by Steve Schmidt, Darby
The stuff we buy is going to get more expensive. The reasons are not as straightforward as we might expect. There are notable solutions.
John Deere recently announced its plan to shift production from the U.S. to Mexico. It’s not difficult to understand why. John Deere acknowledged that they operate in a global market. They sell their products all over the world, not just in the U.S. Consequently, to stay competitive, they have to consider their labor costs. Labor in Mexico is about 80% lower than in the U.S.
That is not to say that American factory workers are overpaid. On the contrary, they should receive a greater proportion of their employers’ profits.
There is great interest in achieving more factory production in the U.S. Many seem to want to vilify foreign countries because they make stuff that could have been made in the U.S. But American companies were not forced to move their factories to other countries. The much lower cost of labor in foreign countries was a key driver to move factories outside the U.S. Sadly, American companies often have spent profits on CEO pay and shareholder buybacks instead of research and development leading to valuable innovations.
The average wage in Mexico is $3.50-6.00/hour. In the United States it is $20.00-30.00/hour. U.S. factory workers earn 5-8x more per hour than Mexican workers. This wage disparity drives nearshoring (U.S. companies moving production to Mexico for cost savings).
It makes sense that some U.S. companies move their factories to Mexico, China, or elsewhere. The larger question is, how should the U.S. respond?
Furthermore, have Americans really considered what stuff would cost if companies returned manufacturing to the U.S.? Labor costs for American companies would skyrocket. In turn, the prices we pay would go up significantly.
Still, we want some things built in American factories. We must provide American jobs.
Where do we go from here? Warren Buffet offered some sage advice. Buffett recently emphasized the importance of countries focusing on producing what they do best during Berkshire Hathaway’s 2024 annual shareholders meeting. He advocates for the economic principle of “comparative advantage,” the idea that nations should specialize in goods or services they can produce most efficiently and trade for the rest. Buffett argues that countries (like businesses) thrive when they prioritize their competitive advantages rather than trying to dominate every industry. Excessive national protectionism is not the answer.
Key Buffet quotes:
“The world works better when we exchange what we’re good at.”
“The world has gotten richer by trading what you make best for what others make best. Trying to do everything yourself is a recipe for poverty.”
John Deere seemingly agrees. John Deere indicated they will retain high-tech research and development at their Iowa plant.
Let’s focus production on what America does best. Let’s put Americans to work designing and building stuff at home that the world wants and can’t get elsewhere.