In Make it in America (2011), Andrew Liveris, CEO of DOW Chemical, highlights a range of factors that pose significant challenges for the American economy in general and the manufacturing sector in particular.
He refers to a study from the National Association of Manufacturers that places the excess US cost burden at 17.6%. Cost burden calculations include corporate taxes, employee benefits, tort costs, pollution abatement compliance and energy costs.
This excess burden is a real force in business decision-making. Let’s assume a manufacturer plans to build a facility that costs half a billion dollars. That 17.6% translates into $88 million, creating a strong incentive to at least consider locating operations elsewhere.
The 2011 Structural Cost Report (Manufacturing Institute) places that figure at 20%, when compared to similar costs for the nine largest US trading partners. The cost burden has increased 2.4% since 2008.
According to the report:
- Corporate tax rates and employee benefits represent 85% of the cost differential for the US when compared to its primary foreign competitors, up from 75% in 2008.
- Tort costs have declined since 2006, and this category now represents only 1.6% of the cost differential.
- The real costs for pollution abatement compliance are unknown, because current relevant data is unavailable. The last survey was completed in 2005.
The report, therefore, treats pollution abatement compliance costs as “unchanged,” because current real costs are not available. This means the 20% figure may understate the actual burden.
Let’s return to our example. That half-billion dollar manufacturing facility is now facing an excess US cost burden of $100 million, or possibly more if the true cost of pollution abatement compliance were known.
Liveris notes that politicians focus on labor costs, a concept all of us can grasp, but they fail to understand or address the significant impact structural cost factors have on US-based manufacturing. Until these problems are resolved, we will continue to struggle in world where US manufacturers are bearing a cost burden that is at least 20% greater than our primary competitors.
The incentive to locate outside the US is stronger in 2011 than it was three short years ago. There are many forces at play, but this fact is sobering.
Which brings us back to the initial question: If we were the decision-makers for a major manufacturing concern, why would we choose to make it in America?
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