Three reasons why the 21st century will be American

There are three major trends underpinning the comeback of the US as the world’s political and economic leader”, says Henk Grootveld, Head of Thematic Equity Investments at Robeco.

First, the outsourcing trend to China and India seems to have passed its peak. Labor costs in these countries are increasing and production costs in China are expected to be on a par with those in the US by 2015. As a result, ‘local for local’—producing closer to home for local consumption—is the new adage in the US.

In 2012, there were more than 100 announcements of new manufacturing sites in the US. Here are just three of them. Egyptian company Orascom will build a USD 1.4 billion fertilizer plant in Iowa, the biggest investment in the state’s history. Airbus will build its first US assembly plant in Alabama. And Honda plans to become a net exporter from the US.

Grootveld points to Inditex’s business model for its Zara format as an example of local production providing a competitive advantage. “This Spanish fashion retailer produces locally and is therefore able to adapt its production quickly to consumer preferences. That’s not the case for H&M, which outsources its production to Asia and runs the risk of being stuck with items that just won’t sell,” he explains.

Shale gas to give US energy autonomy

The second trend—and the one that really has the potential to change the world’s balance of power—is the advance in shale gas & oil. Unhindered by the environmental considerations that keep Europe from fully embracing this relatively new extraction technique, the US has an enormous amount of cheap shale gas & oil at its disposal.

Shale reserves have become an increasingly important source of natural gas & oil in the US since the start of this century. Interest has spread to the potential for shale gas & oil production in the rest of the world. In 2000, shale gas provided only 1% of US natural gas production; by 2010 it was responsible for over 20%. And the US government’s Energy Information Administration predicts that by 2035, 46% of the country’s natural gas supply will come from shale gas.

“An important advantage the US has over Europe and China, for example, is that it already has an extensive pipeline infrastructure at its disposal,” notes Grootveld. As a result, shale gas in the US is cheap. Gas costs approximately USD 3 per million BTU (British thermal units) in the US. That compares with USD 10 in Europe and USD 13 in Asia.

Fatih Birol, the International Energy Agency’s Chief Economist, forecasts that the North American Free Trade Association (NAFTA) will be energy self-sufficient by 2020.

He expects the US to be able to provide its own energy by 2035, having surpassed Russia’s gas production in 2015.

“This is bound to have consequences for the US’s involvement in the Middle East and the political clout of the oil states,” observes Grootveld.

The third industrial revolution

The third trend that he identifies as playing into the US’s hands is the information revolution—or “the third industrial revolution”, as he calls it. Labor costs in the US are increasing only slightly, at a below-inflation rate. One of the developments curbing their rise is the declining cost of manufacturing robots, due to standardization and economies of scale.

If the yen continues to depreciate, this will also dampen robot prices, as most robots are produced in Japan and thus priced in yen. And the trend will not stop there. “I expect new technologies such as cloud computing and 3D printing to lead to the creation of robot apps,” he adds.

A sharp change in geopolitical realities

All in all, these three themes have contributed to a geopolitical map that is very different from even a short while ago. China, with its policy of shifting the driving force of its economy from exports to domestic growth, is likely to produce more for its own population and to reduce exports. The US, meanwhile, will produce more for its own people and reduce imports. In a relatively short period of time, the global economic and political balance has thus shifted significantly. Who would have thought that a couple of years ago?