Study expects tax, rules reforms will fuel reshoring

Lower costs to manufacture in the United States, fueled by lower corporate taxes and a reduction of government regulations, are driving the reshoring of manufacturing work, according to a study by consulting group Plante Moran and the Reshoring Initiative.

Those changes have already happened, but the study said the skilled worker shortage remains a major long-term challenge to bringing work back to the United States. Investments in Industry 4.0 technology will help factories become more competitive in an increasingly tight labor market, according to the study.

Plante Moran and the Reshoring Initiative wanted to explore why U.S. companies source production offshore and what would motivate them to shift work back to domestic sources. The groups surveyed manufacturers between July 2017 and February 2018. Tim Erdmann, principal of Plante Moran's manufacturing consulting group, said most of the responses came in during the fall of 2017, well before the tariff news and even before ​ specifics of President Donald Trump's tax cuts were spelled out.

"Our point is, we've already started in the right direction," Erdmann said. Erdmann and Harry Moser, president of the Reshoring Initiative, co-authored the report, called "The U.S. Manufacturing Reshoring Study."

The survey covered a broad range of manufacturing. Erdmann said plastics processors face the same dynamics covered in the report, but there could be a lag time on reshoring for them, since most processors supply parts to larger companies.

"They're not making an end product; they're typically making a component for the end product. The decisions on where to produce those components is they tend to be collocated with the assembly of the finished product. So, the pressures for work to be reshored to the United States would first be felt by their customers, which would prompt them to bring their suppliers back to support them," Erdmann said.

Not surprisingly, the survey shows that lower prices are by far the biggest motivator for U.S. manufacturers to offshore — a category in the survey that includes companies setting up their own manufacturing, for example, in China, or buying components made offshore for domestic production.

Lower prices directly drove 53 percent of the offshore expenditures. The study also said that 20 percent of the decision to offshore is because a manufacturer already owns production operations overseas. Other lesser reasons were that parts were unavailable domestically (13 percent), customer mandates (4 percent), mandates from their own corporation (2 percent) and maintaining a global presence (2 percent).

The survey looks at dollars and cents behind sourcing decisions. It includes a chart detailing the portion of purchases offshored based on the U.S. cost.

The study suggests that by reducing U.S. costs in the range of 20 to 30 percent, then potentially 20 to 30 percent of offshore purchases could be reshored.

"The price differential — we've got 30 percent of production that's offshore right now, and a good share of that should be economic to return," Erdmann said. "We actually have moved the needle."

The survey asked company officials about how much of an impact several specific U.S. government and corporate policies it would take to influence a decision to reshore. The study used a percentage of a dollar for the categories: for example, 20 percent would be 20 cents.

The biggest impact — 17 percent — would be from a weakened U.S. dollar that falls by 20 percent. A weaker currency makes a nation's goods less expensive compared with goods made in countries with stronger currencies.

Currency fluctuations come and go. But the survey listed three areas that can have a more immediate payback, two of which have already happened. The category of U.S. corporate tax cuts accounted for 7 percent. The survey lists a reduction tax rate of 20 percent — very close to the actual Trump tax cut for corporations of 21 percent, down from 35 percent.

President Trump has also cut the government regulations on business. In the survey, respondents said a 50 percent reduction in the regulatory burden would account for 4 percent. The same 4 percent would come from German-like technical skills and training.

The Trump administration's tariffs, including those on steel and aluminum, and Chinese-made goods, are making headlines around the world today. But the survey was done before the tariffs came out. In fact, one goal of the survey was to show the administration and Congress how implementing other policy changes could add millions of manufacturing jobs without tariffs or other protectionist measures.

Well, tariffs happened. Erdmann of Plante Moran said that would have undoubtedly changed the results. "But the end game of the current administration is not to maintain high tariffs, but to bring other countries to the negotiating table to create a different balance of trade agreements," he said.

Erdmann said long-term tariffs are not really necessary.

"The implications of this survey would say there's a significant amount of work that would come back to the United States if we could produce it. That's where we get into these labor constraints," he said.