102-Saving Jobs by Outsourcing

For nearly two generations, the US has been in a long-term effort at off shoring manufacturing in order to save costs.  More recently, some efforts  are underway to re-shore some of the jobs lost to the cost saving efforts of the last many years. China and Mexico have been the major beneficiaries of off-shoring. How do their costs compare today? What have we gained and lost in the US? And what are the practical implications of re-shoring?

Posted 5/7/09

SmithCNC-USA is an Ohio firm that helps small midwestern manufacturers obtain components and raw materials from China and Mexico. The firm’s customers are U.S. manufacturers who are doing small and medium sized production runs. These companies are under severe pressure in the United States because of relatively high costs here compared to those in China and Mexico. This company has convinced its customers that they can save a good number of their jobs, and perhaps, even grow, by outsourcing only part of their production to cheaper foreign sources. The company convinces its customers to outsource just some components in order to save the rest of the jobs in the customer’s organization.

This cost reduction effort is an example of one of the ways companies are able to reduce the cost of Inputs used to produce product Output. A reduction in the rate of cost a company must pay for the Inputs used to produce product Output is equivalent to reducing the number of Inputs. A person earning $10 an hour, who can replace another earning $20 an hour, effectively cuts the labor input by 50%.

There are several ways that companies have found to reduce the rate of cost they pay for their Inputs. These include the following:

• Purchase in larger quantities
• Reduce the quality of the Input
• Change the components in the rate of cost
• Use subsidies offered by third parties
• Request the supplier to lower the price of the Input
• Change the source of supply to a less expensive supplier
• Expand in-house work

The SmithCNC-USA work is an example of a change in the source of supply, which reduces the effective Inputs required to produce the product Output.

For many more examples of ways to reduce the rate of cost you must pay for your Inputs, please see www/strategystreet/improve/costs/reduce the rate of cost.

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Update 2022:

The US hourly minimum wage is 4 times that of China.  By 2020 the US had lost 3.7 million jobs since 2001 due to its trade imbalance with China.  The manufacturing sector had suffered the most.  The trade deficit has continued to grow.  From 2008 to 2018 1.7 million US jobs disappeared.  These job losses affected all 50 states.  In 2019 the US still had a $321 billion trade deficit with China.

On average, full labor costs account for about 70% of total manufacturing costs.  Mexican direct labor costs average less than 25% of those in the US.  During the period from 1980 until 2022 the US suffered a $250 million average trade deficit with Mexico.  This figure reached a peak of $6.3 billion in 2020.  Most of Mexico’s exports are manufactured products.

The export of US jobs to countries with lower labor rates has decimated US manufacturing employment and has had disastrous effects on many towns reliant on those manufacturing jobs. We have reduced direct costs for consumers but have we counted the full cost to the US economy? Unemployment is low in 2022 but are the jobs that we have today of the same quality as those we had a generation ago?

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Update 7/26

The True Price of Bringing Manufacturing Home

Fifteen years ago, I wrote about SmithCNC-USA, an Ohio broker that helped small Midwest manufacturers cut the Rate of Cost on their Inputs by shifting a slice of production to China and Mexico. The pitch was simple: outsource a few components, save the rest of the jobs. That trade-off is still the central fact of American manufacturing. What’s changed is which country delivers the savings, and how big those savings still are.

I went back and checked the  the numbers on four questions that grew out of that original post.

1. What does outsourcing to China and Mexico actually buy you?

Real savings, but shrinking and increasingly one-sided. The Building Block Costs ( ie., People, Purchases and Capital employed)  break down like this:

• Chinese coastal manufacturing wages: $6.50–$8.00/hour today, up from roughly $3.60/hour in 2016 — more than a doubling in a decade.
• Mexican fully loaded manufacturing wages: $4.90–$7.27/hour, now below China’s.
• Section 301 tariffs on Chinese goods: 25–29.5% across most categories, over 100% in some.
• USMCA-compliant goods from Mexico: 0–4.5% duty.
• Ocean transit from China: 20–40 days. Border transit from Mexico: 2–7 days.
• Net landed cost on a $100 component: often above $125 from China, versus roughly $101–$104 from Mexico.

The number that matters most is the last one. Once you load tariffs, freight, and the working capital tied up in a 30-day supply chain onto the unit cost, China’s Rate of Cost advantage on Inputs is mostly gone for goods headed to US shelves. Ten years ago, outsourcing to China cut input costs by 40–70%. Today, after tariffs and logistics, it often doesn’t cut them at all.

That’s not a small shift. It’s the difference between a strategy that works and one that doesn’t.

2. China vs. Mexico — why has the winner changed?

Because the underlying Rate on every major Building Block Cost moved in Mexico’s favor at the same time China’s tariff exposure went up. Line them up:

• Labor: Mexico now cheaper than China, a reversal of the 2000–2018 pattern.
• Tariffs: Mexico 0–4.5%, China 25–29.5%+. This alone is worth eight figures a year to a mid-size manufacturer shipping $50M annually.
• Lead time: Mexico 2–7 days, China 20–40 days. Shorter lead times mean less inventory, less working capital, and faster response to demand swings.
• Energy: roughly a wash, $0.08–$0.12/kWh in both countries.
• Tooling: China still wins here, 20–40% cheaper on steel molds and tooling, reflecting a deeper, more mature supplier base.

China hasn’t stopped being useful. For non-US markets, for complex tooling, and for high-volume electronics where its supplier density has no real substitute, it’s still the Standard Leader location. But for goods headed to the United States, Mexico has become the low-cost source, and the FDI numbers show manufacturers know it: $41 billion in manufacturing investment flowed into Mexico through the third quarter of 2025, up 15% year over year. That’s not a marginal reallocation. That’s consolidation of US-bound supply chains around a new geography.

The strategic read: if your sourcing strategy still treats China as the default low-cost option for US-bound goods, it’s built on numbers that stopped being true around 2018.

3. What has outsourcing actually cost the US economy and workforce?

Here the honest answer is that the aggregate numbers and the human numbers tell two different stories, and both are true at once.

At the aggregate level, outsourcing worked exactly as trade theory says it should. Import competition from China reduced US consumer prices by nearly two percentage points for every one-point rise in import share, which works out to roughly $411,000 in consumer savings per manufacturing job displaced — savings that fell disproportionately to lower- and middle-income households who spend more of their budget on tradeable goods. Trade with Mexico alone is estimated to support around 5 million US jobs, mostly outside manufacturing: logistics, design, finance, agriculture.

At the community level, the damage was real, concentrated, and long-lasting. The most-cited research puts direct manufacturing job losses from Chinese import competition at roughly 985,000, with total economy-wide losses as high as 2–2.4 million between 1999 and 2011. China-related competition accounted for close to 60% of all US manufacturing job losses in that period. And the workers who lost those jobs mostly didn’t find new ones in other sectors — they converted into long-term unemployment, with effects still visible two decades later in specific regions built around furniture, textiles, and small-parts manufacturing.

An important caveat: not every economist agrees on the size of that number. A competing general-equilibrium model puts China’s share of 2000–2007 manufacturing job losses at closer to 15%, with automation and broader technological change doing more of the damage than trade specifically. Treat the 1–2 million figure as the high end of a real but contested range, not settled fact.

What isn’t contested is the shape of the outcome: diffuse gains spread thinly across the whole country, concentrated losses dropped on a small number of towns, and very little in the way of retraining or transition support to bridge the two. That mismatch, more than the trade deficit itself, is the real policy failure sitting underneath the outsourcing numbers.

4. What would a fully American-made car cost?

Meaningfully more — and the gap grows fast as you move from “mostly American” to “entirely American.”

Start with today’s baseline. The average new vehicle sells for about $48,000, built on roughly $30,000 of parts and materials sourced from a global supply chain even when final assembly happens in a US plant. Industry suppliers estimate the incremental cost of pushing domestic content higher runs like this:

• Raising US/Canada content from 70% to 75–80%: roughly +$5,000
• Raising it further from 80% to 90%+: another +$5,000–$10,000
• Reaching effectively 100% US-made: +$10,000–$20,000 total versus today

That puts a fully domestic vehicle at roughly $58,000–$68,000, a 20–40% premium over today’s average. And that assumes you can actually source everything domestically, which right now you can’t. Certain inputs — specific chips, wiring harnesses, rare earth materials, platinum-group metals — either aren’t produced in the US at any scale or aren’t mined here at all. Building that supply chain from scratch would take 10–15 years and a large amount of new capital investment, and at low initial volumes before Economies of Scale kick in, some estimates put a genuinely from-scratch, all-American vehicle north of $300,000.

The takeaway isn’t that reshoring auto production is impossible. It’s that the Cost Structure of a modern car is a genuinely global Building Block Cost stack, and no single country — including the US — currently has the Input depth to replace it cheaply. Reshoring the last 20–30% of content is the expensive part, not the first 70%.

The core call in the original 2009 post — that outsourcing a slice of production could save the rest of the jobs — still holds, but the map has redrawn itself underneath it. China was the default answer in 2009. Today, for anything headed to a US shelf, Mexico usually is. If you’re still running sourcing decisions off a China-first assumption, it’s worth rerunning the math. The Rate of Cost has moved.

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