Did Offshoring the Bay Bridge Really Save Money?

Did offshoring the Bay Bridge to China really save money? Maybe not.

Sunday’s NYT had an eye-opening article about the eastern span of the San Francisco-Oakland Bay Bridge actually being built in China, and then shipped to the United States.  Given the high unemployment rate here, that seems a remarkably poor use of money (see the piece by Clyde Prestowitz).

But something else struck me as odd about the NYT article. In terms of justifying the cost savings, it noted that:

California officials estimate that they will save at least $400 million by having so much of the work done in China.

I wondered where this $400 million number had come from, since no government statistics currently exist for comparing the cost of production in China with the cost of production in the U.S.  A little digging showed that the $400 million cost saving number dates back to 2004, when the prime contract0r submitted two bids for the project–“a bid of $1.8 billion using American steel and one of $1.4 billion using foreign steel.”  That difference–$400 million–has, as far as I know,  not been recalculated (the contractor would have no reason to redo the calculation, since they had already won the contract)(If anyone know of a recalculation, please let me know).

However, since then, the price of foreign steel has gone up faster and further than American steel. Getting an exact match is difficult, but starting in December 2005 the BLS began reporting import prices in a way that makes comparisons easier.  The chart below compares the change in import and domestic prices, as charged by the broad “iron and steel mills and ferroalloy manufacturing” industry.

You can see the import prices charged by foreign iron and steel mills went up 79% from December 2005 to May 2011, roughly double the 38% increase in the price charged by domestic iron and steel mills.

The relative change in steel prices clearly narrowed the cost difference between China and the U.S. Is it enough to eliminate the price difference between China and the U.S. for the Bay Bridge? It’s impossible to know without more information, but California might very well have made a different decision if it was bidding out the bridge today.


From today’s NYT:

The situation with drugs and medical devices is even more daunting. More than 80 percent of the active ingredients for drugs sold in the United States are made abroad — mostly in plants in China and India that are rarely inspected by the F.D.A. Half of all medical devices sold in the United States are made abroad. Many kinds of antibiotics,steroids, cancer medicines and even aspirin are no longer produced in the United States, or in many cases anywhere in the Western world.

Is that true? Aspirin is not made in the U.S.?  I wonder what the difference in cost is.

Not all productivity gains are the same

Susan Houseman and I have a new essay, “Not all productivity gains are the same: Here’s why” on the McKinsey “What Matters” website. Here’s the conclusion:

in a global economy, we need to be thinking more about the sources of apparent productivity growth. It matters greatly for wages and employment whether rising value-added per worker is being driven by domestic production improvements, supply chain efficiencies, or by productivity gains abroad.
Industries with the same measured productivity growth may generate those gains from very different sources. One industry may benefit mainly from internally generated productivity improvements, another industry may actively search out supply chain improvements, and a third industry may shift sourcing mainly in response to productivity gains and price drops overseas. These different sources of measured productivity growth yield very different wage and employment outcomes for workers…..

Take a look,

Cedar Balls–“Grown in USA, Made in China”?

Yesterday I went shopping with my son Elliot. It was the tour of big box stores…we went to Best Buy for a computer bag for me, to Target for clothing for him, and then to Bed, Bath, and Beyond for a new tea pot for me.

Then I made an executive decision….we weren’t going to leave Bed, Bath, and Beyond until we found a nonfood product made in the U.S. It took a while, but we finally found some beer mugs and some coasters that were U.S-made, so we were free to go.

But along the way, I picked up something very odd…a bag of eco-friendly aromatic cedar balls that were labelled “Grown in USA, Made in China.” Grown in USA, Made in China???

If I’m interpreting the label correctly, cedar is grown in the U.S. (“100% eastern red cedar—a self-renewing, non-endangered resource” according to the website). Is it possible that the wood is shipped to China, turned into little cedar balls in Chinese factories, and then shipped back to the U.S.?

Something is very weird about the economics here. I’m going to contact the company and ask.

Real Trade Deficits in Capital and Consumer Goods Near New (Negative) Record

Many economists are racing to declare a ‘manufacturing revival.’  The latest to join the bandwagon is Paul Krugman. In his latest column, Krugman writes (my emphasis added)

Manufacturing is one of the bright spots of a generally disappointing recovery…..Crucially, the manufacturing trade deficit seems to be coming down. At this point, it’s only about half as large as a share of G.D.P. as it was at the peak of the housing bubble, and further improvements are in the pipeline…one piece of good news is that Americans are, once again, starting to actually make things.

Oh, how I wish Paul was right.  Unfortunately,  I still don’t see it in the trade numbers. In fact, the real trade deficits in capital and consumer goods are both nearing all-time (negative) records. Meanwhile, the real trade deficit for industrial supplies and materials has improved in large part because of an enormous surge in real exports of energy products, including coal, fuel oil, and other petroleum products (yes you read that right) and a sharp decline in imports of building materials. I don’t find either of these convincing proof of a resurgence of manufacturing.

As you might expect, time for some charts. Here’s a chart of the real trade balance in capital goods in billions of 2005 dollars, calculated on a 12-month basis.

Capital goods include computers, telecom gear, machinery, aircraft, medical equipment–the heart of U.S. advanced manufacturing. Within a couple of months, if current trends continue, the capital goods trade deficit will be at a record level. What’s more, there’s no sign of any great domestic capital spending boom that could suck in imports.

And not to digress, these figures probably substantially underestimate the deterioration of the capital goods trade balance because of the import price bias effect , where the government statisticians do not correctly adjust for rapid changes in sourcing from high-cost countries such as the U.S. and Japan to low-cost countries such as China and Mexico (for a good reference see the new paper “Offshoring Bias in U.S. Manufacturing” by Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel in the latest issue of the Journal of Economic Perspectives) .

Now let’s turn to consumer goods. Here’s the chart of the real trade balance in consumer goods, in 2005 dollars.

No sign of any real improvement here either, I’m afraid. The trade balance retreated a bit during the recession, but since then has surged back.  Once again, there’s no sign of a sustainable improvement in the trade balance




he situation with motor vehicles is a bit more ambiguous. As the chart below shows, clearly there has been some gains in the motor vehicles and parts trade balance.  However, it has started deteriorating again.

Finally, we come to the one area, industrial supplies and materials, where there has been a clear improvement in the real trade balance. Industrial supplies and materials includes fuel imports and exports; steel and other metals; building materials; chemicals; and a grab bag of other things including newsprint, audio tapes, and hair.

Since 2006, there has been roughly a $150 billion improvement in the industrial supplies and materials trade deficit, measured in 2005 dollars (I say roughly because this is one case where the chain-weighted procedures used to construct the figures gives quirky answers that aren’t additive. So when I give the following numbers, please please don’t divide them into $150 billion to get a share of the improvement). Part of that is a decline in real imports of crude oil, which fell by roughly $30 billion (measured from 2006 to the 12 months ending in March 2011). But another $30 billion, more or less, came from an increase in real exports of petroleum products such as fuel oil and lubricants. I’m not sure whether a gain in exports of fuel oil really tells us much about the fortunes of manufacturing overall.

Another contributor to the improved trade balance is a decline in the imports of building materials. Once again, not a sign of strength.

So I see no sign in the trade data of a great manufacturing revival. The topline improvement in the real trade deficit has mostly come from industrial materials and supplies, and within that from a swing in the energy sector imports and exports.

Let me finish with a quote from a piece that Paul Krugman wrote back in 1994. In that piece, he scoffed at worries that foreign competition was hurting U.S. manufacturing. He argued that

A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country’s economic difficulties…. recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.

I wonder if he still believes that today.

A Milestone in Trade

In 1987  the G6 countries (Canada, France, Germany, Italy, Japan, and the UK) accounted for 55% of U.S. goods imports. That same year, China, Mexico and Brazil only accounted for 8% of imports.

In 2010 the U.S. reached a milestone–for the first time, imports from China/Mexico/Brazil exceeded imports from the G6 countries. In the year ending March 2011, imports from China/Mexico/Brazil equaled 32% of goods imports, compared to 31% for the G^ countries. Here’s another way of seeing the same thing. Please note that OPEC’s share, and the share of “all other countries,” don’t change very much. It’s really the G6 versus a handful of  low-cost importers.

One final note. The shift in sourcing is most likely happening because the goods made in China/Mexico/Brazil are less expensive than the same goods made in France/Germany/UK. Unfortunately, the BLS import price statistics are not able to pick up the price drops from shifts in country sourcing.

Suppose for example that goods made in China are sold for one-third less than the same goods made in Japan. Then for the same physical quantity of imports, that shift in sourcing will cause the nominal value of imports to be one-third lower. This imparts a significant downward bias to the import penetration ratio.

Replying to a critic

[Added: See Karl’s response in the comments ]

Karl Smith writes  In Which I Disagree With Almost Every Word Mike Mandel Says . It’s a long post (though not nearly as long as mine), and I just wanted to reply to two points.

First, Karl says:

The only way to get GDP wrong is either to miscount the number of goods and services sold in the US or to misestimate the price index of final goods – not intermediate goods.

Um, no. This statement is simply wrong.

gross domestic product = exports + gross domestic  purchases – imports.

Imports, as it turns, out, include a lot of imported intermediate inputs ( according to  this piece in the February 2011 Survey of Current Business, “BEA estimates that about 40 percent of imported commodities are used as intermediate inputs by businesses”).   So that getting the price index wrong for imported intermediate inputs slides right into GDP.

More fundamentally,  remember that GDP is a value-added measure. However, the fundamental unit of observation for the BEA each quarter is  revenues/shipments  for various industries, which is a gross output measure. Then the BEA has the herculean task–which I never fully appreciated before–of figuring out how much of each industry’s  revenues is final product, and how much is intermediate input.  A simple example:  Each month the revenues of law firms are reported each quarter  by the Census Bureau. Part of those revenues are final product (personal consumption of legal services), and part are intermediate inputs (legal services to business). Taking the real growth rate of observed revenues as given,  any error in estimating the real growth rate of intermediate inputs of legal services will translate directly into an error in estimating the real growth rate of personal consumption of legal services.

This sort of error does not wash out in final GDP.   Consider the related question  of whether R&D should be treated as business investment or as intermediate inputs. Currently, R&D is treated as an intermediate input, but the BEA has calculated that treating R&D  as investment would boost real GDP growth.

Second, Karl says:

An improvement in the terms of trade, which is what Mandel is identifying, is a productivity improvement for US workers. Its not based on US innovation, but it does lead to more output per US worker

The question is an important one: Is a ‘terms-of-trade’ productivity improvement equivalent to a ‘domestic’ productivity improvement? Here I’m going to cheat: The short answer is that I’m about to finish a theoretical paper showing  the specific sense in which they are not equivalent.  But you will have to wait a couple of weeks for that one…I kind of overdid the last post.