The Cutting Edge – January 2004

Public Policy

New Study Shows Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness

In December 2003, the NAM’s Manufacturing Institute and the Manufacturers Alliance/MAPI issued a new study, “How Structural Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness,” by economist Jeremy A. Leonard.

The Leonard study introduces a “raw cost index” for manufacturers. This index compares the competitiveness of U.S. producers with those in its nine largest trading partners (See Table I), and compares costs before and after the cost multipliers have been weighed. “This study dispels the myth that most of our industrialized partners face higher manufacturing costs than we do,” Leonard said. “Shifts in international trade trends have generally been masked and our report shows that American trade is increasingly with developing countries where production costs are considerably lower than in the U.S. Our corporate tax burden is heavier than in eight of our nine largest trading partners, and pollution-abatement costs are significantly higher than in most other developed countries, including the so-called ‘green’ economies of Western Europe.”

Kenneth R. Hutton, WMMA® Executive Vice President, noted that “The Popkin Report identified several critical challenges facing American manufacturing. One of those was the dramatic rise in the cost of doing business within the U.S. The Leonard Report documents these costs and places them at 22% of the price of production for U.S. firms relative to our nine most important trading competitors.” (See Table II for details.) Hutton further observed, “This report validates what WMMA members have experienced in the internationally competitive woodworking equipment industry. Now the challenge is to turn this documented information into legislative and regulatory programs that promote, not hinder, manufacturing in this country.”
To view the entire report, please visit www.nam.org/costs.

Why was this study done?
Despite a clear return to competitive pre-eminence in the 1990s due to strong innovation and productivity gains, the position of U.S. manufacturers in global trade has shown a marked deterioration in the last five years.

Import penetration of the U.S. market has risen markedly since 1980, and more rapidly since the 1997-98 financial crisis in Asia and Latin America. The U.S. now has a trade deficit in the goods sector equal to one-quarter of all output of the domestic manufacturing sector. At the same time, the U.S. share of global export markets has fallen from a high of nearly 14 percent in the 1990s to about 10.7 percent in 2002.

That the U.S. manufacturing sector, which has spent the better part of two decades remaking itself into the envy of the world, now finds itself mired in a slow recovery leads to the inescapable conclusion that cost pressures outside manufacturers’ direct control have conspired to threaten the U.S. manufacturing leadership. This report quantifies the most critical obstacles.

Manufacturers, unlike some other sectors, face a cost-price squeeze because intense global competition prevents them from raising prices despite rising costs.

What are main findings?
External overhead costs from taxes, health and pension benefits, tort litigation, regulation and rising energy prices add approximately 22 percent to U.S. manufacturers’ unit labor costs (nearly $5 per hour worked) relative to their major foreign competitors.

The absolute value of the excess cost burden on U.S. manufacturers (nearly $5 per hour) is almost as large as the total raw cost index for China.

Taken together, external overhead costs offset a large part of the 54 percent increase in productivity wrought since 1990.

All four of the top U.S. developing country trading partners (China, Mexico, South Korea and Taiwan) have dramatically increased their U.S. trade share since 1990 and are orienting themselves toward high-end manufactured goods such as industrial machinery, telecom equipment and office machines, and transportation equipment.

To reduce and eventually eliminate this premium gap (22%) found in the Leonard study, the following recommendations are made:

• Reduce the corporate tax burden and reform the treatment of foreign-source income.
• Reduce the burden of rising health coverage costs and encourage greater consumer responsibility for health status and coverage costs.
• Reform rules for funding pension plans to avoid devastating cyclical swings in funding requirements.
• Undertake serious legal reform by curtailing frivolous lawsuits, placing large, nationwide class-action lawsuits in federal court, and negotiating fair and equitable compensation to legitimate asbestos claims.
• Establish a more objective cost-benefit review process for proposed and existing regulations that takes full account of adverse business impacts.
• Adopt changes in land-use regulations to allow access to undeveloped domestic natural gas reserves.

* Taken together, the aggregate advantage of our nine largest trading partners shaves an average of 18.3 percent from their unit labor costs relative to U.S. manufacturers. This implies that the actual hourly U.S. unit labor costs ($24.30 in 2002) would need to fall to $19.85 to offset this burden. Because $24.30 is 22.4 percent greater than $19.85, this is equivalent to stating that domestic cost pressures add 22.4 percent to U.S. unit labor costs in manufacturing relative to its major trading partners.