Significant changes to U.S. trade policy, aimed at bringing manufacturing back to America, are not having the desired impact, according to a new report from A.T. Kearney.
In fact, the consulting firm’s sixth annual Reshoring Index showed that manufactured goods imports to the United States from the 14 largest low-cost-country (LCC) trading partners in Asia actually rose by $66 billion last year. That represented a 9% increase, the largest annual spike since the beginning of the economic recovery a decade ago.
By comparison, U.S. gross manufacturing output grew only 6% year over year in 2018.
“Manufacturers continue to view LCCs as a more desirable location than the U.S. to produce or purchase a wide variety of goods, notwithstanding the trade measures emanating from Washington,” A.T. Kearney said in its report.
The government’s trade policy measures designed to stimulate U.S. manufacturing have included:
- Tariffs of 10% to 25% on hundreds of billions of dollars’ worth of Chinese goods
- Tariffs on steel (25%) and aluminum (10%) originating from Canada, Mexico, and the European Union
- The foreign-derived intangible income (FDII) tax deduction, an element of the Tax Cuts and Jobs Act that allows companies to claim a deduction on any income generated from goods produced in the U.S. and sold overseas
Why haven’t these policies produced an uptick in the reshoring of manufacturing?
“For starters, the fundamental economic benefits of manufacturing in LCCs have not significantly changed, and the FDII tax benefits have not outweighed the significantly lower unit costs to manufacture offshored products,” the report noted.
Manufacturing in China indeed is more expensive because of the tariffs, “but it was already heading in that direction as labor costs have continued to creep upward over the past several years,” A.T. Kearney wrote. And that has led manufacturers to shift operations in recent years to LCCs such as Vietnam and India.
“So rather than incentivizing manufacturers to reshore, the trade spat with China has just accelerated this ongoing shift toward those countries,” the report noted.
While China remained the largest source of U.S. imports, from the beginning of 2018 through the first quarter of this year that share has fallen from 67% to 60%, according to the U.S. International Trade Commission.
That decline is due partly to U.S. companies stockpiling Chinese imports in last year’s third quarter as the prospect of tariff hikes loomed, and partly to structural shifts in manufacturers’ sourcing strategies, according to A.T. Kearney.
The volume lost by China was worth $72 billion, exactly half of which was captured by Vietnam, the report said.
“The confrontation with China is at a stalemate and manufacturers are uncertain as to the end outcome of trade negotiations with the EU, Japan, India, and other key partners.”
When manufacturers do consider bringing production back to North America, they most often opt to “nearshore,” particularly to Mexico. This trend has “picked up considerable momentum” in the past year, partly because of the U.S.-China tensions but also progress on the United States-Mexico-Canada Agreement, which resulted from a renegotiation of the North American Free Trade Agreement.
“Ultimately, trade and tax policies may contribute to some rebalancing of the production equation,” A.T. Kearney observed. “As of now, however, these policies may not have had enough time to mature. The confrontation with China is at a stalemate and manufacturers are uncertain as to the end outcome of trade negotiations with the EU, Japan, India, and other key partners.”
U.S. manufacturing has already started feeling negative effects from the recent policy changes, the report pointed out. The steel and aluminum tariffs, for example, have increased input costs and decreased profits.
As the report noted, in its 2018 annual report Ford cited $750 million of tariff-related loss due to increased input costs and resultant higher prices, which slowed sales. General Motors partly blamed U.S. trade policy for its layoffs of more than 4,000 employees in the first quarter. And Harley-Davidson responded to the EU’s retaliatory tariffs on motorcycles by shifting production of EU-bound export to its international facilities in Thailand.
“So, while intending to increase the number of manufacturing jobs, America’s recent trade policy is, at least for now, having quite the opposite effect,” A.T. Kearney wrote.
That policy doesn’t seem likely to shift over the next year.
“In parallel to the deepening divide with China, the [Trump] administration has threatened to impose tariffs on auto imports from Europe and Japan,” the report noted.
“This measure would amount to a declaration of war on countries such as Germany and Japan, whose auto industries are of high strategic importance. Should this come to pass, Japan and the EU are sure to reciprocate in kind, placing further pressure on U.S. autoworkers’ jobs.”