thing?

I hope this thread takes off…this is a very interesting topic I would like to see discussed in detail.

#11

(shrug) I would expect that energy costs would have to be ruinously high before it would be cost effective to move all that manufacturing back to the states. The real issue is the relative cost of labor, not the price of energy. Why pay an American a living wage when you can pay a Filipino, Mexican or Chinese a sweat shop wage? Energy costs would have to be sky high to overwhelm that advantage–and if energy costs ever get that high, the world’s economy is probably going to be in a lot of trouble.

#12

Probably. But what about new manufacturing? I could see building a new plant incorporating local assembly, with a high degree of automation to keep the numbers low. It might soon turn into a selling point: Locally-made. But you are probably right…it is too far into the pendulum to reverse the trend right now.

#13

Come to think of it, I think I’ve used the term in a really confusing way.

I didn’t mean energy intensive in the sense of “how much energy does it take to make a dollar of GDP”. That’s an interesting thing to look at, though - check out this excel file and draw a picture for the US and China: China’s use of energy per dollar of GDP is a third of what it was in 1980! The US’s has fallen by about a third, which is less spectacular, but pretty impressive. You can also see this nice picture from Wikipedia - which gives a good hint as to why “energy efficiency” is a tricky term (Bangladesh is not energy efficient in any meaningful way).

What I did mean by energy intensive was “what proportion of total production costs are accounted for by energy relative to other costs”? This is going to be a different thing from the thing in the previous paragraph because China is much less productive than the US. You could draw a picture of how much labour it takes to make a dollar of GDP and it would show the same pattern.

After all that, why do I think that energy as a proportion of costs is liable to be higher in the US than China? Because China is labour abundant relative to the US and firms will use more labour intensive and more capital and energy extensive modes of production. It’s still just my guess, though.

#14

Labor costs have diminished through the years due to automation. But, no way we compete with India and China. They work for a fraction of the rates we pay. The idea of an engineering degree obtaining work is ludacrous. They have no technical advantage. They just work a hell of a lot cheaper. They also can build plants without worrying about the evironment. We built machinery to ship to Asia and all the worker safety equipment was removed.