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Cheap, Plentiful US Energy Fuels Case for 'Reshoring'
March 18, 2013

Harry Moser is on a mission.

Having witnessed the exodus of skilled manufacturing jobs from the United States in recent decades, Moser is leading a crusade to encourage U.S.-based manufacturing firms that have "offshored" operations overseas to again make products in U.S. plants. A retired manufacturing industry executive, Moser launched the "Reshoring Initiative" campaign in 2010 that aims to inform American companies about the pitfalls of manufacturing their products abroad.

Although manufacturers sell their products in markets worldwide, Moser contends that where a product is made does matter in a global economy. In the case of the United States, he said that reshoring manufacturing could:

  • eliminate the country's trade deficit
  • boost domestic employment and bolster wages
  • improve the general quality of products
  • help to control government budget deficits
  • support the national defense industry capability
  • spur innovation.

A key component of Moser's endeavor is an online tool called the "Total Cost of Ownership Estimator". The calculator is designed to show manufacturers that offshoring can actually create new costs that offset projected savings from, say, moving plants to regions with cheaper labor. The Reshoring Initiative cites inventory carrying costs, additional travel to check on overseas suppliers and intellectual property risks as examples of new burdens that companies can incur with offshoring.

"Offshoring increases inventories, increasing inventory carrying cost," said Moser, elaborating on a drawback of manufacturing abroad. "Higher inventory levels result in more severe production and sourcing cuts when downturns occur, resulting in more severe recessions."

Abundant and inexpensive supplies of energy produced in North America also are expected to help the United States burnish its manufacturing image. Recently, DownstreamToday asked Moser to frame the issue of greater North American supplies of oil and natural gas in the context of reshoring. The exchange follows.

DST: How do readily available supplies of oil and natural gas produced in North America contribute to the goals of the Reshoring Initiative?

HM: [It has a] big impact on some industries that have significant energy consumption or where natural gas is a key feedstock: steel, foundries, some chemical production, fertilizers, etc. Not so much on the average since energy cost is only about 2 percent of the cost of manufacturing, on average. The industries that are impacted would import less and export more.

DST: There's a great debate nowadays in the U.S. oil and gas and petrochemical industries. In one corner, there are strong advocates of exporting some domestically produced natural gas -- produced by U.S. workers, I might add -- as LNG to markets in Europe and Asia. Others, meanwhile, are cooler toward the idea. For instance, a number of petrochemicals manufacturers have expressed concerns that exporting natural gas would drive up their feedstock costs and diminish their growth prospects here. As a former manufacturing executive, what do you see as the solution for the LNG export issue?

HM: I think the answer depends on your time horizon. The more we export, the sooner our supply is exhausted or our prices rise. Assuming the focus is short-medium term: I would allow the exports. Currently I think we flare some gas because it cannot be transported. Exporting would increase the motivation to put in pipelines to transport the gas. Better to export than to flare. Not exporting is something like China restricting exports of rare earths, not approved by most countries. We need to balance our trade deficit. If exporting gas can help, I support exporting.

DST: What do you consider the key barriers to reshoring manufacturing in the United States in terms of existing laws and regulations?

HM: (1) Corporate tax rates. (2) The NLRB (National Labor Relations Board) and other employee-related [regulatory agencies]. (3) Government loans for university education takes potential candidates from skilled manufacturing careers. Focus the loans on needed skills.

DST: Do you see any signs that the federal government is taking meaningful steps to lift these barriers and entice U.S.-based multinationals to boost operations in their "home base"? If so, what are some prime examples?

HM: The federal government has done nothing on laws and regulations. I think all of these have gotten worse. They have taken some other steps to encourage reshoring. President Obama is talking about "insourcing." The U.S. Commerce Department promotes reshoring and total cost of ownership on three sites with links to the Reshoring Initiative website, five MEP (National Institute of Standards and Technology Manufacturing Extension Partnership) reshoring webinars and cooperation by the Commerce Department's SelectUSA initiative.

DST: Are you concerned that U.S.-based multinationals that move operations back "home" might face new barriers to trade in overseas markets where they have scaled back manufacturing? Why or why not?

HM: The U.S. already has unbalanced barriers with many countries: tariffs, VAT (value-added tax), non-tariff barriers, etc. Foreign companies might retaliate. If they do, that is added proof of the risk of offshoring. We recommend minimizing the risk by following the priorities below:

  • Keep existing domestic sources
  • Shift outsourcing back
  • Repurpose offshore own-facility to serve the offshore market
  • Incrementally invest domestically to serve domestic market
  • Shut offshore own facility
  • Build new domestic facility

DST: In your recent Economist debate on offshoring and outsourcing, you expressed the view that multinationals that offshore their manufacturing have in some cases diminished their long-term returns to shareholders. Would you please elaborate on the position that the economic benefits of offshoring favor short-term cost savings at the expense of long-term profitability?

HM: Offshoring harms even short-term profitability if the company decides on the basis of wage rates, purchase price or landed cost instead of total cost. Some of the costs in total cost are longer term: impacts on innovation, political and natural disaster risk, IP (intellectual property) risk, etc. These make the longer-term negative impacts even higher.

DST: Do you have any final thoughts on reshoring manufacturing and its connection to the ongoing decline in oil and gas imports to the United States?

HM: Reshoring will moderately increase the demand for domestic energy to fuel the manufacturing. Reshoring will improve product energy efficiency due to enhanced innovation. Lower fuel costs help make this the right time to reshore!

Source: Downstream Today Staff

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