U.S. manufacturing becoming more competitive

An update of the widely-cited manufacturing “cost study” released today by the National Association of Manufacturers (NAM), the Manufacturing Institute and the Manufacturers Alliance/MAPI shows that U.S. manufacturing is making progress in reducing its cost disadvantage against nine major foreign competitors but that high corporate tax rates now account for more than half of the burden.

The new study by economist Jeremy Leonard finds that the overall structural cost burden facing U.S. manufacturers for corporate tax rates, employee benefit costs, tort litigation, pollution abatement and energy is 17.6 percent relative to their nine largest trading partners, compared to 31.7 percent in the 2006 study and 22.4 percent in the ground-breaking 2003 study.

“There is clearly encouraging news in this report,” said NAM President and Chief Executive Officer John Engler. “But an excessive cost burden of 17.6 percent is still a serious impediment to our ability to compete. In particular, high corporate tax rates account for more than half of the burden, and this has gotten worse since 2003. We continue to fall behind by standing still. We’re paying the second-highest corporate tax rate in the world. A great way to boost our economy and improve our competitiveness will be to bring our corporate tax costs under control.”

Manufacturers Alliance/MAPI President and Chief Executive Officer Thomas Duesterberg said the main drivers of the narrowing cost gap are employee benefits and pollution abatement costs. “Together, they account for three quarters of the improvement in the overall cost disadvantage for U.S. manufacturers,” he said. “More complete data from China reveal that these costs are higher there than found in previous cost studies. Though much of the improvement for U.S. manufacturers is due to global dynamics, the best way to compete is not to sit back and hope that the structural costs of our trading partners rise faster than ours.”

The study also shows that growth in health insurance costs in the United States has slowed markedly in recent years. “Companies are increasingly using health savings accounts and high-deductible health plans, which is helping contain employer costs,” Duesterberg noted.

“These new numbers show that even though global wage differentials are narrowing, policy-induced costs in the United States, especially corporate taxes, continue to undermine manufacturers’ ability to compete with our largest trading partners,” Duesterberg said.

Author Jeremy Leonard noted, “Even though the cost gap for employee benefits, tort litigation and pollution abatement has narrowed with respect to the previous cost studies, the stubborn fact remains that these costs are still higher than in other countries. The one area where virtually no progress has been made is in lowering corporate taxes. And energy remains a structural cost as well, primarily because it has slipped from a major net advantage for U.S. companies just ten years ago to a negative in this decade,” Leonard said.

“The study shows how a combination of favorable U.S. policy changes advocated by the NAM, actions by manufacturers to innovate and manage structural costs, and rising costs among our major international competitors have contributed to closing the aggregate cost differential faced by U.S. manufacturers over the past two years,” said Emily DeRocco, president of The Manufacturing Institute and senior vice president of the NAM.

“While progress has been made, we look forward to working with the new Administration and Congress to further reduce U.S. manufacturing’s structural costs and help get the economy back on track in 2009,” Engler concluded.

The new 2008 cost study, “The Tide Is Turning: An Update on Structural Cost Pressures Facing U.S. Manufacturers,” is available at: www.nam.org/coststudy.

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