News website headlines, such as those on msnbc.com today, battle each other for my attention. While I'm fascinated by the six-year-old spelling prodigy Lori Ann Madison, the youngest speller ever in the National Spelling Bee, reading her story had to wait until I read the one under the headline "China slowdown threatens US factory revival." The article by Economics Reporter John W. Schoen describes a catch 22—what looks like it could be a panacea for U.S. manufacturing job loss may actually exacerbate our economic woes.
Featured in the article is a fabricator who has appeared in the pages of The FABRICATOR® magazine and on thefabricator.com in articles, blog posts, press releases, and podcasts—Drew Greenblatt of Marlin Steel. The title of this post comes from Greenblatt's comments about rising wages in China giving U.S. companies second thoughts about moving their manufacturing jobs to China. That's a good thing—right?
Greenblatt said, "All of a sudden, if your math says, 'I've got to pay the guy $7.50 an hour in Shanghai or I can hire a guy for $12 an hour in Canton, Ohio,' why would I do it in Shanghai? I've got intellectual property issues over there, there's no rule of law, there's a lot of corruption. Plus if I make it here, I get the stuff six weeks faster: there's no freight. So a lot of the reasons to push jobs overseas are starting to fall apart."
As noted in the article, "Other companies are doing the same math. A report in March by the Boston Consulting Group found seven industry groups, selling about $200 billion in Chinese-made imports, that will likely shift production back to the U.S. to duck rising costs in China. That could add between $20 billion to $55 billion to U.S. gross domestic product before the end of the decade, the authors estimated.
"U.S. export gains in Chinese and other global markets will create between two million and three million American jobs, lower the U.S. unemployment rate by between 1.5 to 2.0 percentage points and cut the U.S. merchandise trade deficit by 25 to 35 percent, according to the study.
"China’s economy is still growing at a pace that would feel like wild prosperity in larger developed economies like the U.S. or Europe. But as the last major engine of growth, some forecasters are cautioning that the loss of Chinese demand threatens to spark a wider global slowdown that will crimp demand for U.S.-made products.
"U.S. manufacturers are 'about to face a negative shock from the hit to exports from the deepening European downturn and the spreading impact on demand in other key trading partners in Asia,' said David Rosenberg, chief economist at Gluskin Sheff."
Greenblatt doesn't necessarily think this is a huge problem for U.S. manufacturers. "Most American factories don’t even consider exporting—it doesn’t even cross their mind," he said. "Because it’s easier sell to Denver and Duluth than it is to Denmark."
I hope Greenblatt is right, but don't expect the U.S. economy to escape a China slowdown or the slowdowns in other parts of the world unscathed. As Schoen wrote, "It remains to be seen how badly U.S. manufacturers would be hurt by a wider, deeper coordinated global slowdown. Once recessions spread around the world, they become more difficult to reverse."
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About the Author: Vicki Bell
As most of the big global companies go through the recession, they are shifting their procurement strategies from worldwide to regional. This is to minimize shipping and other cost associated with overseas sourcing.
It now appears that North America is a region that many companies want to resource their manufacturing because the overall cost are now lower than overseas. The overseas sourcing learning curve has taught many procurement people the true cost of going to China for manufactured product. These lessons have been very costly over time for all parties including the American manufacture.
The local sourcing trend is happening in every major region in the world. Big US firms are building plants overseas not to import to our market, but to service that region. Likewise, other foreign corporations are building plants in the US to manufacture products for the North American market. The European and Japanese auto makers have been doing this for some time now.
This is having a leveling effect world wide. As sourcing becomes regional, it boost the local economies by building infrastructure that supports this growth. It also forces economies to become more resourceful and efficient with resources or risk becoming over priced and subject to outside competition.
The American economy is naturally resourceful. Without intervention, our economy will find, process, distribute, and market products more efficiently than any other in the world. This inherently makes us more competitive and gives us a big advantage in building our markets.
But, and this a big but, our markets have been severely distorted by government intervention since the 1930's. This intervention has become very pronounced since the 2008 elections. We are no longer able to self correct as all markets need to do to remain competitive and efficient. This is the main reason that the recession has been on going since 2007. Traditionally, a recession in a free market will bottom out and start recovery in about eighteen months if the politicians and bureaucrats don't try to "help" with laws and regulations that hinder the recovery. We have suffered an unbelievable amount of this so called help in the past five years.
If we get side swiped by a China down turn, it will be because we aren't nimble enough to redirect resources in the most efficient manner. I lay this directly at the feet of our policy makers that are making the rules. They and they alone are responsible for the condition that we find ourselves in.