If global competition is making your company vulnerable, production sharing may be right for you. It can improve your level of competitiveness, keep your higher wage jobs and capital intensive processes in the United States, and provide an important market for your component exports.

U.S. firms engage in production sharing (also referred to as co-production) to reduce overall costs, as well as to gain access to unique technology, raw materials, specialized intermediate inputs and/or labor skills.

This often allows companies to retain product development and design, capital-intensive manufacturing, and marketing-related activities in the United States, while shifting labor-intensive operations to lower labor cost countries.

Production Sharing Is Not Unique to U.S. Companies

Production sharing is used throughout the world. For example, companies in Japan, Korea and Taiwan co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines primarily to reduce their labor costs.

In the European Union (EU), most co-production involves apparel, auto parts, and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production is also taking place in Northern Africa.

Chapter 98 Can Help You

Production sharing is sometimes the only viable strategy to make your products more competitive abroad — and in the United States.

Under Chapter 98 of the U.S. tariff code (tariff classification 9802.00.60, 9802.00.80 and 9802. 00.90), U.S. materials assembled, processed or improved abroad, can be shipped back to the United States, incurring duty only on the foreign labor and non-U.S.-made materials.

As a result, these imports — which often contain substantial U.S. content — are more price competitive than other imports with no U.S. content. Importantly, this process promotes exports of U.S. components.

Production Sharing Saves U.S. Production and Jobs

In the late 1980s, the U.S. International Trade Commission (ITC) conducted a survey of 900 U.S. firms that co-produced utilizing Chapter 98. When asked what they would do if this Customs provision was eliminated, the firms said they would:

  • Turn to foreign suppliers of components
  • Drop labor-intensive products and import them from East Asia
  • Move all manufacturing to Asia
  • Cut back U.S. production and target a market niche not threatened by imports
  • Go out of business.

Since then, production sharing has become even more important to U.S. companies and workers. According to the ITC, it has been responsible for generating new jobs and retaining those that would have been lost due to intense foreign competition.

Mexico: The Largest U.S. Partner

In 1997, Mexico ranked as the United States’ largest production sharing partner, accounting for 36% of total U.S. imports under Chapter 98. And on average, U.S. content comprised 58% of the value of these products. Mexican co-produced products include apparel, motor vehicles and parts, machinery, and electronic products, to name a few.

However, since an increasing portion of these products is entering U.S. Customs under North American Free Trade Agreement (NAFTA) provisions, and not Chapter 98, real production sharing activity is under reported.

Canada Is Number Two

Canada is the second largest U.S. production sharing partner. In fact, according to the ITC, it is likely that one-third of all Canadian exports to the United States are manufactured using U.S.-made components.

Yet, this is not reflected in Chapter 98 statistics. Instead, motor vehicles frequently enter U.S. Customs under the Automotive Products Trade Act of 1965; aircraft equipment is often entered under the Civil Aircraft Agreement; and other products enter under NAFTA provisions.

U.S. - Caribbean Production Sharing Expanding

In 1997, apparel represented 90% of U.S. imports from the Caribbean Basin entering U.S. Customs under Chapter 98. Medical equipment, which only represented 4%, is the second largest category — but it’s growing.

This has allowed many large U.S. medical equipment manufacturers to compete worldwide in less technology-intensive hospital goods by co-producing these products in the Dominican Republic, Costa Rica, and Mexico.

U.S.-Asia Co-Production Is Strong

The Philippines, Malaysia and Korea are principal suppliers of electronic products to the United States under Chapter 98. As a whole, Southeast Asia is a major U.S. co-producer of semiconductors. In fact, in 1997, semiconductors represented 74% of U.S. imports from the region. Footwear comprised 8%; motor vehicles represented 5%.

From 1996 to 1997, Japan increased its value of U.S. content by 134% in vehicle exports to the U.S. under Chapter 98. During this period, U.S. exports of vehicle parts to Japan also rose — reflecting a benefit to U.S. component suppliers.

Conduct Sound Research and Be Aware of Pitfalls

While co-production has been a panacea for many U.S. firms, some manufacturers have reported a different story.

Many companies have invested in foreign-based production sharing facilities only to find unexpectedly low levels of productivity, excessively high turnover, poor infrastructure, and a corrupt legal system. Consequently, several firms have abandoned their efforts.

To successfully engage in production sharing, it’s essential to fully understand your co-production partner’s needs, culture and environment. And make certain you are knowledgeable of the U.S. tariff codes under which you will operate.

This article appeared in April 1999. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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