The Barrel of Oil is Half-full in the Eyes of Some Manufacturers

Posted on July 8, 2008 by David Laidlaw 

The U.S. has been losing manufacturing jobs overseas, especially to China, for about three decades due to the availability of cheap labor. In China’s case, an artificially weak Yuan and lax environmental and labor regulation helped increase its cost advantage.

This three decade trend may be nearing the end. The rate of U.S. manufacturing job loss is slowing and even some jobs are returning to the U.S. One reason is that as manufacturing increases in China, the competition for labor increases and drives up wages. Increasing manufacturing also increases pollution. As a result, the Chinese government has begun to regulate company waste; cleaner technology means higher costs. Lastly, the Yuan has finally been allowed to appreciate after years of the U.S. voicing concerns over Chinese currency policies.

The real tipping point is the price increase in oil resulting in higher transportation costs. The cost of shipping a standard, 40-foot container from Asia to the East Coast has tripled since 2000. Companies are reacting by relocating manufacturing closer to the end-market. U.S. Companies that kept plants afloat in the U.S. over the last few years are able to take advantage as they shift production back to the U.S.

Other companies are canceling plans to move production to China. While not adding jobs, it is at least slowing the loss. Craftmaster Furniture in North Carolina was bought by a Chinese manufacturer with plans to send 40% of production to China. After sending about 20% of its capacity overseas, the company has stopped.

Of course, the U.S. isn’t the only option for manufacturing other than China. Mexico provides cheap labor and lower transportation costs than China. And the numbers don’t point to a manufacturing boom in the United States. Manufacturing job losses continue to mount (41,000/month in 2008) mainly due to the sinking auto and construction markets.

Longer term, the rate of job loss should continue to slow. This does not mean jobs will return, just that less companies are going to automatically send jobs overseas. The current oil prices are unsustainable—meaning the cost of transportation will become less of an issue. However, other factors reducing China’s cost advantage are permanent and will become a bigger issue as the price of oil falls. Wages will continue to grow. Once environmental regulation is in place it will be difficult to remove. And the Yuan is likely to become more market-driven not less.

Of course, another developing country could emerge offering cheap labor and an infrastructure to compete for manufacturing jobs.