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If China can’t hold on to manufacturing jobs, how can the USA grow them?

by Aaron McCormack on September 26, 2012

Top Manufacturing Countries – courtesy of Investing.curiouscatblog.net

I read a fascinating quote in a great opinion piece from from fellow WEF Young Global Leader Martyn Davies on investment flows to Africa. (see the full article here).  Perhaps the best thing to do is reprint the quote here, let it all sink in and then let’s think about the consequences.

According to Justin Lin, former chief economist of the World Bank and now at Peking University, China is forecast to lose up to 85-million labour-intensive manufacturing jobs in the next decade. Just as Japan lost 9.7-million in the 1960s and Korea almost 2.5-million in the 1980s due to rising wages and production costs, the Chinese economy will undergo a similar process. Wages for unskilled workers in China are set to increase fourfold in 10 years. According to China’s National Statistics Bureau, the average monthly worker’s wage now stands at $322, with an annual increase last year that topped 20%. Wage inflation and rising production costs are forcing China to become a higher-value and more efficient manufacturer. The Chinese economy has reached the “Lewis Turning Point”, which is the point at which manufacturing costs begin to outstrip manufacturing competitiveness. China’s has passed this point in the past two years.

I want to draw together a number of lines of thought here – this quote, or set of facts, is as good a hook as any to hang them on.  The collective theme is really a “global war for jobs” and the implications for discrete economies and societies.  In particular the United States as they are in an election cycle.

First things first. The global economy has been changed forever – certainly by the slow and steady advance of trade liberalization but, as we shall see, much more meaningfully by advances in technology.  Liberalization of trade means the elimination of all trade barriers and tariffs between nations and the creation of bilateral and multi-lateral free-trade zones (like the EU, or NAFTA).  It allows companies to do business where they chose (to buy, make and sell) without any artificial impediments to doing so.

This is supposed to make the world more prosperous – the theory is simple and is best understood by the old “Guns and Butter” story.  A nation must chose what it will produce, because it cannot make all of everything. So, it makes as much as it can of what it is best at, and lets other nations make what they are best at.  Everyone trades freely for what they need.  By focusing on what they are best at, everyone can maxmise output – i.e. the total amount of things made (goods, food, raw materials) is the highest it can possibly be.

In practice life is much more complicated of course. Just because you are good at making something doesn’t mean that people will want it. What happens if a society really isn’t any good at making anything useful at all?

But free-trade advocates will say that “a rising tide lifts all boats” – the same phrase is currently being applied by Mitt Romney to trickle-down economics where “enabling wealth creators” is designed to pull through prosperity for everyone else.  Free trade has certainly lifted hundreds of millions of people in China, India and other far-Eastern economies out of abject poverty.  If the rising tide is global, and the “boats” include the total population of the planet, then Mitt Romney is correct.  If one looks parochially at the benefits to the US as a whole, the jury is still very much out.

Now, if you are paying close attention to the US Presidential race, you will know that both main candidates have been promising that they will create jobs.  They have even said that they will create “good jobs” or “well-paying jobs” or “middle-class jobs”.

Let’s look at the challenge this presents.  The USA needs to create at least 200,000 jobs a month to satisfy growth in working-age population. With nearly 50million people (about 1/6th of the population) on food stamps and a significant number (perhaps 25%) of the population working, but still not earning enough to pay federal income tax, it is safe to say that a huge number of people who have jobs don’t find them to be “good”, “well-paying” or “middle-class”.

To put it another way, work opportunities in the USA seem to be bifurcating into those that are very well paid, and a lot of other jobs that can’t be thought to be “good” or “well-paying” or “middle-class” – even if you hold down two or three of them at the same time.  The whole country is slowly migrating to become like an episode of “Downton Abbey” – a dwindling set of better-off folks being serviced (or trickling down to) a large number of other people who are basically living sustainably, but not comfortably.  Interestingly if you have a “government” job including teaching, fire, police and civil servant you are most definitely in the “better-off” set.

This is often referred to as “the hollowing out of the middle-class” and one of the job groupings in the hollowed-out core is manufacturing.  Manufacturing jobs are thought to be “better” jobs because they tend to pay better than service jobs, they tend to drive much more investment in R&D (hence innovation and longevity), create more clusters of supply jobs and finally are considered “stickier” (meaning it is harder – though clearly not impossible –  to move a factory than it is to decide to get your software written in Bangalore instead of Boston)

At this point it is important to note that the US was until recently the largest manufacturer (by $ output) until China surpassed it in 2010.  The US and China still dominate manufacturing output, followed by Japan and Germany some ways back.

The $ value of manufacturing output is not the whole story at all.  In terms of jobs, the figures for the USA are much more stark.  Roughly speaking, 30% of working Americans in 1960 were in the manufacturing sector.  By 1990 that was 20%.  Now, it is estimated to be under 10%. In raw numbers, 11.7m Americans are today employed in manufacturing.

Interestingly, though, China has also seen manufacturing decline as a percentage of overall employment.  We hear a lot about the massive manufacturing plants that Foxconn and others have created to feed our need for consumer electronics – but the overall facts is that manufacturing is becoming a smaller proportion of employment even in China. If we believe the projections, even the aggregate number of manufacturing jobs in China will decline sharply over the coming decade.

What is behind this? The first answer is simple – productivity gains.  We are able to make more things with less people through automation and a focus on better processes.  That is as true in China as it is in the USA.

The other important thing to note is that countries don’t make stuff – companies do.  China’s manufacturing is dominated by the needs of American and European corporations who have decided that certain tasks are better performed from a cost/quality perspective in lower-cost economies.  Right now you can figure on the hourly costs of a Chinese manufacturing worker to be about one tenth of those in the USA.  And so, if it was possible to redraw the graph above by domicile of the company making the goods, the USA and Germany would most likely come out on top.  It is a complicated picture that requires a fair amount of study and evidence to begin to see the full picture, right?

Back to the headline at the top of this post, though. China itself is now struggling to compete with other countries who present a better risk/reward balance for labor costs.  Those countries are other East Asian nations as well as emerging Latin American and African nations.  Driven in part by Chinese investments in upgrading infrastructure, some African countries will now do to Chinese manufacturing jobs what China did to American manufacturing jobs.

In terms of generic manufacturing jobs, the tides are flowing even further away from the USA – never mind any form of reversal of that tide.

But let’s remember that the largest driver for the loss of manufacturing jobs anywhere on the planet is increased productivity, meaning better technologies and processes.  Think about it – how many people used to stand on the line making cars in Lansing MI in the 1970s, compared to the number required on a similar line today? Maybe a ten-fold reduction in numbers.  It is no different from how the invention of mechanised farming radically reduced the number of people who work the land.  And by the way it is happening in service industries too – for example the rise of autonomic computing (computers fixing other computers) is greatly reducing the amount of IT support staff that a company needs.

So, what exactly can the Presidential candidates do to create “good”, “well-paying”, “middle-class” jobs if they are elected?

President Obama currently points to an increase in over 500,000 manufacturing jobs since taking office in January 2012 – reversing 10 straight prior years of decline.  He and his spokespeople are less specific about how this has taken place – i.e. where is the real specific cause-and-effect.  But likely much of the rise will be in the domestic energy sector (the job creation record that Gov Rick Perry loved to talk about) and perhaps from actions to rescue the auto industry.  As the Wall Street people love to say, even a dead cat bounces if you drop it from high enough.  So, whilst the results are encouraging, the President doesn’t seem to be able to conjure up a repeatable playbook that links specific government action to job creation.

His challenger has a three-pronged message for revitalizing the economy in general – one that does have implications for manufacturing specifically.  Those key themes are the rollback of regulations, opening more federal land to energy/resource companies and the lowering of taxes on companies and job creators.  Successful companies, big and small, will create a general increase in jobs  – removing regulations and lowering taxes will, according to Romney, encourage money currently waiting on the sidelines to invest in creating new businesses and growing existing ones.  However, there needs to be demand for the things that these new businesses will create – and it is not clear that such demand exists, except perhaps for oil and gas.

Like much of this election cycle, there is more specificity that would be required to really judge the plans that the candidates are offering.

In practice, it seems that only the domestic energy sector will offer a real opportunity for a high-impact set of decisions that can both improve energy security in an increasingly volatile world AND put Americans to work in a wide range of jobs that can pay well.  I think we can expect to see an aggressive move in this direction whoever wins – at the expense of environmental and health&safety concerns.  Like all resource extraction, it could be short-lived (a decade, maybe two) but will be too great a prize for congress and the White House to forgo.

The other long-shot for immediate impact would be a reversal of the direction on free trade.  It seems an amazing thing to say – that the USA, the country that drove the free trade agenda, may start to walk backwards from this.  But, with enough domestic pressure, and in particular if there are further major external shocks (Euro, Middle East war) it could provide an avenue to move more jobs back to the markets where their customers reside.  Mitt Romney has been playing TV adverts about how he will “deal firmly with trade cheats like China” and there is an isolationist strain in the Republican genetic makeup that has always been prevalent.  The left in the USA has always been resolutely against the expansion of free trade (at least for goods entering the USA) citing their “solidarity” with labor in other countries and concerns that both the safety of workers is not assured overseas, and the safety of American consumers is put at risk with lower-quality (or dangerous) goods.  But with both parties highly reliant on corporate money (yes, even Democrats) and with corporations being the largest beneficiary of free trade, it is hard to see such a volt-face occurring.

That simply leaves the “hard yards”.  Meaning, a long slow battle to invent, create, manufacture and service things in the USA that enough people around the planet want in sufficient quantities.  And it can’t be Iphones, right? It would have to be those “high end” and “complex” manufacturing and service tasks where the high costs of the US worker are justifiable – either because the quality cannot be found elsewhere, or because the expertise is clustered in some important way.  Think clean-tech, biotech, nanotech, life sciences and automation jobs, for example.

It is quite a task to invent and produce enough things to provide even 1 million jobs in that space.  And there are other advanced nations, or emerging nations, with better education systems, great universities, well educated workforces, lucrative tax incentives, fantastic infrastructure and nimble governments with the same ideas.

The detail and the drive required to make progress in this way is far-removed from the election soundbites. It is tempting to say that in fact government shouldn’t be involved at all in this space – but the early signs point to public-private partnership being crucial to successful emerging clusters of growth.

I wonder if this bottom-up, organic approach will deliver results that will satisfy the US electorate in the next decade (the same question can be posed for many other countries too)?

There is no way to push back the great tectonic shift that is automation & productivity.  But there will be opportunities for societies that continue to struggle to roll back aspects of global free trade – even if it is done so under the guise of concerns for workers’ rights or through a (more legitimate) measure like a “cost of carbon” for imports.  It is going to get very interesting and not just for the USA it seems…

 

 

 

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