FAQ: Do U.S. production sharing operations abroad destroy U.S. jobs?

Talking Points:

Several anti-globalist groups feel U.S. production sharing (the allocation of different stages of the manufacturing process to different countries) is totally unnecessary and should be eliminated. What they don’t understand is that production sharing actually saves more jobs here at home than would be lost due to protectionist efforts to place a straight jacket on business.

Production sharing has many benefits. For one, it can result in lower manufacturing costs while increasing a company’s level of global competitiveness. This process not only helps retain jobs that otherwise would be lost due to competition, it also grows jobs in capital-intensive manufacturing, product development, design and marketing-related activities here in the U.S.

Also known as co-production or cross-border manufacturing, production sharing allows firms anywhere in the world to complement their respective strengths by providing access to unique technology, raw materials, specialized intermediate inputs or labor skills in a way that creates greater product value.

Production sharing is sometimes the only viable strategy available to companies to make products more competitive here and abroad. Under the U.S. production-sharing Harmonized Tariff Schedule provision 9802, U.S. materials that are 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. As such, these imports—which often contain substantial U.S. content—are often more price competitive than other imports with no U.S. content, and subject to lower Customs duties.

In the late 1980s, the U.S. International Trade Commission conducted a survey of 900 U.S. firms engaged in production sharing. When asked what they would do if the production-sharing provision were eliminated, respondents indicated they would increase reliance on foreign-made parts or suffer a loss of U.S. market share to foreign competitors not using U.S.-made components. Their responses, ranked according to frequency, were:

 

• Turn to foreign suppliers of components.
• Discontinue producing 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.

 

These options are poor alternatives to production sharing, especially since the strategy is responsible for generating new jobs and retaining those that would be lost due to intense foreign competition, according to the U.S. International Trade Commission.

FAQ: Do other countries engage in production sharing?

Talking Points:

Yes, they do. The number of firms around the world engaging in cross-border manufacturing is on the rise. In fact, back in 1998, it involved more than $800 billion or at least 30 percent of total manufacturing trade annually, according to the World Bank report Just How Big Is Global Production Sharing? Today it is certainly much higher. And the growing interdependence of countries utilizing this strategy also is evident, since trade in components and parts has been growing considerably faster than trade in finished products.

Companies in Japan, Korea and Taiwan co-produce in China, Indonesia, Malaysia, Thailand and the Philippines primarily to reduce their labor costs. In the 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 taking place in Northern Africa.

As a result of its growing use, production sharing for many companies has become a necessary strategy used simply to keep up as opposed to achieving a competitive advantage. But while co-production has allowed many producers to cut costs, improve technology and increase their level of competitiveness, not all have benefited. Some 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, many of these firms have abandoned their efforts.

FAQ: How has worldwide sourcing changed?

Talking Points:

In the past, global sourcing typically involved the purchase of foreign goods. In recent years, however, worldwide sourcing, also referred to as offshoring or outsourcing abroad, has expanded to include services. (Note: unlike production sharing, which utilizes U.S. components and materials in the final product, products purchased overseas may or may not include U.S. components and materials.)

Labor-intensive services have begun to be outsourced in India, the Philippines, Malaysia and other countries with large, well-educated, English-speaking labor pools. This has been made possible by new technologies that allow for the transfer of huge amounts of information around the world at minimal costs—coupled with the ability to digitize and computerize many services.

Since global sourcing is structurally simpler in the service sector than in the manufacturing sector in terms of resources, space and equipment requirements, worldwide sourcing of services is expected to grow. However, the McKinsey Global Institute report says that fear of massive job losses is unfounded, since the vast majority of services cannot be purchased abroad and will remain in the U.S.

But the report goes much further. It estimates that two-thirds of the economic benefits from sourcing services in India flow back to the U.S. In turn, U.S. companies that outsource generate greater profits, become more globally competitive, and are better positioned to sell more goods and services worldwide. As stated earlier, the Bureau of Labor Statistics predicts that the number of U.S. jobs will increase by 21.3 million from 2002 to 2012. This figure accommodates the projected loss of jobs due to global outsourcing, manufacturing abroad or other reasons. Note: for more information on this concept, see Part II.

Very important is the issue of insourcing: the movement of foreign jobs to the United States or put another way, the expansion into the United States by foreign headquartered multinational firms. According to Insourcing Jobs: Making the Global Economy Work for America, by Professor Matthew J. Slaughter of the Dartmouth College Tuck School of Business, foreign companies operating in the United States employed 5.4 million Americans with a U.S. payroll of $307 billion in 2002.

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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