U.S. Competitiveness Seen On The Decline

U .S. manufacturers have become less competitive in the global marketplace in recent years because of rising energy and other "structural" costs, according to a report issued Sept. 27 by the National Association of Manufacturers (NAM).

"The sharp rise in these nonwage costs represents a significant and long-term problem for our nation's manufacturers and America's economy," NAM President John Engler remarked at a Washington, D.C., briefing.

The study by economist Jeremy A. Leonard of the Manufacturers Alliance concludes that nonproduction costs for U.S. manufacturers are 32% higher than those of nine of the nation's major economic competitors???Britain, Canada, China, France, Germany, Japan, Mexico, South Korea, and Taiwan.

Domestic manufacturers faced a 22% disadvantage in 2003, the last time NAM studied structural costs, which include corporate taxes, employee health and pension benefits, and legal expenses.

The sharp increase in energy prices over the past three years has been especially painful for chemical manufacturers, which use huge amounts of natural gas both to power their plants and as a key raw material.

The U.S. benefited from relatively low natural gas prices until the late 1990s. But by 2005, the report says, this competitive advantage had turned into a cost disadvantage for U.S. firms.

Leonard said the steady increase in domestic natural gas prices was due to "a fundamental imbalance between supply and demand." He explained that "policy decisions on the part of the government stymied development of known domestic reserves, but at the same time Clean Air Act mandates increased demand."

Leonard noted that congressional and presidential moratoriums on offshore drilling have put 85% of U.S coastal waters off-limits to energy development, while utilities have been switching from coal to cleaner burning natural gas for power generation to meet air quality regulations.

The report indicates that the chemical industry is the largest industrial consumer of natural gas in the U.S., accounting for about 36% of domestic demand.??

The U.S. ought not be at a cost disadvantage, Leonard stressed. "We produce more than 80% of the natural gas we consume, and most of the remainder comes from Canada, where domestic prices are about 20% lower than in the U.S," he noted. Because Canada produces more natural gas than it can consume, Leonard said one policy option is to "encourage Canada to extract more natural gas for export to the U.S."