For the past several years, I've held the contrarian belief that Canadian and American companies doing business in North America should manufacture closer to home. For me, it comes down to being more responsive to your customers' needs. We've become a society focused on cheap price, and only now consumers are realizing this comes at a price. Manufacturing jobs have moved to Asia by the millions, replaced by lower-paying positions in the service industry. Walmart (NYSE: WMT) argues that saving you money lets you live better. Those on the other side of the argument believe savings in one hand have come at the expense of wages in the other. Who is correct is likely unanswerable. What I do know is that making products thousands of miles away is about as sensible as driving all the way across town to save 5 cents a gallon for gas. I believe "Made in the U.S.A." wins. Here are my reasons why:
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Wages Heading Higher
In 10 years, Chinese wages have risen from $1,000 annually to $3,900. Credit Suisse (NYSE: CS) believes U.S. companies doing business in China will face lower margins in the coming months due to rising wages. Price increases, the usual remedy for rising costs, won't be absorbed by consumers. In an effort to keep input costs low, some manufacturers will move production to low-cost locations like Vietnam or Bangladesh. Others like General Electric (NYSE: GE) will opt to bring it home, as is the case with its hybrid water heater that will now be made in Kentucky rather than China. Let's face it, if wages in Asia were similar to those in the U.S., we wouldn't be having this discussion. Eventually, they could be.
Wage-Equalization Import Taxes
Canadian billionaire and money manager Stephen Jarislowsky believes free trade is a good thing, but only if all countries involved are operating on a level playing field. Until wages in China and the U.S. are closer, an unfair advantage exists. One solution is to revalue the Yuan, an idea that doesn't seem likely. Another is to adjust wages in the U.S. downward, also unlikely. This leaves Jarislowsky's suggestion that Canada and the U.S. should implement a wage-equalization import tax, which hits low-wage countries like China while simultaneously creating jobs here in North America. Once this occurs, wages in China will rise, as there won't be an incentive to keep them low. Everyone wins. I believe he's right.
Up until a few years ago, this meant something good. Then shareholder profits became the focus, and quality went out the window. The Japanese didn't necessarily get that much better; America just got that much worse. I've owned two Jeeps (including my existing SUV) in my life, and they've both been excellent vehicles. A recent ad for the new 2011 Jeep Grand Cherokee trumpets, "Made in the U.S.A.", not because it's manufactured at the Jefferson North plant in Detroit, but because Americans know how to make things. Examples of companies with products made almost exclusively in the U.S. include Intuitive Surgical's (Nasdaq: ISRG) da Vinci surgical system, True Religion Brand Jeans (Nasdaq: TRLG) premium denim, Arctic Cat (Nasdaq: ACAT) snowmobiles and Burt's Bees (a division of Clorox (NYSE: CLX) personal care products. It's a small list but growing.
Americans see Canada as the land of hockey and beer. Interestingly, up until 1992, beer brewed in one province could not be sold in another. This ensured breweries and the jobs that came with them existed in every province. According to the Fraser Institute, this raised the cost of beer. That's true, but it also likely meant the product was fresher. While we can't go back to the days of protectionism, it does seem possible through legislation like the Manufacturing Enhancement Act to provide American businesses with reasons to manufacture in the U.S. Implementing tax breaks for companies who do so, and then taxing imports from low-wage countries, are two ways to revive manufacturing in this country. A third is to get tough with countries such as Japan that seriously restrict the sale of certain imports (cars in their case) considered vital to the country's economic interests. Free trade must be fair trade.
I believe "Made in the U.S.A." will win because it's practical. A.O. Smith (NYSE: AOS) manufactures tankless water heaters in the U.S., China, India and elsewhere. As far as I can tell, much of what it manufactures in the U.S. is sold in the U.S., and what is made in China is sold in China and so on. It's not unlike the Canadian beer example above but on a country-by-country basis. In my opinion, this is the only form of globalization that's sustainable and beneficial to all. (For more, see The Basics Of Tariffs And Trade Barriers.)
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