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The importance of manufacturing to the U.S

By Chris Lewis - posted Tuesday, 31 July 2012


The Accenture study also suggests that companies “may have neglected to factor in such cost variables as taxes, country regulations, customer service, quality, inventory and other supply chain costs, human capital, and currency rates”.

Fourth, the U.S. debate is increasingly aggressive towards China and resistant to the belief that a developed nation cannot have a substantial manufacturing sector. Gene Sperling, Director of the National Economic Council, in May 2012, disputes the decline of U.S. manufacturing as “an inevitable and irreversible decline due to decades-long productivity and technology gains that will mean a continual loss of jobs”.

Sperling notes that U.S. workers have constantly improved productivity, including the period from 1965 to 2000 when U.S. manufacturing jobs were relatively stable, but the major reasons to US manufacturing decline was due to “currency manipulation, foreign trade barriers, intellectual property theft, and related factors”.

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Ian Fletcher argues that the U.S. government needs to go further at a time when GM was forced to import the batteries for the Chevy Volt from South Korea, and China is systematically targeting and killing off America's solar-cell industry. Fletcher argues that given “the aggressive, cheating economic strategies of foreign nations”, U.S. manufacturing industry needs the U.S. government to adopt aggressive foreign policymeasures to counter unfair trade practices. While President Obama has doubled the rate of World Trade Organisation (WTO) cases against China from the previous administration, Fletcher argues that “until the political decision is made to offend the multinational corporations and get serious about trade enforcement, new laws and new institutions will mean nothing. It's just posturing to convince people the administration is "doing something”.

Fletcher stresses that “any administration that wants to help American victims of unfair foreign trade practices, but isn't doing anything about currency manipulation, simply isn't serious. It's a 30 to 40 per cent subsidy to Chinese exports plus an equivalent tariff on American imports. And it drags along third countries whose own currencies are affected by the dollar-renminbi exchange rate.

Alan Tonelson also calls for more urgent action on the basis that recent U.S. policy decisions are having only a minimal impact. For example, from June 2010 to June 2012, after Beijing loosened the Yuan’s peg to the dollar, the Yuan strengthened by 6.94 percent versus the U.S. yet dollar yet Chinese import prices increased by only 4.58 percent, despite increasing Chinese wages. This is because productivity in China’s export industries keeps rising strongly, while China continues to provide huge subsidies to Chinese manufacturing and export industries, thus offsetting any cost increase caused by a rising Yuan.

It remains to be seen just how much U.S. manufacturing industry will be revitalised in coming years. Doug Jones, executive vice-president of MSC Industrial Direct Company, a company that distributes around 600,000 industrial products from 3,000-plus suppliers to 320,000 customers, believes that global sourcing is here to stay, whether operations are in Mexico, China, or other countries. He believes “there is just as much opportunity in global sourcing as there was five years ago—if not more”.

However, Cort Jacoby, a supply-chain expert at the consulting firm Hackett Group, suggests U.S. companies may move back or stay offshore for a variety of reasons. Goods coming back may include heavy or bulky items subject to high shipping costs, such as heavy machinery. Domestic production may include expensive goods influenced by frequent changes in consumer demand for certain colors or styles, such as high-end clothing, home furnishings or appliances.  Jacoby also refers to goods where safety is a paramount concern: food or baby products (James Hagerty, Wall Street Journal, 21 May 2012).

To conclude, it looks like manufacturing debate in the U.S. remains alive and well. And who knows, perhaps the U.S. is taking its first steps coming back.

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I suspect that the U.S. is not alone amongst modern democracies in recognising the importance of manufacturing. WithMalcolm Bosworth, a former economist at the Productivity Commission, telling Radio National that car industry protection was bad economics given that just 13-14 countries having a motor industry, it turns out that 34 countries produced more than 100,000 cars in 2011, including 19 OECD nations.

Perhaps rather than adhere to some magical free trade theory, as tends to dominate in Australia, we should look closer at the U.S. experience to help us understand why the end of manufacturing is not a given, although some of the answers may still mean more pain ahead for some workers. The fact is wages and productivity are important factors, but so too is mercantile China. 

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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