Careful With Those Corporate Incentives

Anne Kim has an article in our latest issue which focuses on the recent “insourcing” trend in manufacturing—which is to say, companies deciding to forgo overseas operation and move their production facilities back to the United States. The shrinking wage differential from 40 years of stagnant median incomes here and quickly rising labor costs in China is part of it, but another part is that outsource is a terrific logistical headache:

For one thing, some companies have learned the hard way about offshoring’s hidden downsides, such as the lack of intellectual property protection for proprietary manufacturing processes, quality control issues, and the frustration of waiting weeks for products to arrive by container ship while rivals potentially rush hot new products to the shelves. Moreover, long supply chains mean more exposure to earthquakes and tsunamis, wars, oil shocks, and other unpredictable disruptions.

In an oft-cited 2011 study, the consulting firm Accenture surveyed 287 major companies and found that nearly half are plagued by “cycle or delivery time” problems and quality issues due to offshoring. For some manufacturers, such as baby crib makers, the problems went far beyond quality to basic safety. In 2010, the Consumer Product Safety Commission recalled more than two million cribs—made mostly in China, Thailand, Mexico, Indonesia, and Croatia—for safety defects leading to at least thirty-two infant deaths.

Kim writes that we should promote manufacturing not as a major jobs program, since robotics are likely to be much of the actual work, but as a way of maintaining our innovation. This seems reasonable. But one of her suggested methods for achieving this end seems a bit misguided:

We should shamelessly court companies to America and help them expand when they get here. Even as offshoring’s economics tilt America’s way, other countries—less opposed than we are to heavy-handed industrial policy and even downright cheating—are busily dreaming up strategies to put a thumb on the scales in their favor…

[President Obama] should ask Congress for a several-billion-dollar “war chest” to meet or beat any incentive offered to a company by a foreign government to lure production there.

As iffy as it sounds under current trade laws, the reality is that America’s competitors routinely engage in this behavior, and the United States would only be leveling the playing field by doing the same. By entering the game, Washington could use the opportunity to argue for clearer and more restrictive rules on such recruitment activity, which would be the best outcome.

With respect, this seems likely to backfire. As Kim herself points out we’ve already seen this kind of race-to-the-bottom behavior among US states trying to lure large companies. Rather than try to bribe the corporations, countries ought to set a level playing field and make the corporations work for them. Simple tax incentives aren’t everything, as James Fallows pointed out once.

But more important are the financial implications. Part of what caused the massive property bubble in Ireland was a flood of corporate cash drawn by lax regulation and tax incentives similar to what Kim describes.

However, the rest of her suggestions seem like a good bet, and her piece is worth a read.

Ryan Cooper

Ryan Cooper is national correspondent for the Week, and a former web editor for the Washington Monthly.