Offshoring Bias in U.S. Manufacturing

Abstract

In this paper, we show that the substitution of imported for domestically produced goods and services—often known as offshoring—can lead to overestimates of U.S. productivity growth and value added. We explore how the measurement of productivity and value added in manufacturing has been affected by the dramatic rise in imports of manufactured goods, which more than doubled from 1997 to 2007. We argue that, analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index, the price declines associated with the shift to low-cost foreign suppliers are generally not captured in existing price indexes. Just as the CPI fails to capture fully the lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. As a result, the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in multifactor productivity and real value added in the manufacturing sector have been overstated. We estimate that average annual multifactor productivity growth in manufacturing was overstated by 0.1 to 0.2 percentage point and real value added growth by 0.2 to 0.5 percentage point from 1997 to 2007. Moreover, this bias may have accounted for a fifth to a half of the growth in real value added in manufacturing output excluding the computer and electronics industry.

Developing the Service Sector as Engine of Growth for Asia: An Overview

“…These analytical challenges are even further compounded at the level of the firm, where many of today's major multinational corporations with their origins in manufacturing such as General Motors or General Electric have large service sector divisions. Indeed, part of the apparent intensification of service sector activity may reflect the changing nature of the firm, specifically outsourcing and off-shoring, with the latter also affecting the measurement of productivity in service-using sectors such as manufacturing (Yuskavage, Strassner, and Medieros 2008;Houseman et al 2011).…”

The Debate over the State of U.S. Manufacturing: How the Computer Industry Affects the Numbers and Perceptions

“…3 The computer industry has a similarly large impact on the aggregate manufacturing productivity statistics. For example, manufacturing multifactor productivity growth rates between 1997 and 2007 fall by almost half when the computer industry is excluded (Houseman et al 2011). …”

“…This bias arises because the price declines associated with the shift in sourcing to low-cost countries are not properly captured, which in turn results in an underestimation of the real growth in imports and an overestimation of the growth in real value added produced domestically. Accounting for offshoring bias, the average annual growth rate in real value added for manufacturing excluding computers was well under 1 percent between 1997 and 2007 (Houseman et al 2011).…”

Biases to Manufacturing Statistics from Offshoring: Evidence from Japan

“…If manufacturers shift sourcing from a high-cost domestic supplier to a low-cost foreign supplier and statisticians do not take account of this price gap, statisticians' estimates of the inputs of these manufacturers will be downward biased and estimates of the TFP will be upward biased. This has been referred to as "offshoring bias" in the literature (Diewert andNakamura 2011 andHouseman et al 2011). …”