Whiff of wishful thinking about stories of onshoring

Dog breath is a big problem for pet owners.

The canine habit of eating every wayside foulness can create a pungent exhalation deeply distressing to the sort of dog owners who allow their pet in the house, or even let it sleep on their bed.

Alert to a gap in the market, an inventive American company has come up with a solution: Orapup - a meat-flavoured oral hygiene implement designed especially to freshen that doggy breath.

Like most businesses selling low-cost plastic items, the company's executives considered manufacturing in China. But moulding problems, shipping costs and extended delivery times prompted them to think again. According to media reports, they decided it was worth paying an extra 5 to 10 per cent in manufacturing costs to make Orapups in the US.

Apparently they are not alone. In his January state-of-the-union address, US President Barack Obama described how companies, including Apple, Caterpillar and Intel, have chosen to site new manufacturing operations in the US rather than in Asia.

"After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three," the president declared, exhorting Congress to help ensure that "the next revolution in manufacturing is made right here in America".

The emergence of this "onshoring" trend has long been predicted. The idea is that fast-rising wages in China, an appreciating yuan and shipping costs pushed up by high fuel prices, will combine with a sinking US dollar, falling American labour costs and cheap US energy thanks to shale gas to erode China's manufacturing cost advantage relative to the United States. In response, companies will go back to making stuff in America again.

It's a nice idea, but if the onshoring trend is real, there is little sign of it in the data.

Since 2000, the US has lost more than five million manufacturing jobs, half of them during the financial crisis. So if American factories have taken on 500,000 workers in the last three years as Obama claimed, the increase is as likely to reflect a domestic cyclical upswing as any structural trend towards repatriating jobs from abroad.

What's more, according to Paul Ashworth at independent research house Capital Economics, "even though US manufacturers have stopped shedding jobs and maybe even added a few at home, they are still increasing employment abroad at a much faster pace".

Even more discouraging, Ashworth notes that the number of American workers employed in hi-tech manufacturing has grown only by around 10,000 since the beginning of 2010.

In short, there is little sign that onshoring is taking place on an appreciable scale.

That shouldn't be too surprising. It is true that over the last 10 years Chinese factory wages have doubled in relative terms from 5 per cent of US levels to around 10 per cent in 2011. But over the same period Chinese worker productivity is estimated to have increased even faster, from roughly 8 per cent of the US level to 17 per cent today. As a result, Chinese factories have maintained and even sharpened their competitive edge.

Things could change in the future. Enthusiasts for manufacturing in the US are pinning their hopes on the development of new technologies like three-dimensional printing and the increasing use of sophisticated robot assembly lines.

But if these technologies do emerge - and 3-D printing has been massively overhyped - a manufacturer's competitive advantage will depend largely on its low capital costs, rather than on cheap labour.

So, while it might well become less expensive to make stuff in the US than China, it will be American robots employed on the factory floor, rather than American workers. Smells like Obama has been sold a pup.

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