by Ian Fletcher
1.46 %
Utilities
1.16 %
Software
0.80 %
It has been estimated that direct labor is under 20 percent of production cost for half of U.S. manufacturers.226 The average cost disadvantage of U.S. manufacturers versus their opposite numbers in low-wage nations is, in fact, estimated to be only 17 percent, a difference obviously often within the reach of smart strategies.227 This is why manufacturing still exists in high-wage nations in the first place.228 It is why America could be successfully defending blue-collar wages when we are failing and why some other developed nations are succeeding at this better than we are.
About the only thing postindustrialism gets right is that selling a product with a high value per embodied man-hour almost always means selling embodied know-how. But know-how must usually be embodied in some physical package before reaching the consumer, and manufactured goods are actually a rather good package for embodying it in. Exporting disembodied know-how like design services is definitely an inferior proposition, as indicated by the fact that since 2004, America’s deficit in high technology goods has exceeded our surplus in intellectual property, royalties, licenses, and fees.229
That some individual companies like Apple make a success out of keeping design functions at home and offshoring the manufacturing does not make this a viable strategy for the economy as a whole. Apple is a unique company; that is why it succeeds. And even fabled Apple is not quite the success story one might hope for from a trade point-of-view. Due to its foreign components and assembly, every $300 iPod sold in the U.S. adds, in fact, another $140 to our deficit with China.230 If sophisticated American design must be embodied in imported goods in order to be sold, it will not help our trade situation.
Meanwhile, other companies are shutting their U.S. design centers and moving them closer to actual production and the know-how that accumulates where it takes place. As Douglas Bartlett, chairman of the printed circuit board manufacturer Bartlett manufacturing in Cary, Illinois, puts it:
Anyone who knows anything about real-world manufacturing knows that the factory floor and the lab form a continuous feedback loop. Unfortunately, virtually none of our trade and economic policymakers know anything about real-world manufacturing.231
So the erosion continues, industry by industry. For example, in March 2007, Chrysler closed its Pacifica Advanced Product Design Center in Southern California, following the closure of nearby centers owned by Italdesign, American Specialty Cars, Porsche, Nissan, and Volvo.232 Of GM’s 11 design centers, only three are still in the U.S.233 In the words of Eric Noble of The Car Lab, an automotive consulting company, “Advanced studios want to be where the new frontier is. So in China, studios are popping up like rabbits.”234 This trend bodes extremely ill for the future; as Stephen Cohen and John Zysman explain in their book Manufacturing Matters:
America must control the production of those high-tech products it invents and designs—and it must do so in a direct and hands-on way...First, production is where the lion’s share of the value added is realized...This is where the returns needed to finance the next round of research and development are generated. Second and most important, unless [research and development] is tightly tied to manufacturing of the product...R&D will fall behind the cutting edge of incremental innovation...High tech gravitates to the state-of-the-art producers.235
Neither are individual technological or entrepreneurial genius going to save America, no matter how impressive they look on the cover of glossy magazines. Richard Florida and Martin Kenny have documented the limited (albeit real) value of stand-alone inventive genius in their book The Breakthrough Illusion.236 Despite the impressive U.S. record in pure innovation, innovations actually fail to translate into mass production (and thus high employment) industries here as well as they do in Japan and elsewhere. The fragmentation of America’s high-tech research into thousands of small companies in Silicon Valley and elsewhere may be optimal for innovation itself, but it is not optimal for mass commercialization.237 Indeed, it has the unfortunate side effect of making it exceptionally easy for foreign companies to buy up American innovations à la carte. Among other things, this has helped make Japanese, rather than American, companies the ultimate commercial beneficiaries of much recent Pentagon-funded research.
A small American company named Ampex in Redwood City, California, encapsulates everything that is wrong with postindustrialism. This leading audio tape firm invented the video cassette recorder in 1970 but bungled the transition to mass production and ended up licensing the technology to the Japanese.238 It collected millions in royalties all through the 1980s and 1990s and employed a few hundred people. Its licensee companies collected tens of billions in sales and employed hundreds of thousands of people.
So when someone like self-described “radical free trader” Thomas Friedman writes that “there may be a limit to the number of good factory jobs in the world, but there is no limit to the number of good idea-generated jobs in the world,”239 (emphasis in the original) this is simply false.240 There is nothing about the fact that ideas are abstract and the products of factories concrete that causes there to be an infinite demand for ideas. The limit on the number of idea-generated jobs is set by the amount of money people are willing to pay for ideas (either in their pure form or embodied in goods) because this ultimately pays the salaries of idea-generated jobs.
The final killer of the postindustrial dream, of course, is offshoring, as this means that even if capturing primarily service industry jobs were a desirable strategy, America can’t reliably capture and hold these jobs anyway. The caliber of jobs being offshored—which started with fairly mundane jobs such as call centers—is relentlessly rising. According to a 2007 study by Duke University’s Fuqua School of Business and the consulting firm Booz Allen Hamilton:
Relocating core business functions such as product design, engineering and R&D represents a new and growing trend. Although labor arbitrage strategies continue to be key drivers of offshoring, sourcing and accessing talent is the primary driver of next-generation offshoring…Until recently, offshoring was almost entirely associated with locating and setting up IT services, call centers and other business processes in lower-cost countries. But IT outsourcing is reaching maturity and now the growth is centered around product and process innovation.241
Among sophisticated business functions, product development, including software development, is now the second-largest corporate function being offshored. Offshoring of sophisticated white-collar tasks such as finance, accounting, sales, and personnel management is growing at 35 percent per year.242 Meanwhile, despite a few individual companies bringing offshored call centers back home, offshoring of call centers and help desks continues to grow at a double-digit pace.243
It is no accident that, as noted in the Foreword, some of America’s corporate elite are now starting to question postindustrialism, about which they were utterly gung-ho only a few years ago. In the February 2009 words of General Electric’s chairman, Jeffrey Immelt:
I believe that a popular, 30-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering.244
Immelt has since argued that the U.S. should aim for manufacturing jobs to comprise at least 20 percent of all jobs—roughly double their current percentage.245 Only a few years ago, this idea would have been dismissed as an ignorant and reactionary piece of central planning, especially if it had not been proposed by a respected Fortune 500 CEO.
MANUFACTURING AMERICA’S DECLINE
The claims of an American manufacturing revival that surface now and again are false. They are based on anecdotes, massaged figures, and airbrushing out the dependence of revived companies upon imported components. For example, the
much-heralded revival of the American TV industry based on digital high-definition television (HDTV) never actually happened, and Japanese manufacturers still dominate the industry today.246
Even the vaunted Boeing aircraft company, the single largest U.S. manufacturing exporter, has been relentlessly hollowing itself out of real manufacturing for decades.247 Boeing and similar companies call this “systems integration.” This sounds sophisticated, but doesn’t change the reality that Boeing has been morphing into a “Lego brick” assembler of European, Japanese, and increasingly Chinese components.248 For example, the entire composite wing—master key to aircraft design because the wing determines the weight the rest of the plane can carry—for the Boeing 787 is built in Japan.249 (By contrast, Boeing’s European Airbus competitor by deliberate policy outsources no more than 35 percent of its work.)250
As also noted in the Foreword, Boeing has realized it got burned by this strategy251 and is trying to bring more manufacturing back inside the company and back to the U.S. So much for inevitable globalization. But it remains to be seen whether this emerging countertrend can reach fruition on its own, or whether it is a cry of help from a corporate America that has so badly damaged its competitive position with its hollow-corporation strategy that it will need the help of tariff walls to recover. (This is especially likely outside industries, like aircraft, in which America is still relatively strong.)
Every few years there emerges an entire new industry, like hybrid cars, which has no strong American players—“strong” meaning not dependent on repackaging imported key components or licensing foreign technology.252 And because America’s share of world production in “sunrise” industries continues to drop, this problem is on track to get worse, not better. For example, the U.S. invented photovoltaic cells, and was number one in their production as recently as 1998, but has now dropped to fifth behind Japan, China, Germany, and Taiwan.253 Of the world’s 10 largest wind turbine makers, only one (General Electric) is American.254 Over time, the industries of the future inexorably become the industries of the present, so this is a formula for automatic economic decline.
The U.S. has been running a deficit in high technology since 2002.255 We even run a deficit in high technology with China,256 a nation that is supposedly specializing in low-end manufacturing so we can specialize in the high end. But China is rapidly climbing the industrial food chain. In 2009, it exported $301 billion worth of electrical machinery and equipment, but only $100 billion of apparel257 and a mere $7.8 billion of that stereotypical item of “Chinese junk,” toys.258 As a result, whereas in 1989 only 30 percent of America’s imports from China competed with high-wage industries in the U.S., by 1999 that percentage had reached 50 percent, and it has risen further since then.259 Chinese imports now constitute 83 percent of our non-oil trade deficit260 and over 100 percent of our deficit in technology (i.e., we run a surplus against the rest of the world).261
America’s areas of industrial advantage, measured by what we are a net exporter of, are few and shrinking: only aircraft, aircraft parts, weapons, and specialized machine tools.262 In 2007, the nation that put a man on the moon was a net importer of spacecraft.263 Given that many of these weapons and machine tools are aviation-related, this means that essentially all our net manufacturing exports are a legacy effect of 60 years of Pentagon industrial policy. (We are nonetheless told by free-market ideologues that industrial policy can never work; more on that in Chapter Nine.)
Even our economic rivals are beginning to worry about our health. Akio Morita, the late chairman of Sony, once accused the U.S. of “abandoning its status as an industrial power.”264 Our rivals have problems of their own, of course, but suffer far less from deindustrialization than we do. Both Japan and Germany have booming manufacturing exports. (Germany was the world’s number one exporter as late as 2008.)265 Both employ a larger percentage of their workforce in manufacturing. Both are high-wage nations, not sweatshop dictatorships. What is their secret? To some extent, simply more manufacturing-oriented business cultures. Also financial systems more oriented to the long term by greater use of bank debt rather than stock market equity, combined with devices like cross-shareholdings to repel speculators seeking short-term gains.266 And more state investment in worker training.267 But also fundamental are Japan’s and the EU’s non-tariff trade barriers, which have helped preserve their economies against being hollowed out of manufacturing.
Many of these barriers are not actual laws, and thus lurk below the surface to casual examination. For example, in the words of William Greider of the liberal magazine The Nation:
In the European Union, supposedly liberalized by unifying fifteen national markets, the countries had more than seven hundred national restrictions on import quantities, many of which were converted to so-called voluntary restraints. The UK’s Society of Motor Manufacturers and Traders maintained a long-standing ‘gentlemen’s agreement’ with the Japanese Automobile Manufacturers Association that effectively limited Japanese cars to 11 percent of the British market. France and Italy had tougher restrictions. The EU periodically proclaimed its intention to eliminate such informal barriers but, meanwhile, it was tightening them. During the recessionary conditions in late 1993, Japanese auto imports to Europe were arbitrarily reduced by 18 percent.268
Europe has other tricks up its sleeve, such as using discretionary enforcement of antidumping laws to pressure foreign companies into locating technology-intensive functions in Europe.269 And the EU has an institutional bias towards reciprocal market-opening agreements with foreign nations.270 This all suggests that overt or covert protectionism is a necessary part of any solution.
CURRENCY REVALUATION WON’T SAVE US
It is sometimes suggested that our trade problems will go away on their own once currency values adjust. Bottom line? A declining dollar will eventually solve everything. But even if we assume currencies will eventually adjust, there are still serious problems with just letting the dollar slide until our trade balances.
For one thing, our trade might balance only after the dollar has declined so much that America’s per capita GDP is lower, at prevailing exchange rates, than Portugal’s.271 A 50 percent decline in the dollar from 2009 levels would bring us to this level.272 How big a decline would be needed to balance our trade nobody really knows, especially as we cannot predict how aggressively our trading partners will try to employ subsidies, tariffs, and non-tariff barriers to protect their trade surpluses.
Dollar decline will write down the value of wealth that Americans have toiled for decades to acquire. Ordinary Americans do not care about the internationally denominated value of their money per se; they will experience dollar decline as a wave of inflation in the price of imported goods. Everything from blue jeans to home heating oil will go up, with a ripple effect on the prices of domestically produced goods.273
A declining dollar may even worsen our trade deficit in the short run, as it will increase the dollar price of many articles we no longer have any choice but to import, foreign competition having wiped out all domestic suppliers of items as prosaic as fabric suitcases and as sophisticated as the epoxy cresol novolac resins used in computer chips.274 (Of the billion or so cellular phones made worldwide in 2008, not one was made in the U.S.) Ominously, the specialized skills base in the U.S. has been so depleted in some industries that even when corporations do want to move production back, they cannot do so at feasible cost.
Another problem with relying upon dollar decline to square our books is that this won’t only make American exports more attractive. It will also make foreign purchases of American assets—everything from Miami apartments to corporate takeovers—more attractive, too. As a result, it may just stimulate asset purchases, if not combined with policies designed to promote the export of actual goods.
A spate of corporate acquisitions by Japanese companies was, in fact, one of the major unintended consequences of a previous currency-rebalancing effort: the 1985 Plaza Accord to increase the va
lue of the Japanese Yen, which carries important lessons for today. Combined with some stimulation of Japan’s then-recessionary economy, it was supposed to produce a surge in Japanese demand for American exports and rectify our deficit with Japan, then the crux of our trade problems. For a few years, it appeared to work: the dollar fell by half against the yen by 1988 and after a lag, our deficit with Japan fell by roughly half, too, bottoming out in the recession year of 1991.275 This was enough for political agitation against Japan to go off the boil, and Congress and the public seemed to lose interest in the Japanese threat. But only a few years later, things returned to business as usual, and Japan’s trade surpluses reattained their former size. Japan’s surplus against the U.S. in 1985 was $46.2 billion, but by 1993 it had reached $59.4 billion.276 (It was $74.1 billion in 2008 before dipping with the recession.)277
Relying on currency revaluation to rebalance our trade also assumes that the economies of foreign nations are not rigged to reject our exports regardless of their price in foreign currency.278 Many nations play this game to some extent: the most sophisticated player is probably still Japan, about which former trade diplomat Clyde Prestowitz has written:
If the administration listed the structural barriers of Japan—such as keiretsu [conglomerates], tied distribution, relationship-based business dealings, and industrial policy—it had described in its earlier report, it would, in effect, be taking on the essence of Japanese economic organization.279
We cannot expect foreign nations to redesign their entire economies just to pull in more imports from the U.S.280
In any case, the killer argument against balancing our trade by just letting the dollar fall comes down to a single word: oil. If the dollar has to fall by half to do this, this means that the price of oil must double in dollar terms. Even if oil remains denominated in dollars (it is already de facto partly priced in euros) a declining dollar will drive its price up. The U.S., with its entrenched suburban land use patterns and two generations of underinvestment in mass transit, is exceptionally ill-equipped to adapt.
