Revolutionary technologies combined with production sharing have transformed the U.S. manufacturing industry. As a result, levels of productivity and competitiveness during the 1990s increased significantly.

The Manufacturing Process Is Evolving

In the 1990s, the manufacturing industry grew faster than the U.S. economy and generated 29% of gross domestic product (GDP) growth. This is significantly greater than its 21.5% contribution in the 1980s, according to the National Association of Manufacturers (NAM). In addition, manufacturing productivity (output per man hour) grew by 3.1% annually from 1991 through 1998. This was considerably higher than productivity in non-manufacturing sectors.

The recent U.S. economic slowdown, terrorist attacks, and new security measures have contributed to weaker manufacturing output. And “the level of productivity will presumably undergo a one-time downward adjustment,” said Federal Reserve Chairman Alan Greenspan. Nevertheless, as U.S. real GDP growth climbs to Bank of America projected levels of 1.5% in 2002 and 3.5% in 2003, the manufacturing sector is positioned for greater achievements.

World Production Sharing Is on the Rise

Since much of what enters the supply chain involves sharing different stages of the manufacturing process among countries, production sharing — also known as co-production, cross-border manufacturing and outward processing — deserves an indepth review.

Production sharing occurs when producers in different countries share in the manufacturing of a product to complement each others’ strengths and combine competitive advantages to create greater value. According to The World Bank, production sharing involves more than $800 billion or 30% of total manufacturing trade annually. This demonstrates that trade in components and parts has been growing considerably faster than trade in finished products — a point that clearly documents the growing interdependence of countries in international trade and production operations.

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 also is taking place in Northern Africa.

North American Production Sharing Strong

A portion of U.S. exports is co-produced abroad and re-imported by the U.S. as finished products. In 2000, Mexico and Canada were the leading U.S. co-production partners. This process allows U.S. companies to retain product development and design, capital-intensive manufacturing, and marketing-related activities in the United States, while shifting labor-intensive operations to Mexico. Canada’s contribution was mainly in auto production. The result: a greater level of productivity and competitiveness.

According to Ralph Watkins, Chief, Miscellaneous Manufactures Branch, U.S. International Trade Commission, Mexican assembly plant co-production exports to the United States amounted to $127 billion in 2000. This represented 86% of total Mexican exports to the U.S. And of this, 62% or $79 billion was comprised of U.S. components. The chief exports to the United States from these production sharing (maquiladora) facilities were motor vehicles, $19.3 billion; auto parts, $10 billion; apparel, $8.6 billion; color televisions, $7.9 billion; telecommunications equipment, $7.7 billion; and computer equipment, $7.2 billion.

A portion of these goods entered the U.S. under the production sharing Harmonized Tariff Schedule (HTS) provision 9802. Under this category, U.S. materials assembled, processed or improved abroad can be shipped back to the U.S. incurring duty only on the foreign labor and non-U.S.-made materials. However, the majority entered under NAFTA provisions.

Co-Production in Japan and Germany

In 2000, Japan and Germany ranked as the third and fourth largest sources of U.S. co-produced imports entering under HTS 9802. Major co-produced goods from Japan included transportation equipment, $17.4 billion; electronic products, $223.6 million; and machinery and equipment, $191.4 million. U.S. content was 2.6%, 36.5%, and 4.5%, respectively.

The primary goods co-produced from Germany included transportation equipment, $9.8 billion; machinery and equipment, $38 million; and electronic products, $21 million. U.S. content was 1%, 25%, and 49%, respectively.

Production Sharing Offers Many Benefits

Sharing manufacturing strengths with high and low-wage countries has become an important strategy for U.S. companies. Co-produced goods, which contain substantial U.S. content, offer the best quality and technology global companies have to offer. And according to the U.S. International Trade Commission, production sharing generates new jobs and retains those that would have been lost due to intense foreign competition.

This article appeared in December 2001. (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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