News, Trends, & Analysis

Off-shoring Trends
Support Trade Growth

By Walter Kemmsies, Chief Economist for Moffat & Nichol

Last month, we noted that over the last six decades, world trade in manufactured goods grew twice as fast as global GDP adjusted for inflation. Analogously, over the last three decades, U.S. container volumes have also grown twice as fast as U.S. inflation-adjusted GDP.

Until recently, container volumes have continued to grow even during recessions, mostly due to structural factors that have motivated U.S. manufacturers to move their production to offshore locations. These factors have been, most importantly, fluctuations in oil prices, financial market turbulence, and consumer finances during the last three decades, and they remain in place today.

Demographic Trends — A Key Driver

Demographic shifts are the main factor underlying the 6.2 percent average growth rate in international container volumes. Since the beginning of the last century, the proportion of people over the age of 55 has been increasing. The largest jumps have occurred over the last ten years, and the Census Bureau projects an even larger jump will occur over the next 12 years, due to the aging Baby Boom generation.

In 1990 one in seven U.S. citizens were over the age of 55; by 2010, this is projected to be one in four, and by 2020, almost one in three. As households age, wealth is accumulated, and spending patterns change. Since 1950, consumer expenditures for services have been growing faster than for goods. Prior to 1980, U.S. consumers spent more on goods than on services, since then expenditures on services have exceeded that of goods and have continued to gain share.

The changing pattern of consumer expenditures is also evident in employment trends. In 1950, 33 percent of the labor force was employed in manufacturing. Since then, this share has declined to 10 percent, partially due to the service sector bidding labor away from manufacturing. Since China formally became a member of the WTO in 2001, total U.S. employment has grown 6.1 percent, with service employment increasing 8.9 percent and manufacturing employment decreasing 11.5 percent. Manufacturers who were able to produce more cheaply in other locations began outsourcing.

The first waves of off-shoring were low value-added goods because those manufacturers were under the greatest profit margin pressure. Companies in other sectors reduced labor usage by employing more capital, which raises productivity and reduces profit margin pressure. Although off-shoring has reduced the domestic production of low-value goods, U.S. manufacturing output has continued to rise over the last several decades because of the increase in high-end manufactured products such as nuclear reactors and complex transportation equipment.

Manufacturers that off-shore their production not only gain the advantage of lower costs, but also improve their proximity to markets with the highest growth potential. The market for low cost manufactured goods is more likely to grow faster in less developed economies with higher population and per capita income growth than in mature industrialized economies. The belief that off-shoring companies are attempting to maximize profits as opposed to simply minimizing costs is why, among other factors, the notion that high oil prices would reverse the globalization of the world economy was disputed in the September edition of this column.

As the service sector grows and attracts labor away from manufacturing, the net increase in U.S. GDP is relatively small compared to the increase in international trade. This also occurs on a global scale because countries that host the new manufacturing operations are not producing for their own consumption, but for export. On average, global GDP rises by the increase in service production in the industrialized nations that are off-shoring the manufacturing of the goods they consume. Therefore, global real GDP growth is less than that of global manufactured goods trade.


The strong growth in global trade most likely would not have occurred if:

• Trade barriers had not been continuously reduced via the efforts of the World Trade Organization.

• Information and communication technology had not advanced and been deployed globally.

• Seaborne trade had not become containerized.

These are important factors, but the very large increase in global trade is probably most attributable to the significant change in the age structure of the industrialized nations.

What Hasn’t Been Outsourced Yet?

The arguments above imply that not all industries are likely to outsource simultaneously. Those with lower profit margins would go first, and this process would continue with those with the next lowest profit margins, and so on.
One way to see this is to review patterns in U.S. labor employment shown in the chart. Monthly employment for industries that manufacture containerizable goods is shown from 1990 through the middle of 2008, all of them indexed to 100 in January 1990 to make the chart easier to read, given that employment levels by industry vary significantly. The chart shows that the clothing-related industries have outsourced the most, and industries related to automobile manufacturing and home construction have outsourced the least. This can be attributed to the boom in the housing market and strong auto sales that were supported by loans with below market interest rates extended by manufacturers focused on retaining their market shares. The decline in residential real estate and automobile sales is pressuring the profits and financial viability of companies in these sectors.

The survivors will most likely be the ones that have been off-shoring their production operations. The off-shoring of those industries’ employment provides support for U.S. international container volumes to continue growing faster than GDP. Given this outlook, U.S. manufacturing employment could continue to fall, on average, by 2 percent per year, which would support U.S. container volume growth — particularly during recessions, assuming the world financial system does not freeze up again.