Manufacturing in Puerto Rico: Falling Behind the States

Manufacturing in the United States as a whole is experiencing a renaissance. After years of offshoring, American manufacturing is adding new jobs at an impressive pace.

Not so in Puerto Rico.

In 2013, mainland manufacturing jobs rose at an average rate of 7,000 jobs per month. In 2014, the average was 16,000 jobs per month, rising in December to 17,000 jobs. In Puerto Rico, by contrast, manufacturing jobs fell by 1.7% year over year in the most recent figures, those for November 2014. (Data from the Bureau of Labor Statistics.)

Since one of the factors encouraging manufacturing to return to the United States is increasing automation, with lessened reliance on low-paying jobs and more well-paid technical positions, the sheer number of jobs isn’t the only metric to consider. The National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers showed a remarkable 91.2% positive outlook in the final quarter of 2014. And the PMI (Manufacturing Purchasing Managers Index, considered a reflection of the health of the industry overall and factoring in new orders, inventory levels, production, supplier deliveries and employment environment) was at 58.7 for the U.S. as a whole in December, while in Puerto Rico it stood at 46.7.

A number of factors have been beneficial for manufacturing in the States, from falling energy prices to increasing levels of safety in industrial automation. Some lesser-known factors:

  • There is an increased emphasis on the mainland of education-industry partnerships. Many companies have already taken their own steps to connect with local colleges.
  • Walmart’s push for U.S.-made goods, which includes extensive grants for innovation and direct support for companies willing to build or upgrade American factories, has made reshoring practical for many companies which might otherwise hesitate to make the investment.
  • Steadily increasing wages in China and stricter sourcing guidelines from major retailers have increased the costs of managing overseas production. Major retailers are demanding that manufacturers have a representative in the country where the factories are located, and many factories in countries like Bangladesh have been blacklisted for safety issues.

Manufacturing should be a strong opportunity for Puerto Rico under these conditions. The institutions of higher education in Puerto Rico, the existence of a large, educated workforce of U.S. citizens, and the application of U.S. laws in Puerto Rico could be advantages for Puerto Rico.

Yet manufacturing in Puerto Rico has had a different history from manufacturing in the states.  Because the U.S. territory is not a part of the federal Internal Revenue Code, it has not been unusual for U.S. based international companies to reduce federal tax liability by manufacturing through Puerto Rican subsidiaries as if they were operating abroad. The federal government has encouraged this practice based on the premise that the corporate tax breaks would help create jobs in Puerto Rico. For example, former Section 936 of the tax code, enacted in 1976, explicitly exempted income earned by U.S. firms operating in all U.S. possessions. Yet by 1993, the Government Accounting Office (GAO) recognized  “[c]oncerns about the tax benefits in relation to employment generated,” and Congress repealed the credit in 1996.

Critics claim that Section 936 helped Puerto Rico grow its manufacturing base and that its repeal is a factor in current unemployment. Yet Puerto Rico’s history of manufacturing has largely followed the general decline in U.S. based manufacturing, in Detroit and elsewhere.  In addition, favorable tax treatment for U.S. based companies today operating in Puerto Rico as Controlled Foreign Corporations (CFCs) under the tax code does not appear to be bringing manufacturing rates to the level enjoyed by the rest of the United States.

Critics of CFCs in Puerto Rico claim that this special tax treatment does not promote sustained economic growth any more than Section 936 did, and that the policy’s only benefit is the profitability of the companies that use this tax loophole.  Today Puerto Rico is missing out on a manufacturing renaissance.

One Comment

Luis Arroyo

And thats exactly how the “commonwealth” party wants it. The worse PR is ecfonomically, the more likely a rejection of statehood forcing a victory for “commonwealth” by default. That’s what the “populist Democrat Party-Commonwealth” thinks.

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