Alan Tonelson: 'The Insourcing Boom That Isn't'

The current issue of our magazine (a subscription makes a perfect gift!™) has a two-part cover-story package. One is Charles Fishman's "The Insourcing Boom," which concentrates on GE and argues that U.S.-based manufacturing companies are finding it more attractive to do more of their work within our borders. The other is my "Mr. China Comes to America," which says that increasing costs and friction of doing business in China, and shifts in technology that allow very rapid-cycle production close to the market inside the United States, will encourage new companies to do more of their manufacturing work here rather than outsourcing it to China.

Alan Tonelson, of the US Business & Industry Council, is a long-time friend with whom I have often agreed on questions of U.S.-Japanese trade frictions. He completely disagrees with the premise of these two articles. In the spirit of free-and-full discussion, I turn the floor over to him. I have a brief response at the end.

The Insourcing Boom that Isn't
By Alan Tonelson [right]

According to the two feature articles in December's Atlantic, manufacturing in the United States is making an historic comeback.  In particular, changes in wages, energy costs, and technology around the world mean that China and other Asian locations no longer hold all the cards as manufacturing locations.  Even better, large and small American businesses increasingly are recognizing that producing - and innovating - back in the United States has become their most lucrative option.

Moreover, both "The Insourcing Boom," by Charles Fishman and "Mr. China Comes to America" by James Fallows state that much more is involved than domestic manufacturing's cyclical rebound from an historically painful recession.  As the former contends, the manufacturing revival "cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers."  In the latter's words, domestic industry's outlook is better today "than at any other time since Rust Belt desolation and the hollowing-out of the American working class came to seem the grim inevitabilities of the globalized industrial age."

Both authors provide numerous and seemingly impressive examples of insourcing and corporate start-ups that support these claims. They also present statistics on energy prices, U.S. and Chinese wages, and the post-2010 rise in American manufacturing employment.  But neither gives their readers the most important information they need to know about domestic industry's current circumstances and future prospects - that virtually no national- or global-level data show that American manufacturing is even continuing its recovery from recession, much less stealing the march on Chinese and other foreign rivals.  Indeed, nearly all of the most comprehensive statistics portray U.S. industry as still slipping further down the international ranks.

For example, during an historically sluggish American recovery, a U.S. manufacturing sector in renaissance mode should be growing faster than the rest of the economy.  That was true in 2010 and 2011.  But the out-performance is already over.  This year, the entire U.S. economy has expanded by only 2.06 percent after inflation.  Manufacturing output, however, has actually fallen - by 0.54 percent.

A manufacturing sector engineering a big secular rebound should be gaining share in its own home market - the world's largest single national market, and the one its companies should know best.  Yet new government data analyzed by the U.S. Business and Industry Council show that more than 100 advanced domestic manufacturing industries collectively lost American customers to imports worldwide last year.

In 2011, foreign-based producers supplied a record total of 37.57 percent of total American purchases in industries ranging from semiconductors to pharmaceuticals to ball bearings to machine tools and dozens of other capital-and technology-intensive sectors.  In 2010, when the industrial renaissance supposedly was stirring, the import penetration rate was 37.07 percent and in 1997 - the earliest data year - only 24.49 percent.   In fact, imports accounted for half or more of everything Americans bought in nearly a third of these industries, including construction equipment, metal-cutting  machine tools, laboratory equipment, turbines and turbine generator sets, and of course autos and heavy-duty trucks alike.

Companies losing market share rightly are almost never described as winners or viewed as promising.  Do industries losing market share deserve better reviews?

Nor is the growth of exports compensating for these losses.  Since plummeting during the Great Recession as American economic demand nosedived across the board, America's manufacturing trade deficit has rebounded much faster than the economy as a whole, and indeed hit a monthly record earlier this year.  This shortfall's strong comeback is an especially important and bearish indicator of U.S. industry's global competitiveness, since mainstream economic theory teaches that trade flows are the means by which market forces create the optimal global division of labor.  In other words, the countries that trade a given product most successfully are those that eventually will produce it most successfully, and vice versa.

The China story told by these data also clash with that told in the December Atlantic articles.  As fast as imports worldwide have been grabbing share of U.S. advanced manufactures' markets, the inroads being made by imports from China have been much faster.  And although these shipments started from a considerably lower base, they supplied more than six percent of all American purchases of these capital- and technology-intensive products last year.

As robustly as the overall U.S. manufacturing trade deficit has risen recently, the China deficit has recovered just as dramatically, and from a much shallower trough.  In fact, so far this year, the manufacturing trade gap with China has increased more four times faster than America's global trade gap.

Signs of American industry's weakness also emerge from comparing its growth rate with those of leading competitor countries.  Last week, the U.S. Labor Department reported that between 2009 and 2011, American manufacturing output expanded more slowly than industry in Germany, Sweden, Korea, Taiwan, and Singapore, and only slightly faster than manufacturing in Japan, whose industry is widely described as hemorrhaging competitiveness.  These years of course cover the period when the U.S. manufacturing renaissance allegedly was well underway.

Data for China were not provided in this survey of high-income countries.  Yet the consulting firm IHS reported this earlier year that in 2010 and 2011, America's share of world industrial output not only has fallen behind not only China's, but has been falling faster than that of the 27-nation European Union, whose economic problems are by now all too well known.

Other major problems with the articles revolve around insourcing claims themselves.  Do the new investments in U.S. manufacturing mean that outsourcing has stopped or has slowed significantly?  None of this essential context is presented.  But last July, a major Bloomberg News investigation spotlighted a study reporting that continuing outsourcing neglected by the news media has entirely offset the job creation credited to insourcing.

In addition, improved American competitiveness is far from the only reason for insourcing.  Scratch an instance of reshored manufacturing, and significant federal, state, and local government subsidies can often be found beneath the surface.  For example, according to GE official Kim Freeman, the $800 million Louisville appliance investment detailed in "The Insourcing Boom" was keyed by $100 million in such supports.  Over the last year, two New York Times articles have made clear that subsidies have been "increasingly important" spurs to new and retained domestic manufacturing investments.

Using taxpayer dollars to pay manufacturing companies to move or stay may make perfect sense in many cases.  And certainly most of America's major trade competitors engage in such practices pervasively.  But relying substantially on government inducements is likely a losing proposition for domestic manufacturing advocates.  After all, industrial rivals like China, Germany, and Japan are financially strong.  The United States remains saddled with enormous debts - many owed to these very countries, and is unlikely to win a worldwide subsidy competition.

American manufacturing still retains many strengths.  Some of it, moreover, may boast considerable growth potential.  But no one should underestimate the continuing weaknesses and challenges made clear by the most comprehensive, most detailed data.  Without presenting this readily available big-picture evidence, accurately describing domestic manufacturing's present circumstances and realistically assessing its prospects simply is not possible.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council, which represents nearly 2,000 small and medium-sized domestic U.S. manufacturers.  The author of The Race to the Bottom (Westview Press, 2002), Tonelson contributes to the Council's website, and can be followed on Twitter @AlanTonelson and on Facebook at Tonelsonontheeconomy. 
I will leave to Charles Fishman any response to the specifics in his article. For my part I will say that I don't think Alan Tonelson engages the main point I was making.

As my article said, we have been through a relentless decades-long period in which every observable trend seemed to be, and was, working against the feasibility of manufacturing within the United States. Alan Tonelson and his USBIC have been in the vanguard in chronicling those pressures. But, I explained, people close to the factory-floor realities in both the United States and China told me that changes beginning to be visible now seemed likely to alter those pressures. I wrote the story because people whose track record and judgment about technological trends I have learned to trust, over the years, told me these changes were worth noticing. Since they were talking about shifts that are just getting underway, the early trends they were talking about would not be captured in past manufacturing statistics, even those from 2011.

If the pattern of decline that Alan Tonelson lays out still prevails in 2015 or 2018, then the people I quoted will prove to have been wrong. If the pattern changes, their explanations will be part of the reason why. Thanks to Alan Tonelson for laying out his case.