Legal Commentary

US Manufacturing

By Kenneth Anderson

Economist Mark J. Perry has an op-ed in today?s Wall Street Journal observing that US manufacturing is in nowhere near the dire straits that many of us  (me included, as well as my international business transactions law students, to whom I put the question of US versus China manufacturing) have tended to assume.  I?m not in a position to assess his data or empirical conclusions, but his bottom line conclusion is:

In 2009, the most recent full year for which international data are available, our manufacturing output was $2.155 trillion (including mining and utilities). That?s more than 45% higher than China?s, the country we?re supposedly losing ground to. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.

That was a surprise to me, and to my students.  (If someone proposes to say why that empirical conclusion is not what it appears to be, I?d be interested to hear.)  The key additional point is that this is done with increasing productivity per worker, and fewer workers as well:

The truth is that America still makes a lot of stuff, and we?re making more of it than ever before. We?re merely able to do it with a fraction of the workers needed in the past.  Consider the incredible, increasing productivity of America?s manufacturing workers: The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972.

Perry has made these observations before, but I was particularly interested to see something that extends the argument directly into my areas of international business transactions, in an article in Wired that doesn?t yet seem to be online, although it is in my March hard copy issue (I?ll link when it comes around).  The claim in the Wired article is that increasing numbers of American manufacturers, particularly small and medium size, are bringing manufacturing home to the United States from China.

Apple, the article said, is able to staff up and supervise an entire factory, or several, in China, and so maintain production schedules, quality control, and take the full factory output according to its needs.  But smaller American companies, seeking to outsource specific supply requirements, don?t have that kind of control over the supply chain.  They are at the mercy of the local contractor with respect to schedules, quality (a major concern), and subcontracting by the Chinese contractor to still cheaper suppliers elsewhere in China, multiplying all the other problems, and adding important new issues, particularly around IP piracy by subcontractors.

Factor in the increasing labor costs in China and downward pressures on American manufacturing wages, and, according to the article, the propositions either not to go abroad in the first place or to re-source back to the US, look like serious possibilities in an environment that not long ago was considered a no-brainer for outsourcing.

I think that?s a fair summary of the Wired article, and I?ll link when it?s available.  I?m not in a position to evaluate its empirical claims, and particularly whether such returns to the US are actually happening to any great extent.  But from an IBT lawyer?s standpoint, it raises several important questions as to supply contracts, exits, options to re-source to the US, etc.

Full post as published by The Volokh Conspiracy on February 25, 2011 (boomark / email).