How Does America “Reshore” Skills that Are Disappearing?
While some U.S. industries are bringing manufacturing back to our shores, many others remain skittish about the paucity of workers here who still know how to make things. Can their fears be allayed?
By TODD OPPENHEIMER
Editor’s Note: An update to this story’s original version, first published in 2016.
When I talked on the phone recently with Harry Moser about all the fuss being made in this year’s presidential campaign about possible new taxes, he offered a few ideas that are rarely discussed, but which could appease both liberals and conservatives. Moser is the founder of The Reshoring Initiative, a Florida-based organization dedicated to bringing manufacturing back to America. And he thinks the problem, in both offshoring decisions and tax discussions, is that people don’t accurately do the math.
“If I were setting tax policy,” he told me, “I’d take corporate tax rates down to zero.” Now, before you laugh, as I almost did, consider this: In 2018, corporate taxes accounted for only 6 percent of federal revenue. So, given the larger amount that payroll taxes contribute (35 percent of federal revenue), the still larger sum from personal income taxes (50 percent), and corporations’ ability to put factories wherever they want, Moser thinks it makes more financial sense to leave the corporations alone—and just raise income taxes.
While Moser describes himself as “a good Republican,” he believes those income tax hikes should fall on the wealthy. By his accounting, if top income tax rates were increased from the current 37 percent to around 45 percent, that would make up for the $200 billion (last year’s take) that would be lost by eliminating corporate taxes. As a windfall, American corporations would be encouraged to stay home, which would lead to more homegrown wages, and thus more income tax revenue. In other words, trickle-down economics that might actually happen.
During your first meetings with overseas contractors, you’re likely to be shown some impressive prototypes, manufactured by a relatively skilled production team. By the time the second and third rounds of deliveries are made, the quality of the materials has declined. “The work isn’t being done by the A-team anymore,” says Harry Moser of the Reshoring Initiative. “The plant now has its C-team on the job.”
Moser has applied the same cold logic to the economics of offshoring.
When the offshoring movement first began, way back in the 1960s, Chinese factory workers were being paid the abysmal wages often quoted by people like Bernie Sanders: an average of 50 cents an hour. But those wages have been rising every year—as China’s economy has grown, as its people have gotten richer, and as its manufacturing skills have improved.
Today, U.S. industries have to pay Chinese laborers an average of $3 to $4 an hour, still a meager wage. But when those labor costs get added to the troubles with doing business overseas—the constant miscommunications, the difficulty supervising production, the often sub-standard quality, the returns, the risk of intellectual property theft (read knock-offs), the cultural resistance to innovation, the frequent labor turnover, the long-distance shipping costs (and the carbon emissions that result), the delayed shipments to a market demanding increasingly fast deliveries, the downside of minimal regulation overseas, the political instability there, and the negative publicity that offshoring generates—all of a sudden, building a new U.S. factory starts to look pretty good.
In dollars and cents, according to The Reshoring Initiative, those extra factors add 15 to 25 percent to the cost of any item made in an overseas factory. So, in the end, maybe cheap Chinese labor isn’t so cheap after all.
Given offshoring’s many pitfalls, why didn’t American business leaders see them coming? It turns out that for many years, those pitfalls were somewhat hidden. During a U.S. executive’s first meetings with overseas contractors, Moser says, he or she is likely to be shown some impressive prototypes, manufactured by a relatively skilled production team. By the time the second and third rounds of deliveries are made, the quality of the materials has declined. And, as Moser puts it, “the work isn’t being done by the A-team anymore. The plant now has its C-team on the job.”
As this paradigm took shape (call it the Asian version of that old cliché, there is no free lunch), more and more companies started to “reshore” operations that they once gleefully offshored. Over the last decade, according to data Moser has compiled, the U.S. has gone from losing approximately 140,000 manufacturing jobs each year to regaining nearly 800,000 jobs since Moser’s project first launched, in 2010.
Under the Trump Administration, reshoring has indeed picked up a bit, but the uptick seems provoked only partly by the president’s new tariffs on Chinese imports. According to the American Chamber of Commerce, some 40 percent of U.S. companies in China have begun moving manufacturing out of the country; of those, only 15 percent of are coming back to U.S. shores. The vast majority are going elsewhere, primarily to new low-cost frontiers in Southeast Asia and Mexico. By The Reshoring Initiative’s calculations, there are still three to four million manufacturing jobs overseas that could be brought back here—“a huge potential for U.S. economic growth,” Moser writes.
Moser believes there are two other important reason that more companies are coming back to U.S. shores: the Trump Administration’s cuts in both taxes and regulations on industry. Unfortunately, both of those measures cut both ways.
Take deregulation, which enjoys an extensive and very mixed history. The effort always begins, and is heavily promoted, as a long overdue effort to reduce unnecessary red tape, and the excessive government spending on the bloated bureaucracies that unspool all that tape. Today’s government agencies have clearly grown far too large, but many regulatory cuts not only weaken vital protections for both workers and the environment, they also turn into favors done for business cronies outside the official channels of administrative review. One of the most dramatic examples of this syndrome was initiated in the mid-1980s, by President Ronald Reagan, and carried out behind the scenes, often in questionable fashion, by his vice president, George H.W. Bush. Trump has taken a much more preemptory approach to this game, bottle-necking regulations before they get put on the books.
As for the tax cuts, arguments are always made on both sides about whether taxes are too high or too low. But consider this: In 2011, when Warren Buffett famously reported that he paid a lower tax rate than his secretary, it was soon determined that Buffett’s case was an anomaly. Regardless of the loopholes available at the time, the tax rate for most wealthy Americans was higher than it was for the middle class. This fall, however, the numbers changed. For the first time on record, the 400 richest Americans last year paid a lower tax rate than any other income group. Maybe it’s finally time for a “good Republican” like Moser to persuade a president the case to raise taxes on the wealthy. He’s now in a position to so. In August, 2019, Moser was appointed to the Department of Commerce’s Investment Advisory Council.
Beyond any production problems overseas, the future of manufacturing is likely to be driven by a far bigger trend: the dawning of the age of the smart factory. This is the moment when today’s digital capabilities—for modeling software, remote control, prototype testing through 3D printing, even virtual reality—intersect with real machinery for making stuff. Some industry leaders describe the new factories following this model as “cyber-physical systems,” which will lead to a new age of manufacturing that the Germans call “Industry 4.0.”
Christine Furstoss, who is Technical Director of Manufacturing & Materials Technologies for General Electric, is so into these possibilities that she helped GE launch a program called the Brilliant Factory Initiative. “For you gaming fans,” she writes, “it’s like massive, multi-player online gaming meeting the real world of manufacturing.” Furstoss foresees an unprecedented range of efficiencies in this future, as computer modeling and 3D printing help factories speed up the testing of new components, eliminating waste in the process. “It would essentially create a self-improving factory that never stops.” With 3D printing, for example, “you can come up with a design, print it out in an hour, and then test it in an engine that runs at 2,000 degrees.” In some GE factories, she says, workers are already working with mechanical partners, called “co-bots.”
Boosterism or not, GE has been putting its money where its mouth is. It has renovated factories in Louisville, Kentucky, and elsewhere that make water heaters, refrigerators, and washing machines—a move that, by 2016, had allowed the company to bring 1,300 jobs back from China. To underscore just how bright the future looks to GE, the company is now selling off its iconic appliance division to focus on a bigger project: upgrading 400 factories that make everything from jet engines and medical imaging scanners to power-generation equipment and locomotives.
This kind of activity suggests that American business leaders are starting to make an entirely new set of calculations. Yes, the U.S. might impose higher costs than the Chinese do for items such as labor and regulatory compliance. In the coming years, however, if that expense buys innovation, efficiency, and dominance of new markets, what’s not to love?
Should those calculations succeed, it will be thanks to what might be called the Leapfrog Principle of Economics. The pattern goes like this: After Henry Ford invented the assembly line, the U.S. dominated manufacturing for much of the coming decades. Then it was Asia’s turn, beginning with Japan. In the 1980s, when Japanese industrialists introduced new methods of efficiency and automation, its economies—which were further helped by a rise in the value of the American dollar—jumped over our greasy assembly lines, stealing our business in the process. Now, quite possibly, it’s our turn to retake the lead, with all the technical innovation pioneered in recent years by American entrepreneurs—as long as we can find enough workers with the right skills.
No wonder countries like Germany and Switzerland have done better a job of keeping their manufacturing sectors healthy. “They get the B students, and they’re better trained,” Moser says. “We get the C and D students, and we don’t train them very well.”
Some manufacturing leaders are starting to connect the dots on this picture. Oklahoma recently developed a whole new trade-school program devoted to the next wave of automation. At one point, Tech Shop—an initiative that created high-tech shop classes for youngsters and adults—had 10 thriving centers around the country, along with one in Paris, one in Abu Dhabi, and another in Tokyo. (In 2017, the venture abruptly closed, declaring bankruptcy, but was soon repurchased for revival as Shop Build.) During Tech Shop’s heydey, Mark Hatch, the venture’s CEO, said he had people come in all the time, just for the fun of building some new gizmo. A week later, when their invention was finished, so many people liked what they had made, they were able to “start companies the next day.” In Los Angeles, another initiative launched by the National Toolmaking and Machining Association has been training people for tomorrow’s factories for years, landing high-paying jobs for graduates even in the depths of the recession.
The problem is that all this activity still lives in the job market’s shadows. “People still have this image of 1950s style factories,” says GE’s Furstoss. “Dirty, boring places where your days are full of piece-work.” American culture doesn’t exactly help the situation. Everywhere one turns, it seems, the people getting glamorized in America are celebrities, financiers, and other big winners in the “new” economy. No wonder countries like Germany and Switzerland have done a better job of keeping their manufacturing sectors healthy. “They get the B students, and they’re better trained,” Moser says. “We get too many of the C and D students, and we don’t train them very well.”
While all these job opportunities sound enticing, haven’t we been here before as well? The history of the American labor market is littered with promises of new booms in one industry or another, only to see those jobs fade away the next decade. Remember the booms and busts of the oil industry in one state after another? Or the chronic call for more engineers?
There is growing evidence, however, that this movement might have legs. One reason is that America’s financial stability might literally depend on it.
“The ultimate success of reshoring will be if we can eliminate or minimize the trade deficit,” says Moser. Like many economists, Moser is alarmed at the slowly ballooning level of debt the U.S. has started to carry. Not coincidentally, in his view, the growth of that deficit closely matches our offshoring activity—starting relatively small in the latter decades of the 20th century, then rising dramatically from 2000 to 2007, after President Clinton loosened our trade relations with China. Today, despite the Trump Administration’s aggressive business policies, our trade deficit exceeds $600 billion—the largest in the world, and still growing. While the U.S. pays no interest on that debt, the larger it gets, the more it weakens the dollar. And the more other countries lose confidence in our economy. “If you keep that up, Moser says, “eventually the U.S. dollar isn’t worth anything, and the dollar collapses.”
At some point, Moser believes, the U.S. will be forced to reshore jobs here just to survive. This grim scenario leaves him with yet another idea—this one not nearly as rosy as his solution to immigration.
In Moser’s view, a significant new wave of jobs will come back to the U.S. in one of two ways. The first is “the smart way—getting ahead of the manufacturing curve in all the ways that people like Furstoss envision. The second is “the painful way—we continue letting events take care of themselves, while suffering more and more each year from growing trade deficits. If the latter scenario unfolds, Moser fears we will trade places with China and become the world’s new grunt country. “And the Chinese will send their dirty laundry here to be done by Americans.”
The more likely possibility, of course, is some muddled combination of the two: a little advanced planning, a lot of laissez-faire. Now, however, the U.S., and the world as a whole, faces daunting challenges for industry on many increasingly desperate fronts—our aging infrastructure, our growing renewable energy needs, and the rapidly worsening consequences of climate change, just for starters. Once the depth and scale of these problems eventually sink in, maybe our political and industrial leaders will finally begin to pursue the “smart way” to bring jobs back to our shores.