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Guarded Optimists

Is American manufacturing on the way out, or on the cusp of something better?

By 10.29.03

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"Going, going, gone" is an expression used by announcers describing a home run ball. Recently it has also come to define manufacturing job losses in the United States. For over 37 consecutive months, manufacturing jobs have hemorrhaged. The total number of jobs lost in the U.S. exceeds 2.7 million and this trend will continue into the foreseeable future.

Most of these jobs have gone to China where low "slave" wages have provided manufacturers with a windfall. As the president of a major Midwestern firm put it, "If I intend to compete, I must take advantage of the low wage rates in China." The differential in wages between the U.S. and China is a factor of 50. Moreover, the added costs of doing business in China -- i.e. health insurance, legal expenses -- are minimal.

Nor are white collar workers immune from this drain. The Gartner Group, a market research firm, estimates that 10 percent of the jobs at U.S. information technology vendors will move offshore by 2004. Andy Grove, chairman of Intel, said recently that he is torn between his responsibility to shareholders, to cut costs and improve profits, and to U.S. workers, who helped build the nation's technology industry but are now being replaced by cheap foreign labor. China and India could surpass the United States in software and technical service jobs by 2010.

For most analysts this is the standard snapshot of globalization, a world in which competition among nations has grown fierce, with high social costs. Union officials and those forced onto unemployment insurance greet the news with anger and calls for tariff protection. Columnist Paul Craig Roberts has been an impassioned voice for protectionism. He notes with alarm that the nation has gone from more than 17 million manufacturing workers in 2000 to under 14.5 million in 2003.

Some practitioners of the dismal science greet this news philosophically. The U.S., these economists say, has merely entered the information age with manufacturing an increasingly peripheral part of the economy. After all, consumers derive the benefits of cheap products. Wal-Mart is the nation's largest retailer in large part because it passes along to the consumer the benefits of low wage manufacturing in China. This company alone accounts for about 10 percent of the U.S. current account imbalance with China.

Pessimists argue that the loss of manufacturing will have national security implications, forcing the U.S. to rely on foreign suppliers during a time of war. Others maintain that low wage rates in China and elsewhere will have a dampening effect on earnings, putting the economy of the U.S. and other advanced nations into a deflationary tailspin not unlike what has been experienced in Japan since the 1990s.

A new book, U.S. Manufacturing: The Engine for Growth in a Global Economy (Praeger Books, 264 pages, $69.95), edited by Thomas J. Duesterberg and Ernest H. Preeg, presents a nuanced, somewhat brighter picture of manufacturing. As the editors note, manufacturing has been on a roller coaster ride, expanding in the 1990s and then declining in the last three years in the worst recession since the oil crisis of the 1970s. They ask whether U.S. manufacturing is doomed to long term decline in the face of foreign competition. And whether this long-term decline would foreshadow the loss of U.S. technological leadership?

Their analysis is both crisp and commonsensical. In historical terms the "hollowing out" of manufacturing is not new. It has happened before. What distinguishes recent developments from the past is the acceleration of change. And the lousy economy hasn't helped matters.

In their breakdown of the data with suggestions for policy reform, Duesterberg and Preeg emerge as counter-intuitive guarded optimists. Since 1991, they write, manufacturing in the so-called "new economy" has actually grown faster than the overall economy when measured in real, chain-weighted dollars. Moreover, productivity gains in manufacturing have been staggering mainly because of new technologies and the U.S. edge in research development.

So, the decline in the relative proportion of employment in manufacturing is likely to continue, but manufacturing on the whole is not likely to decrease. Their most notable conclusion is that since technology drives economic growth and the U.S. has a commanding technology lead, the success of manufacturing is bound to technological innovation.

It's worth noting that capital investment in the U.S. is generally more productive than elsewhere because American managers are more flexible and open to change than their peer competitors. Even with the wage disadvantage and structural barriers to innovation (e.g., litigation madness, escalating health care costs, a poor education system), the United States is still the most open and resourceful market on the globe.

Some evidence: In a 20-year period starting with 1980, the National Science Foundation reports, the high technology share of U.S. manufacturing output increased from 9.6 to 16.6 percent. During the same period, the U.S. share of worldwide technology production expanded from 30 to 36 percent.

With the onset of an era of customized production, the editors forecast new opportunities and challenges for U.S. manufacturers. Markets will expand and companies that once only produced goods will now be obliged to offer a host of services, including maintenance, insurance, logistics, and finance. A seamless web of supply, production, marketing, and service operations will have to be put in place, indeed are already being put in place.

If U.S. capital firms continue to invest, innovate, adapt and integrate into global markets, I suspect the optimistic speculations in this book are warranted. But it's going to be a bumpy ride. The loss of low end manufacturing, along with the exportation of white collar jobs, will put enormous pressure on politicians to enact tariff barriers, which would have a chilling effect on the innovations needed for the U.S. to maintain its technological edge.

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About the Author

Herbert London is president of the London Center for Policy Research.