A new report issued today by a group of manufacturing research and policy organizations says that over the past three years a competitive cost disadvantage borne by U.S. companies has worsened by more than 40%.
The report, called "The Escalating Cost Crisis," says the growing cost burden faced by U.S. manufacturers poses a serious threat to domestic manufacturing and the economy, in large part due to government policy issues and despite the significant improvements in productivity achieved by manufacturing companies.
"The findings show trends heading in the wrong direction for U.S. manufacturers and the economy," said John Engler, president and chief executive of the National Association of Manufacturers (NAM), one of the organizations involved in the study, during a press conference today. "They undermine the ability to compete in a fierce global marketplace."
In 2003, the NAM; the Manufacturing Institute, NAM's education arm; and the Manufacturers Alliance/MAPI, an executive education and research organization based in Arlington, VA, said in their first study of U.S. manufacturing's structural costs that U.S. companies were operating at a 22.4% cost disadvantage compared with nine other countries. The percentage equated to nearly $5 per hour added to the production costs of U.S. manufacturers.
The follow-up study issued today found that the cost disadvantage has worsened over the past three years to 31.7%, a 42% increase, or the equivalent of $6 per hour worked. The overall calculation takes into account corporate tax rates, employee benefits, tort costs, natural gas prices, and spending on pollution abatement. These structural costs are then compared to similar expenses borne by manufacturers in Canada, Mexico, Japan, China, Germany, the United Kingdom, South Korea, Taiwan, and France.
Jeremy Leonard, an economic consultant with the Manufacturers Alliance/MAPI and the author of both the 2003 study and today's report, said that he was stunned by the increase in the cost numbers.
"I was, quite frankly, astonished by the findings of the study," Leonard said during the press conference. "The most important contribution to the increase in the burden is corporate tax rates." Leonard said these rates represent one-third of the 31.7% number. (View the press conference.)
Corporate taxes cut a couple of ways, according to the 17-page report. In addition to taxes being the largest part of the cost gap, it was also the largest contributor to the deterioration found over the past three years, adding two full percentage points to the U.S. cost disadvantage. "This is largely due to the fact that U.S. statutory rates were unchanged, even as several other trading partners continued to lower their rates, but it is also due to other aspects of tax policy," the report said.
Other contributors to the worsening gap were the recent sharp increase in natural gas prices, which added 0.7% to the disadvantage; rising costs for employee health and pension benefits, which added 1.3 points; and regulatory compliance, which kicked in 1.7 points. Litigation and tort costs increased only modestly, the report said.
The study also had some choice words concerning labor costs and productivity. "Even though U.S. manufacturers have improved their productivity relative to most trading partners since the 2003 cost study, the strong domestic economic expansion and tightening job markets have caused wage costs to increase more rapidly, resulting in a net deterioration of labor competitiveness," the report said. "Although not strictly a 'structural cost,' since 2003 this deterioration has widened the total cost gap with foreign competitors."
In a forward to the study, NAM president Engler criticized U.S. government policies that limit natural gas and oil exploration, saying the U.S. needs a comprehensive energy policy that will encourage exploration. He also said the NAM is seeking a host of policy changes that, he claimed, will improve U.S. manufacturers' competitiveness. These include Congressional reauthorization of the research and development tax credit, making tax cuts permanent, expanding health savings accounts, ending frivolous lawsuits, opening up foreign markets to U.S. exports to a greater degree, and reducing environmental compliance costs.
The development of the report was underwritten by Emerson, DuPont, and Deloitte.