Tillam­ook cheese fac­tory in Oregon

This year, man­u­fac­tur­ing jobs have been on the rise in the United States. Jobs that used to be per­formed over­seas are now being held by Amer­i­cans. Given that Pres­i­dent Obama is being held account­able for the state of the econ­omy, it’s worth exam­in­ing the forces behind this move­ment. Why is this hap­pen­ing in 2012?

It’s a com­bi­na­tion of fac­tors, but the two largest appear to be China and energy costs. I’ll show you what I mean; the two are inter­twined. We can start with a brief history. 

China became a man­u­fac­tur­ing pow­er­house over the past two decades. The nation has large quan­ti­ties of avail­able land for fac­to­ries, and a sub­stan­tial sup­ply of coal for elec­tric power. Cou­ple this with a labor force that has been will­ing to work long hours for low pay, and you have a com­pelling foun­da­tion for manufacturing.

Also, if you look at the graph to the right (you can click on it to see it in full size), you’ll note that oil prices remained fairly sta­ble from 1986 to 2003, and at real prices match­ing those in place in 1973. This made for par­tic­u­larly inex­pen­sive trans­porta­tion costs, mak­ing it afford­able to man­u­fac­ture goods in China for sale 7,000 miles away in the United States.

Nearly every prod­uct cat­e­gory you can imag­ine avail­able for sale in the United States is being made in China today. There are a few excep­tions, such as per­ish­ables (such as fresh foods) and many large, bulky items (such as auto­mo­biles), but those have been more the excep­tion than the rule.

Why has this changed? As I said, it’s China and energy. Let’s look at each in turn.

Man­u­fac­tur­ing costs in China have been on the rise in recent years, as wages have slowly inflated over time, and down­stream com­pa­nies have been demand­ing bet­ter work­ing con­di­tions for Chi­nese labor­ers in the con­tracted fac­to­ries. Cou­ple this with the stag­nat­ing wages of their Amer­i­can coun­ter­parts, and the wage gap, while still sig­nif­i­cant, has been shrink­ing over the past two decades.

On top of this, China’s rep­u­ta­tion was tar­nished in 2008 when it was dis­cov­ered that raw mate­ri­als sup­pli­ers for food prod­ucts were adul­ter­at­ing their prod­ucts with melamine in order to boost the appar­ent pro­tein con­tent, so as to under­cut the com­pe­ti­tion on price. This proved to be the tip of an ice­berg of qual­ity issues with Chi­nese prod­ucts, and it quickly became appar­ent that sup­ply chains in the coun­try were suf­fi­ciently con­vo­luted as to ren­der it infea­si­ble to ade­quately assess the qual­ity of many types of prod­ucts. Con­sumers in the United States began to ques­tion the source of food and cos­met­ics in a way that they hadn’t before.

More­over, down­stream pack­agers and retail­ers began to have sim­i­lar qual­ity con­cerns. With sup­pli­ers 7,000 miles away, and prod­ucts being shipped by boat, it takes sev­eral months for pro­duc­tion qual­ity issues to man­i­fest them­selves at the point of sale. Cor­rect­ing a prob­lem, then, requires a solu­tion for the prod­ucts in the pipeline (i.e., in ship­ping con­tain­ers on the Pacific Ocean). Do they get thrown out? If so, what is the retailer sup­posed to do with empty shelves for four months? Or does the retailer sell a prod­uct with known defects, fur­ther dam­ag­ing the retailer’s rep­u­ta­tion? Nei­ther option is pretty.

For this rea­son, retail­ers began to view local sup­pli­ers with renewed inter­est. Shorter sup­ply chains mean faster response in cor­rect­ing problems.

While all of this was hap­pen­ing, oil prices rose expo­nen­tially from 2003 to 2008, reach­ing real prices unseen since 1979. This made the trans­porta­tion costs a far more impor­tant con­sid­er­a­tion with prod­ucts made so far away from the con­sumers. While oil prices dropped as we entered the Great Reces­sion, they didn’t drop as quickly as coal and nat­ural gas prices. This is an impor­tant con­sid­er­a­tion, since the lower coal and nat­ural gas prices trans­late into lower man­u­fac­tur­ing energy costs (man­u­fac­tur­ing in the United States is almost entirely dri­ven by elec­tric­ity, which is gen­er­ated mostly by coal and nat­ural gas).

Nat­ural gas in par­tic­u­lar became unusu­ally inex­pen­sive due to a com­bi­na­tion of two fac­tors. First, it is dif­fi­cult and expen­sive to ship over long dis­tances, so North Amer­i­can sup­plies stay in North Amer­ica. Sec­ond, the sup­ply rose sud­denly due to a sub­stan­tial increase in the amount of hydraulic frac­tur­ing (“frack­ing”) in the Amer­i­can petro­leum indus­try. The frack­ing, ini­tially focused on pro­duc­ing more domes­tic oil, had the side effect of releas­ing unprece­dented amounts of methane. So, with a sharp increase in sup­ply, cou­pled with an inabil­ity of the rest of the world to absorb it, nat­ural gas prices have dropped to his­tor­i­cal lows. This still makes Amer­i­can man­u­fac­tur­ing fis­cally attrac­tive com­pared to China.

Put all of these fac­tors together, and Amer­i­can man­u­fac­tur­ing looks more attrac­tive than it has since the Rea­gan years.

If you look back at the begin­ning of this arti­cle, you’ll note that I said that Pres­i­dent Obama is being held account­able for the state of the econ­omy. Clearly, when it comes to man­u­fac­tur­ing jobs, his actions are com­pletely inde­pen­dent of the fac­tors I out­lined above. I’ve men­tioned this before, but it bears repeat­ing: Pres­i­dents don’t really have all that much they can do to affect the econ­omy. Sure, they are prob­a­bly able to impact the econ­omy more than any other sin­gle indi­vid­ual. But in a nation of over 300 mil­lion peo­ple, that’s still a small impact. It’s an unfor­tu­nate facet of our sys­tem of gov­ern­ment that the econ­omy is typ­i­cally the dom­i­nant fac­tor in choos­ing a Pres­i­dent, and yet the econ­omy is one of the areas in which a Pres­i­dent is inher­ently least effective.

In any case, we should be grate­ful that the stars have aligned to make Amer­i­can man­u­fac­tur­ing more attrac­tive. But there are some storm clouds on the hori­zon, and they’re related to hydraulic frac­tur­ing. That, though, is a topic for a future article.

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