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Natural Gas Gives U.S. Global Edge, Says Study

Higher U.S. manufacturing exports may add up to five million jobs by the end of the decade as manufacturers shift production from Europe and Japan to take advantage of lower domestic costs, including lower natural gas costs, according to The Boston Consulting Group (BCG).

By about 2015, the United States is expected to have an export cost advantage of 5-25% in a "range of industries" over Germany, Italy, France, the United Kingdom and Japan.

"Among the biggest drivers of this advantage will be the costs of labor, natural gas and electricity," the consulting group said. "As a result, the U.S. could capture 2-4% of exports from the four European countries and 3-7% from Japan by the end of the current decade. This would translate into as much as $90 billion in additional U.S. exports per year."

Inexpensive natural gas would provide a big boost to U.S. competitiveness. "For the foreseeable future, thanks to the recovery of vast U.S. underground gas deposits of shale, natural gas is likely to remain 50-70% cheaper in the U.S. than in Europe and Japan," BCG predicted.

"That will translate into significantly lower costs for electricity generation, for fuel used to power industrial plants, and for feedstock used across many industrial processes," said BCG Principal Justin Rose, who coauthored the report.

When the increase in U.S. exports to the rest of the world is included, annual gains could hit $130 billion. The biggest U.S. export gains are forecast to be in machinery, transportation equipment, electrical equipment and appliances, and chemicals.

"The export manufacturing sector has been the unsung hero of the U.S. economy for the past few years," said BCG Senior Partner Harold L. Sirkin, who also coauthored the research. "But this is only the beginning. The U.S. is becoming one of the lowest-cost producers of the developed world, and companies in Europe and Japan are taking notice."

The analysis, part of BCG's ongoing series "Made in America, Again," focuses on changing global economics that are beginning to favor domestic manufacturing. The new analysis raises BCG's previous estimate of U.S. job gains. Earlier this year BCG had predicted that the United States would gain up to three million jobs from higher exports and production work that was shifting from China to the United States.

The "reshoring" trend, also referred to as "insourcing" and "onshoring," is in early stages, many large foreign manufacturers have announced plans to use the United States as an export base for other markets, said BCG.

"Toyota, for example, has announced that it will export Camry sedans assembled in Kentucky and Sienna minivans made in Indiana to South Korea, while Honda and Nissan both say they expect to boost exports of vehicles made in their U.S. plants to the rest of the world. Siemens is building gas turbines in North Carolina to ship to Saudi Arabia for construction of a 4 GW power plant. Rolls-Royce recently opened a new aircraft engine parts manufacturing facility in Virginia citing lower labor costs, productivity and 'dollarization' (doing business in U.S. dollars to mitigate local currency risk)," the authors said.

"Over the coming years, as European and Japanese companies decide where to locate new capacity, we can expect many more announcements like these," said coauthor Michael Zinser, who leads the firm's Americas manufacturing work. "Producing in the U.S. offers increasingly compelling cost advantages -- to supply not only North America but also some of the most important overseas markets."

Average manufacturing costs in 2015 are estimated to be 8% lower in the United States than in the UK, 15% lower than in both Germany and France, 21% lower than in Japan, and 23% percent lower than in Italy. Average manufacturing costs in China by 2015 still would be 7% lower than those of the United States, "but those costs do not include transportation, duties and other expenses. And it is less than half of the advantage that China enjoyed a decade ago."

When the many risks and hidden costs of managing extended global supply chains are taken into account, it would be as economical to manufacture many products domestically if those goods were sold in the United States, according to BCG.

"Labor and energy costs will be especially important sources of U.S. competitive advantage in manufacturing. Adjusted for differences in worker productivity, which is considerably higher in the U.S., average labor costs of the other large developed economies will be 20-45% higher than those of the U.S. Only a decade ago, the same U.S. worker cost only 12% less than the average factory worker in Europe."

Some of the U.S. gains are expected to come from making products that otherwise would have been imported from Europe and Japan, but other gains are forecast from higher U.S. export shares in key international trade lanes.

"For example, in many industries, the U.S. will be significantly more cost competitive than Europe as an export base for Asia," said the authors. "In addition to lower labor and energy prices, it is 59% cheaper on average to ship goods from the U.S. to Japan than it is to ship from Europe to Japan. That's because the U.S. is closer to Japan, and rates are much lower for containers departing U.S. ports, where there is significant overcapacity. Similarly, the U.S. will be more attractive than Japan as a base for supplying many goods to Europe."

U.S. exports have risen by 30% since 2006, said BCG, far outpacing growth in gross domestic product. "The signs pointing to continued export growth offer further evidence that the U.S. is poised for a manufacturing renaissance between 2015 and 2020," said Sirkin.

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