The election is over and the spotlight is on the fiscal cliff.
Yet the Washington political drama over year-end tax increases and spending cuts will eventually end, as all do. Some business leaders are already looking past it to a more difficult challenge: the decline of U.S. competitiveness.
A recurring theme in the presidential campaign, the United States’ dominant position in the global marketplace has been declining for more than a decade. It underlies the listless recovery, weak job growth and decline of the middle class, economists say.
Next week, a coalition of business leaders will press a longer-term to-do list on Washington’s politicians. Its 200 items include cutting corporate taxes, streamlining regulations, upgrading the nation’s crumbling infrastructure and creating a more highly skilled workforce. The nation’s $16 trillion debt itself is a deterrent to U.S. competitiveness because it crimps government investment in education and infrastructure and creates uncertainty among businesses about taxes and interest rates.
The Council on Competitiveness, a group of CEOs, university presidents and labor leaders, notes that many of the issues aren’t partisan in nature and should draw support from both parties in a divided Congress.
“We need to make the United States a leader in attracting investment, growing jobs and delivering prosperity,” says Deborah Wince-Smith, who heads the competitiveness council. “And we’re falling behind in all those things.”
Despite its slippage, the U.S. is still an economic power and the world’s manufacturing leader. And in recent years, falling U.S. factory wages and energy prices have allowed it to narrow its business-cost gap with other countries.
Over the long term, however, its status has declined as manufacturers have outsourced millions of jobs to countries that have lower wages, such as China; capitalism has spread to formerly closed economies, and technology has allowed companies to do business almost anywhere. The World Economic Forum recently said America’s global ranking among the most competitive economies fell for the fourth year in a row in 2012, from fifth to seventh. It listed government bureaucracy, high taxes and an inadequately educated workforce among the biggest deterrents for doing business here.
And in a recent Harvard Business School survey of nearly 7,000 alumni, most of whom are senior business executives, 58% said they expect U.S. competitiveness to deteriorate over the next three years, though that’s down from 71% last year. Competitiveness was defined as the ability to compete in the global economy while supporting high living standards for average Americans.
There is some good news. The past few years, companies such as General Electric, NCR and Ford have moved at least some production back to the U.S., a trend known as reshoring.
There are myriad reasons for the trend. Chinese wages have climbed an average 19% annually in recent years, while U.S. wages have risen by less than 4% annually, shrinking China’s labor advantage, according to a study by Boston Consulting Group. Companies also cite rising overseas shipping costs, the sometimes-poor quality of foreign-made goods and the desire to more closely oversee production.
Meanwhile, rising domestic energy production promises to pay huge dividends for the U.S. economy. A natural gas drilling boom has sharply lowered prices of the commodity and prompted companies that use natural gas as an energy source or feedstock to build plants in the U.S. or move production from overseas.
To some extent, the U.S. is benefiting from a growing tendency of companies to locate production closer to customers, whether here or abroad. Yet manufacturers such as Toyota, Honda and Siemens are taking advantage of low U.S. costs to begin exporting U.S.-made cars, gas turbines and other products to foreign countries.
By the end of the decade, on-shoring and increased exports are expected to add about $125 billion a year to U.S. economic output and create 2.5 million to 5 million jobs, says BCG Senior Vice President Hal Sirkin.
Yet while the offshoring calculus has shifted for many companies, it’s not enough to reverse the long-term trend, says Harvard business professor Jan Rivkin. Respondents to the Harvard alumni survey were still three times as likely to be considering moving a business out of the U.S. as into the country.
“We know the dominant flow remains outbound,” he says. “Are we sinking more slowly than in the past? There’s no question you hear lots of hopeful stories about reshoring.”
The fruitful upsides and frustrating downsides of manufacturing in the U.S. can both be found in the example of Chesapeake Bay Candle.
The company moved some production of certain candles — those largely produced with automated machines — from Vietnam to Glen Burnie, Md., last year. A big reason is that a 25% Vietnamese labor cost advantage has been cut in half the past three years, says marketing manager Mareike Finck.
Also, the company was able to reduce delivery times to U.S. stores from eight weeks to two — an advantage that became critical as power outages from Hurricane Sandy caused stores to quickly run out of Chesapeake’s candles. “Now we can replenish stores on the East Coast within two weeks,” says Chesapeake Bay owner Mei Xu.
But Xu says obtaining a county permit to convert a former 117,000-square-foot warehouse into its factory and warehouse was a regulatory nightmare as county officials requested numerous revisions to fire safety, engineering and other plans. Permit approval, which can be secured in a few weeks in Asia, took more than six months, adding about $500,000 in costs and delaying the opening of the plant, which employs 46 and expects to add about 50 workers in the next year.
Here are some of the ways businesses say policymakers can help improve U.S. competitiveness:
• Lower corporate taxes. The 39.1% combined U.S. corporate tax rate, including state and local taxes — the federal rate is 35% — is the highest among industrialized countries and about 50% higher than that group’s 25.1% average, according to the Business Roundtable. The effective tax rate, including deductions and tax credits, is about 27%, though that’s still higher than the 19.5% rate of the other nations.
Business Roundtable Vice President Matt Miller says the official rate should be lowered to 25% to encourage companies to move and keep operations here. As much as 45% to 75% of the corporate tax burden is offset by lower U.S. wages, according to the Business Roundtable and the President’s Council on Jobs and Competitiveness.
Also, companies don’t pay taxes on profits that remain overseas but do pay the difference between the foreign rate and the higher U.S. rate if they bring those earnings back to the U.S. Business officials say other developed countries impose little or no tax on earnings brought home, or repatriated, and they want the U.S. to adopt a similar policy.
“We’re competing (worldwide) to serve a common customer,” says Caterpillar Chief Financial Officer Ed Rapp. “If I operate under a system that has a higher rate and I can’t move that capital around the way I want to, then I’m at a competitive disadvantage.”
President Obama has proposed cutting the corporate tax rate to 28% but applying it to all income, whether repatriated or not — toughening, rather than easing, current tax rules on repatriation. He has said he wants to reward companies for locating businesses here, rather than abroad.
Deutsche Bank, however, says that would simply encourage companies to move their headquarters overseas so they don’t face any U.S. tax on foreign income.
And Rapp says says current policy encourages a company to keep its profits overseas.
Intel Vice President Peter Cleveland says his company keeps “billions and billions” of foreign income abroad to shield it from U.S. taxes.
“We would invest in jobs and research” in the U.S. if tax rules were more business-friendly, he says.
A Senate panel last year found that a law that allowed companies to repatriate income at a 5.25% effective tax rate from 2004 to 2006 led to no additional hiring. Yet Caterpillar’s Rapp says that even if new rules simply allow the company to be more profitable abroad, that may prompt it to increase investment and staffing in the U.S.
There is far from universal agreement on the issue. For example, Scott Paul, head of the Alliance for American Manufacturing, worries that cutting the rate could mean eliminating deductions, such as a tax credit that benefits manufacturers.
• Streamline regulations.The U.S. has enacted 2,000 regulations the past 30 years that have imposed $750 million in environmental, labor and other costs on U.S. manufacturers, says Jay Timmons, CEO of the National Association of Manufacturers. Rivkin of Harvard says regulators should focus on outcomes rather than burdensome reporting and compliance requirements, shortening delays and minimizing litigation.
• Promote a more highly skilled workforce. A Deloitte study last year found 600,000 advanced manufacturing openings and 80% of manufacturers struggling to find skilled workers. Cleveland says Intel is seeking 4,000 to 5,000 engineering and other technical workers. Businesses lament a high school and college system that has de-emphasized training for skilled jobs.
Meanwhile, immigration law imposes annual limits on the number of workers from each country who are eligible for permanent residency. Cleveland says the cap hurts the large numbers of high-tech workers from countries such as India whose quotas are reached first.
The policy, he says, shrinks the pool of qualified candidates, many of whom return to their home countries after graduating college, and harms existing employees who can’t be promoted. “We have 2,300 people at Intel waiting in a green-card line and it’s very discouraging to them,” Cleveland says.
Instead, he says, green cards should be granted on a first-come, first-served basis, benefiting the large population of workers from Asian countries. A bill that would do that was passed by the House last year but stalled in the Senate.
Also, Wince-Smith of the competitiveness council advocates beefing up technical training in high school and community colleges and better matching classes with the needs of local employers.
• Expand trade. Wince-Smith and Rapp say the U.S. no longer takes an active role in promoting free trade. Although Russia joined the World Trade Organization this year, Congress has not extended permanent normal trade relations status — which would eliminate costly duties and protect intellectual property — to Moscow. Legislation is bogged down, in part, in provisions addressing human-rights issues.
“Other countries are getting the benefits,” Cleveland says, noting the law would let it sharply increase semiconductor exports to Russia.
• Make permanent the research-and-development tax credit. The credit typically is renewed annually and, though it wasn’t this year, it’s expected to be renewed eventually, allowing benefits to be applied to 2012 retroactively. But executives say the uncertainty each year makes it difficult to plan R&D budgets.
“It wreaks havoc,” says Cleveland, noting Intel spends about $8 billion a year on R&D. “We don’t know if we’re going to get it, when we’re going to get it and so we don’t put it to as good use as we should.”
• Improve the country’s creaky infrastructure. The nation is spending about half the $2.2 trillion it should on infrastructure improvements, according to the American Society of Civil Engineers. For example, shallow seaports can’t accommodate larger ships, causing delays. Rapp says Caterpillar has moved 30% of its exports to Canadian ports in recent years for faster, cheaper service.
Paul of the Manufacturing Alliance advocates spending an additional $500 billion on upgrades over the next five years.
Yet while sweeping proposals are broadly supported by the business community, implementing some may mean compromising on others.
“If we can cut corporate taxes and also help education and infrastructure and all those other things, it’s a good thing to do,” Sirkin says. “But what are the trade-offs?”