Despite Strong Dollar, U.S. Retains Manufacturing Cost Advantage - Global Trade Magazine
  August 21st, 2015 | Written by

Despite Strong Dollar, U.S. Retains Manufacturing Cost Advantage

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  • European exporters are still 10 percent more expensive than U.S.-based manufacturers.
  • Most emerging markets known for low costs—particularly China—had become far more expensive.
  • Manufacturers are more likely to focus on wages, productivity, and energy costs when making plant site decisions.

The rise of the U.S. dollar against the euro and other world currencies over the past year has reduced the cost-competitiveness of U.S. manufacturing compared with economies such as Germany, France, Japan, Australia, and Brazil. But the U.S. still maintains a very significant cost advantage over these economies, and therefore manufacturers are unlikely to shift production to other nations, according to new research released from The Boston Consulting Group (BCG).

Since mid-2014, the manufacturing cost advantages of China, South Korea, India, and Mexico have narrowed considerably against European economies and Japan, though not against the U.S., because their currencies have remained relatively stable against the dollar. Switzerland and South Korea lost competitive ground against all major goods-exporting economies mainly because of currency fluctuations. The decline in the euro did tip the competitive balance in two European economies—the Czech Republic and Poland—where average manufacturing costs are now lower than in the U.S.

“While the major drop in the euro has reduced costs for European exporters, they’re still about 10 percent more expensive on average than U.S.-based manufacturers,” said Harold L. Sirkin, a BCG senior partner and a coauthor of the analysis. “The U.S. remains one of the lowest-cost locations for manufacturing in the developed world.”

The findings are based on BCG’s Global Manufacturing Cost-Competitiveness Index which tracks changes in production costs in the world’s 25 largest export economies. Research conducted last year found that several economies traditionally regarded as having high costs, such as the U.S., had become much more competitive. Most emerging markets known for low costs—particularly China—had become far more expensive.

Several factors have enabled the U.S. and other developed economies to retain their competitiveness relative to many of their trade partners, according to BCG. One is labor productivity. In the U.S., increases in labor productivity continue to largely offset increases in wages. In the UK, manufacturing wages adjusted for productivity dropped by 9 percent over the past year. In the Netherlands, productivity-adjusted wages declined by 17 percent.

The U.S. also has a big energy-cost advantage that has largely been driven by the sharp fall in U.S. natural-gas prices.

As a result, most European economies have been unable to close the cost gap with the U.S. The 18 percent decline in the euro against the U.S. dollar between mid-2014 and mid-2015 translated into an improvement for European in the BCG index of six to 12 percentage points. But direct manufacturing costs were around 10 to 20 percent higher in economies such as France, Germany, Italy, and Belgium.

A similar pattern applied to several other developed economies. The U.S. dollar gained around 13 percent against the yen, but Japan’s manufacturing cost structure remains seven percentage points higher than that of the U.S. The dollar gained 14 percent against the Canadian dollar, but that nation’s cost-competitiveness improved by six points. The U.S. dollar rose 20 percent against the Brazilian real and 10 percent against the Australian dollar, but manufacturing costs in those countries remain 17 percent higher and 19 percent higher, respectively, than those in the U.S.

“The underlying trends that have driven the improvement in U.S. cost competitiveness over the past decade have not changed,” said Justin Rose, a BCG partner. “Manufacturers know that sharp gains in the dollar can quickly reverse. So they are far more likely to focus on trends in wages, productivity, and energy costs when making long-term decisions over where to locate plants.”