(Jan. 19, 2003) — A recent report from two manufacturing trade groups makes some worthwhile points about how U.S. companies are faring in the international economy.
The bad news: U.S. companies pay what amounts to a 22 percent premium compared with major foreign competitors, because of higher taxes, health and pension costs, litigation and regulatory expenses. That amounts to an extra $5 per hour.
The good news: U.S. companies generally have experienced productivity growth well above that of competitors in other industrialized nations. U.S. manufacturing productivity increased 4.5 percent a year from 1995-2000, according to the report put together by the National Association of Manufacturers and the Manufacturers Alliance/MAPI.
The other bad news: the report argues that those higher overhead costs significantly offset productivity gains.
Like most things originating in Washington, the report has a political purpose. NAM President Jerry Jasinowski said he wants to make politicians in Washington and in state capitals aware that they can't have a “free lunch” by continually imposing costs on manufacturers, without consequences for the economy.
It's a very good point. But the manufacturers' groups need a little reality check of their own. While the report said the two biggest problems are high taxes and high health-care costs, it's a little short on realistic solutions. It's not likely, for example, that the U.S. government is going to make any significant business tax cuts while the federal deficit is spiraling out of control.
And most of the other countries have lower health-care costs for companies because they use higher personal taxes to pay for them. It presumably would require a lot of money — note the deficit again — to establish any kind of national health-care system that would take some of the burden off employers.
Costs like those can be a factor in where investments are made. Some experts on selecting sites for new factories say that Canada's national health-care system is becoming a plus for businesses seeking to relocate. Personal taxes are higher to pay for it, but that's not a direct cost that businesses bear.
Increasingly, companies are making borderless decisions when it comes to locations for new factories and new investment. And finding that low-cost location is all the more important, as a way to drive down manufacturing costs.
The report notes that U.S. manufacturing costs are $24.30 an hour, higher than competitors', including most major industrialized nations, and much higher than the low-cost manufacturing centers of China and Mexico. China's costs are $3.50 per hour and Mexico's are $6.19, by comparison.
Despite the report's shortcomings on offering realistic solutions, it highlights an important point. The international economy is brutally competitive for manufacturers, without federal and state governments making it more difficult.