• Strategy
  • The Economist

The Misery of Manufacturing

Why there is a new panic over manufacturing in the rich world.

Rich-country manufacturing has supposedly been in decline for so long that it is surprising that the politicians, unions and journalists who leap so nobly to its defence find much left to save. But they do: after years of silence on this hoariest of economic fallacies — that manufacturing is something special — the alarm bells are now ringing louder than ever. American politicians are rushing to aid the manufacturing lobby. In Britain the rebranded engineering workers union, Amicus, is raising the issue to embarrass the government at the Labour Party conference next week; it is asking for a minister for manufacturing and loads of government help.

Politicians love manufacturing because it provides lots of visible, reasonably well-paid jobs. That is why American states fight each other with subsidies to land each new Japanese car-assembly plant, and central European countries do the same, knowing that no new car factories will be built in western Europe.

In Japan, politicians decry the “hollowing out” of Japanese manufacturing, as large-firm production seems to flee offshore. In Europe, the French are normally stoutest in defence of their national champions. But Germany is newly fierce; its chancellor, Gerhard Schröder, has picked a fight with the European Commission, denouncing its “anti-industrial bias” as it seeks to stop subsidised state loans and other favours for German industry.

Maybe this onslaught on the commission explains why its president, Romano Prodi, wrote plaintively in Le Monde this week of the “deindustrialisation of Europe”. But at least another Italian economist, the competition commissioner Mario Monti, is questioning yet another French bail-out, this time of an engineering giant, Alstom, where around 100,000 French jobs are at risk.

Made (Too Much of) in America

But the clamour is loudest in America. In the 1980s, the enemy was Japan: now it is China. “Walk around Wal-Mart,” says Jack Smith, until this spring chairman of General Motors, “and it looks as if everything is made in China.” This week, America’s National Association of Manufacturers (NAM) resolved to press Congress to sanction China for “manipulating” its currency markets (ie, keeping its exchange rate low).

Protectionist bills may begin to proliferate in Washington, D.C. John Snow, the treasury secretary, jawbones the Chinese about the yuan. George Bush has a raft of initiatives to keep manufacturers afloat, including a new office at the Commerce Department to monitor unfair trade, and an assistant secretary to co-ordinate manufacturing policies. The anti-Japan campaign in the 1980s wreaked havoc on international trade relations and currency markets. What will happen in the China row?

One minor obstacle, then as now, is the awkwardness of facts. Manufacturing has only recently, and with unusual lethargy, emerged from a global recession. (From a peak in June 2000 to a trough in December 2001, manufacturing output shrank by 7.6 percent in America.) But, on a longer view, rich-world manufacturing is in terrific shape (see chart). Amicus may have a point that Britain under-performs its peers in manufacturing. But that is only because Britain’s competitors — particularly America — have done so well. Since 1970, America’s manufacturing output has more than doubled. Even after the recession, American manufacturing output is almost 50 percent higher than in 1992.

What really animates the China-bashers, of course, is not the decline of manufacturing, but the loss of rich-world manufacturing jobs, as firms cut payrolls by using more sophisticated processes. In 1947, according to the Federal Reserve Bank of Chicago, 35 percent of America’s workforce were employed in manufacturing. By 2002, this figure had fallen to just 12 percent. With employment falling and output rising, America has enjoyed soaring manufacturing productivity, a feat repeated to some extent elsewhere in the rich world. On the one hand, NAM suggests that “manufacturing’s future in America is now in jeopardy”. On the other, NAM boasts that American manufacturing is “innovative, productive and efficient”. Which is it?

The Chinese facts are even more awkward. What alarmists really hear when they tune into the “giant sucking sound” (or whatever) of American factories disappearing into China is mostly the continuing stampede of its firms into other rich countries’ markets. Though growing rapidly, American manufacturing investment in China is still a trickle compared to the far larger flows into other rich countries.

Despite the pull of China’s cheap labour, firms find lots of reasons to keep lots of manufacturing at home. One is that, as rich-country factories employ fewer workers, labour costs no longer make or break decisions about where to put a factory. Frank Vargo of NAM, for instance, calculates that payroll costs account for just 11 percent of overall manufacturing costs in America. Because shipping costs and speedy distribution are more important than relative wages, Dell builds its computer-assembly plants near to its customers, both in rich and poor countries. Moreover, Mike Kilgore, a consultant with Chainalytics in Atlanta, says firms often underestimate the cost of overseas manufacturing, particularly those associated with transportation, extra inventory, and political and security risks. Meanwhile, growing demand for prompt delivery from retailers such as Wal-Mart in America and Carrefour in France also pulls manufacturing home.

Primitive mercantilist views about the piling up of foreign currency by a nation selling more than it buys from abroad still rule in parts of Europe, notably Paris. In Britain, on the other hand, the unions may find their latest campaign tough going. The Labour government of Tony Blair has, at least until now, cast off its old pro-manufacturing socialist bias and embraced the mostly neutral policies towards manufacturing of its Conservative predecessor. Amicus’s pleas over the 2,500 manufacturing jobs it claims are lost in Britain every week will probably fall on deaf ears in Britain, which despite slow economic growth still has more or less full employment — unlike America or Japan.

In Japan China is a favourite bugbear of nationalist politicians — and Japanese racists in general. Yet the ruling Liberal Democratic Party finds some of its baser instincts leavened by its desire to please big Japanese manufacturers, such as the car companies and electronics firms, which are finding both selling to and investing in China so attractive.

Hopefully, similar common sense will prevail in America, where big firms are indeed worried about growing protectionist sentiment towards China. But it may not. America’s presidential elections next year will follow a recession that has cost 2.7m jobs. Politicians will feel the sharp anger of thousands of smaller American manufacturers, from furniture firms in North Carolina to car-parts makers in the Midwest. These firms really are taking a beating from China. An early test of Mr Bush’s mettle will be how he handles a review of America’s steel tariffs, slapped on 18 months ago at the behest of its ailing foundries. Expect more fireworks.

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