The report notes that the US is still the world’s largest manufacturer, and produces about 20% of all global manufacturing output. Perhaps surprising to some, exports have fueled a considerable amount of US manufacturing growth. Exports have grown by 70% since 2001, and represent a startling two-thirds of the growth of US GPD.
The reduced gap in the delta between US structural costs and major competitors is coming from a combination of progress in the US in some cost areas and rising costs in other countries in others.
For example, the report notes that health care cost increases have moderated a bit in the US, there has been progress made in tort reform, regulatory costs, and pensions costs, the latter of which are declining as more companies move to 401ks and other “defined contribution” plans versus pensions.
Conversely, social benefit spending and environmental/regulatory costs are rising in many of the other countries, including China, the report says, as well as raw structural costs. Those costs doubled in Mexico from 2002 to 2006, for example, which may seem almost impossible, but is true, the report says.
This “illustrates a common pattern in economies in the later phases of industrial development: After a period of falling unit labor costs driven by capital investment, wages eventually start to increase faster than productivity, which perforce leads to rising unit labor costs,” the report notes. “In Mexico, hourly direct pay has increased by 55 percent since 2000, but productivity by only 27 percent. Recent examination of trends in China reveals that it too has seen wage growth well in excess of labor productivity growth.” Korea has also seen rapid wage inflation.
Taxes and Energy
The report finds the most burden is in the US corporate tax rate; it also found the previous US advantage in energy costs is shrinking.
“High corporate tax rates continue to be the single most significant drag on manufacturing cost competitiveness,” the report says. It adds that while the US has kept manufacturing taxes steady, many other countries have lowered them in recent years to give strength to their producers. It goes on to forecast that a cut in the corporate tax rate of 5% would lead to the creation of 500,000 US manufacturing jobs.
On energy, the report says that government policies have kept the US from fully leveraging its advantages in natural gas supplies, and that, as a result, the US energy advantage is shrinking over other countries.
“It is important to realize that a decade ago the United States enjoyed energy prices on the order of 30 percent lower on average than its major trading partners, implying a cost advantage of more than double that of today,’ the report says.
The report concludes by noting that the US should not rely on a falling dollar to drive global competitiveness and exports – a conclusion especially pertinent now given the steep run up in the dollar of late, after several years of decline.
“Further leveling the playing field with regard to structural costs will allow U.S. manufacturers to compete and win in the global economy irrespective of the vagaries of currency exchange rates,” the report says.
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