Monday, September 8, 2008

Competition between states for manufacturing

The US is becoming the low-cost manufacturing location of choice:

The reason is less the level of the dollar, which remains relatively low in spite of the euro’s recent plunge, but rather the huge level of incentives some US states are offering companies to set up factories in their region.

Tennessee, for instance, has just disclosed that it agreed to give German carmaker Volkswagen $577m in incentives for its $1bn plant in Chattanooga.

A senior executive at Fiat, the Italian industrial conglomerate, said: “With the amount of money US states are willing to throw at you, you would be stupid to turn them down at the moment. It is one of the low-cost locations to be in at the moment.”

ThyssenKrupp, the German steelmaker and industrial group, is receiving more than $811m to build a new steel mill in Alabama. It turned down even more from Louisiana, which reportedly offered as much as $2bn, as well as an additional $900m in cheap debt from Alabama, which it declined as it wished to remain debt-free.

Incentives are not new but their increasing size, plus the relative weakness of the dollar and increasing wages in China and eastern Europe, makes the US more attractive.

A VW official suggested the US also had a competitive advantage because European Union state aid rules made support for factories difficult. “It is more difficult in Europe.”

“States are willing to pay for new roads, re-train workers and offer huge tax breaks – that is a competitive package that not many parts of the world can match when you look at how productive US workers are and where the dollar is,” said the chairman of a large Swiss group.

1 comment:

  1. If one state can bribe a company to locate there, other states will be able to bribe them to relocate elsewhere.

    The problem with state subsidies like this is that they do not necessarily line up well with a real comparative advantage.