What is the future of manufacturing?

The end to blind faith, and the beginning of rationality in international trade.

After he left his position, after a decade of pushing "free trade" and NAFTA, Mickey Kantor, the former U.S. Trade Representative, finally told it like it is and said "there is no free trade." After roughly nine months of intensive study and interviews with many experts, it's obvious to me that he's right.

There is no question of whether there will be protectionism. We, and every other country in the world, are in it up to our ears. The only question is what kind there will be, and whether it will further our interests or impale us on a sword of mindless ideology.

I'm not falling on any swords, and I'm not buying the free-trade crap from the ideologues. As for what I'm suggesting, it's whatever will enable our economy to maintain its strength and our society to maintain its middle-class, democratic core. I'll consider all practical suggestions.

-- Ed Huntress (remove "3" from email address for email reply)

Don't forget hydroelectric dams that block fish breeding grounds, and flood

We could never have built there latest dam project in the US.

V> >

I have been following this thread with interest.

I have had 2 question for a long time that I have never seen the answer to.

2.) How many man years of American labor goes into products shipped over seas?

and for completeness, I should ask

I have a feeling that the imbalance would be scary, and that an augment could be made that the world is really working for America. I could be an elitist and say so what? But I'm not. What scars me is that we will forget how to do things ourselves. At some point factory workers in Chine will have unions, and better pay, and then better pay then Americans, and the world will stop shipping to the US, and start shipping to China where the consumer has money.

It seems to me Germany understands the new world better then us. They make cars in South America, but the engines and transmissions are still made in German. They protest there technology, and send over seas the simple stuff (assembly). From what I have read in this thread, if the US companies are setting up state of the art engine factories in China, then we are hosed.

Vince

P.S. Has anyone ever seen data for my 3 questions?

LOL. Not just geriatrics.

The medical field in general is not going to suffer the 'ship it overseas to china or india' problem that software and other engineering disciplines are starting to see.

What are they going to do, ship the *patients* overseas?

No. The nurses will still have to be in the US. Time to go get my RN.

Jim

================================================== please reply to: JRR(zero) at yktvmv (dot) vnet (dot) ibm (dot) com ==================================================

That's one way to describe the argument made by Milton Friedman, our Commerce Dept., the Cato Institute, and many economists who take a conservative view of free trade.

In the long run.

Trade, like most economic activity, is a mixture of win-win (economic growth) and win-lose (zero-sum) transactions. The free-trade ideologues are macroeconomists who pay no real attention to micro issues, where there are many more zero-sum transactions, in which somebody gets hurt badly so someone else can get ahead.

What has the argument fired up today is that the zero-sum games appear to be showing up at the macro level. The Cato Institute looks backwards, and says there is no evidence of economic losses from trade because the figures being used are overwhelmed by the recession. People like me aren't looking backwards, we're looking ahead, and considering the effects of, for example, $30B/yr. worth of car parts that will be imported by just two car companies within the next seven years.

I've never seen figures compiled that way, but you could roughly derive it from existing trade figures. It would be a lot of work.

-- Ed Huntress (remove "3" from email address for email reply)

I see it demographically, but I'm wondering who's going to pay for it. If that's our only viable industry, we're in trouble.

Unfortunately, I'm not sure I have the right personality to be dealing with patients directly (not that I'm unfriendly, but I think it would drive me nuts after a while). But I also know that job satisfaction typically depends on who you work for rather than what business you're in (organizational psychology is a fascinating topic-- I wish I could figure out how to make a living at it).

Will we still have a strong economy in 10 years?

It's interesting that you'd recommend this, because he's usually portrayed as the most rabid ultra-free-trade zealot on the planet (ie, someone who thinks theory is more valid than reality).

There's an interesting book called "Turbo Capitalism" by Edward Luttwak (published in 1999, so slightly out of date now, but it has a brief section on China that matches what you've been writing). He points out that deregulated economies are very efficient but also highly unstable. His conclusion seems to be that we'll have plenty of jobs, but most of them won't pay much (but you'll be free to work 80 hrs/wk to make up for it-- this is called "progress").

He also talks about the various social implications-- he was born in Transylvania and went to school in Italy and England, so he brings a non-US perspective to it.

You're doing a pretty good job so far.

BTW if you hear NPR's "Marketplace" program, I just heard an ad for a segment tonight about how people see their economic future.

Actually, it looks like we do now have the materials technology to build a beanstalk. Researchers have now made carbon nanotube structures up to 5 feet long (limited only by their tabletop equipment) with the requisite tensile strength. It is just straightforward engineering development from there to the lengths needed for a beanstalk.

Getting government out of the launch business doesn't somehow change the rocket equation. The mass ratio needed to reach orbit ultimately determines the cost to orbit by rocket, and that's only a function of the gravity well. The equation tells us best case cost is still a couple of orders of magnitude too high for commercial exploitation of space.

Gary

Of course there is no "free trade" in the pure ideological sense. In the same way there is no "pure freedom" of "perfect democracy" in the ideological sense. We live in a world of imperfect solutions. In world trade as in politics and sausage; you should not look too closely at the ingredients.

Now that we have established the obvious, lets talk the reality. If our trade policies serve to protect the guy cranking the Bridgeport then we are doomed. We must recognize those technologies that have matured, the ones that anyone can do, and let them go overseas. They are heading over there anyway and to stop them with trade barriers hurts us more then it helps us in the long term.

Therein lies the conundrum.

Ideologies are for university professors and think tank gurus. However, if our trade policies serve to protect the current industries at the expense of the future industries then we all will loose. The reality is that the current industries have the political power to have themselves protected. New industries, often 2 guys in a garage, have little political power. The ideology that says that everyone should compete in the marketplace is useful here. It is an ideology that has served us well and serves to counterbalance the strong economic forces for protectionism.

So far America has dodged the protectionist bullet. Often the Europeans are more protectionist than America. They don't have as strong a commitment to the that competitive ideology. However, we have had some close calls. The auto manufacturers and their unions would love to have a lot more protectionism for their industry. That is also true of the steel and textile industries. Those industries now fall into the category of "anybody can do it". The auto industry probably does not belong in that category, yet.

A world in which America develops new technology which, after a time, move to more efficient locations is a very good position for America to be in. This is a competition where we have been very successful in the past. If we stop the race there are surely others that will be happy to take the lead.

Pete.

Trade means that there are no win-lose transactions. A deal defined as a willing buyer coming to agreement with a willing seller. Where is the win-lose? A win-lose deal must entail fraud or force. Get the military involved and you surely have a win-lose situation. Often it is a lose-lose situation. ;-)

Pete.

"Human resources." In a big company, it presents a lot of opportunities.

I think so, but if my long-term economic predictions were reliable, I'd be rich. I'm not.

I'm just trying to point out the differences between the ideologies we're being fed and the realities, to focus attention on the "displacements" that free-trade economists dust off so easily, but which translate into serious ups and downs in human lives.

Also, I'm alarmed about how little political and economic leaders understand about the dynamics of manufacturing. It makes me deeply suspicious that their "big picture" economic views are based on reality. They do love their theories.

He may be, but he's also the respected economist who popularized the theories that became Reaganomics. And we've been living under that theory ever since, without interruption.

I've heard of it but I haven't read it. There's a lot to read, but I'll keep my eye out for it.

I just turned it on and it's about other topics here. Too bad. Maybe tomorrow.

-- Ed Huntress (remove "3" from email address for email reply)

On 3 Aug 2003 19:32:34 -0700, snipped-for-privacy@sitestar.net (ROCKY HELMS) wrote something ......and in reply I say!:

This has been the usual lively and interesting thread, but apparently not of interest to the original poster? Rocky old son, where are you.

However.

This may not be a popular suggestion and has its problems.

Use your expertise to be a better middle man. I feel there is a great deal of pride in providing really good middleman service. There is probably more money in that anyway.

If the nation becomes one of middle men, then maybe that's its future; as a trader of ideas, gear and services that other people sweat to provide. It seems to me that the middle men are always there in any situation, taking whatever cut the market will allow.

The internet may not help here, though.

Nick White --- HEAD:Hertz Music Please remove ns from my header address to reply via email !!

Back to manufacturing. IT has had profound effects on metalworking manufacturing. Now, who is making the CNCs and the machine tools that they control? Who is making the computer components? How long did the U.S. "innovation" remain a winner for us, in terms of trade? Not very long. I watched it disappear in the '70s.

That's the point. It doesn't matter where these things are invented anymore. What matters, in terms of trade, is where they're put to use. To the extent that IT is a productivity booster for manufacturing, the benefit follows the manufacturing itself. And manufacturing in the U.S. is in decline, once you adjust for the booms and busts.

Again, you're getting pretty far afield from manufacturing. If you're saying that we'd may as well kiss manufacturing goodbye and focus on other things, there are a lot of economists who agree with you.

But even biotech is vulnerable to the low-wage exodus. Do a search on Google for "biotech industry" and you'll find that very few of the hits have anything to do with the US. The whole world has jumped on that bandwagon. Expect the Indians to be very, very good at it within a few years.

Innovations used to provide long-term benefits because they tended to be implemented where they were created. No more. Technology is a commodity. Innovation isn't what it used to be, in economic terms.

No one has shown any economic benefit to alternative energy -- except maybe Iceland, and that's still a question mark.

It's a social/political thing, not an economic thing. I watched half a billion dollars go into the Tokomak at Princeton three decades ago (in fact, I helped make thousands of parts that went into it). I have yet to see an economic benefit. It made a lot of people feel good, though.

Which project? Does somebody out there know something about alternative energy that they aren't telling us?

BTW, I made my living off of alternative energy for several years. Besides being part owner of a shop that supplied parts for Forrestal's Tokomak, I did materials-application research for MITI. Among my projects were ocean-thermal energy generation (I machined the heat exchangers and made the final assembly of the prototype OTE cell that used thermoelectric cells to generate power -- it was a fun toy ) and a research paper on fluorescent enhancement of solar cells, based on research done at MIT.

It's been a terrific way to keep a lot of PhD's off the street and a bunch of government money floating around the research labs. It's been a lousy way to produce electric power.

-- Ed Huntress (remove "3" from email address for email reply)

This SF ebook covers several variants of that theory:

See also Victor Koman's "Kings of the High Frontier"

No, I didn't say we don't benefit from innovation. I said that relying on innovation to compete with 80-cent/hr. wage rates is an artifact of the past. It doesn't work as a general method for competing with low-wage countries, now that our free-trade policies are having success in breaking down the barriers for capital flow. A multinational will take that innovation and implement it in the lowest-wage country that it can. That's why, for example, Shanghai-GM now has one of the most advanced engine lines in the world, which, starting next month, will be shipping complete engines to Canada for installation in the 2004 Chevy Equinox SUV -- which then will be shipped to the US. And so on.

That's true, but it's also history.

Of course it would. It would be an even bigger mistake to believe that innovation in product design and manufacturing technology will protect us from low wage rates employed by world-galloping multinationals. It isn't the answer anymore. Like tax breaks, it's a small contributing factor at best.

That is, unless you want to open up the discussion and include innovations in hedge funds, bond creation, electronic securities trading and split-second arbitrage. We're very good at those, and, given that they have a half-life of a few months, we probably can keep innovating financial instruments and keep the money flowing our way for quite a while. At least, until the Indians get the hang of it.

Even after two decades of development, total employment in the US biotech sector, according to the Dept. of Labor, is 191,000. In contrast, over just the last 3 years we've lost 2,600,000 manufacturing jobs.

Biotech certainly is a growth area, it's exciting, and it's sexy. It has consequences well beyond its employment figures. But, as I've said, if you search on "biotechnology" on the major search engines, a US source typically doesn't come up until page 2 or 3. The fact is that biotech innovation is proceeding all over the world, and I see no reason that it won't follow the same pattern as other technologies that require high levels of education: its center of gravity will wind up wherever the required educational skills are concentrated...in combination with low wages. As for it being so big it was "driving our economic growth for a number of years," I'd like to see your numbers on that.

Please, tell us about one. With the relevant numbers, please.

Why do you say 50 years? Do you know what percentage of science and engineering graduate students in US universities are from India? Are you aware that fewer of them are staying in the US after they graduate, now that they have emerging opportunities in their own country?

Look at where they're moving their manufacturing operations.

The bottom line on all of this is that the sources and rates of innovation have little connection today to the economic benefits from those innovations. For that, follow the capital flow. Where the capital goes so goes the employment, the machine purchases, and the value-added that accrues to the local economy in the form of employment income and savings, wherever that may be.

That's the way it looks if you're examining national economies. If you're looking for investment opportunities, the picture looks very different. For that, you want the company you're investing in to chase the lowest wages and other costs, no matter where they may be in the world.

And that's our problem. We're still doing quite well in attracting capital, but don't count on it as a given. Our coming deficits are a big threat to attracting more of it at such low rates as we've enjoyed for the last decade.

Good luck on the alternative energy, BTW. I fought that battle, and now it's your turn.

-- Ed Huntress (remove "3" from email address for email reply)

I agree that innovation will not totally protect us. it is not the be-all, answer-all. we will definitely lose most mfg to other competing economies. Anyone who thinks different is deceiving themselves. Lets face it, when you have satellites being produced and launched in China, what technology cannot be produced their effectively?

But American companies do benefit from innovation. Whether it lasts 10 years or 50 years, there is still benefit. Intel still benefits from their technology. They can produce the chips cheaper in China, and they do. But the corporation still benefits and so do all of the workers (including mfg) in the USA from the China operations. They benefit, because they still have jobs. without the profit from the China business, the workers in the USA would lose their jobs completely. Intel gives the China operations the ability to produce, but innovation and high tech production in the USA is what drives the company.

we are still benefitting from those innovations. Millions are.

Innovating military hardware. While I believe it may not be really productive. it is for those companies that produce. We have been innovating since our birth and just look at all of the recent innovation in the past 10 years. I'm not really talking about financial instruments. However, we do seem to be very creative in that area, dont we? Someone will always find a way to get everyones money. when you are paid to think about it for 24 hours a day, I can guarantee they will get good at it.

What about cellular/wireless technology? With our innovation, American companies license that technology and still receive benefit from their innovation. They continue to innovate here, produce the highest tech here and license there (everywhere). Just think of CDMA for example.

Do you remember the bio-techs driving our stock market for a number of years? They may not be the largest of industries, but innovation there became a driving force for our financial markets, that brought along pharmaceuticals as well.

I still think you are misinterpreting my statement. I am not coming down on one type of energy or another. I havent a clue as to which would be more useful. But by investing in research on a very, very serious level, we can determine which would be most productive and follow through on it. The numbers say this at the very least: If you were able to develop an energy source that frees us from the dependence on oil, is cheaper than oil, is environmentally safe, and is easily reproduceable, you have eliminated a huge crutch from the hands of our economy. This will help benefit mfg and every other industry in the USA. We can then of course license that same technology to others. In the meatime, we can continue to improve on that initial innovation and licensing more.

Judging from the way India is run, it will probably be more like 100 years. They are not organized and far from the level of China today as an economic force. While they do produce a good number of engineering students, medical students, and scientists, they have brain drain problems, economic problems that are immense, lousy government administration of their economy, and population problems that stem from cultural and governmental mismanagement. Maybe when they can first feed all of their people, they can then begin to realize the beneift of investing in research and technology.

They just announced new MFG facilities to be built in Texas that will be unrivaled. It will become their command post for innovation, research and production of the latest technology.

I disagree wholeheartedly. Source of innovation is exactly where the benefit goes. Even in cases where there is no mfg benefit, there is till benefit to be had in the innovating country. You still need service people, marketing, administrative personnel, all of whom earn a living and pay taxes. Do you think Motorola USA does not benefit from having their largest factory in Tianjin, China? Of course they do. Without the profit from those China operations, I can assure you of USA layoffs.

while we will not necessarily always benefit from the mfg of that innovation, we can still benefit from the innovation in all other aspects.

I agree. Though I dont think we are doing well in attracting real capital. In the USA, with our current deficits, we are borrowing at a tremendous rate. I also believe these deficits are an immense threat. Unfortunately many politicos dont seem to realize this. It took the greatest economic expansion in our history to eliminate our last deficit, not debt. I guess they are banking they can do the same thing again. Well I can assure you it doesnt have a chance in hell without innovation.

I dont want to come off like a green. I am not. I am looking at it from a purely economical standpoint. Hopefully, we can at least get something going in the near term. It's not looking very pretty.

bg

Is the effect of a capital-flow deficit different from a balance-of-trade-deficit?

Less capital would seem to mean fewer jobs, *unless* we can create jobs that are less capital-intensive than the ones we're losing (including the capital spent on education & training). This seems to be what you're implying when you mention jobs in the financial sector.

Back in 1987 Tom Peters wrote a book that argued (among other things) that moving manufacturing overseas meant giving up an important source of innovation, because a lot of it comes from interactions between the design guys and the production guys, which is difficult if they're on different continents.

Of course you can always move the design people overseas as well. Then all that's left for us to do is consume the result-- unless too many of us are unemployed (oops).

The service sector is said to be doing well, but it's hard to increase productivity when services have to be rendered in person. And all wealth comes from productivity.

It also gives up independence and freedoms.

Shipping manufacturing jobs overseas does what when that country or group of countries decides not to send our stuff out or back... e.g. They control now.

When War breaks out - what politics take play ?

This was a poor plan if it was ever planned. I think we were sold down the river myself. NAFTA was one thing, China et. al. is another.

Martin

Firstly, never follow these trends to the "ultimate end." There are always counterforces in an economy. That's why economics is about as predictable as the weather. Our manufacturing isn't going to disappear. The problem is that , as an economic institution, it may wind up crippled and unable to contribute its powerful leveraging ability to our economy. And then it will be irrelevent, even if it provides some jobs.

If you go back and look at the Friedman book I mentioned earlier in the thread, you'll see that the basic free-trade theory says that two things happen. First, when you're running a big trade deficit, you're getting a lot of goods from other countries at cheap prices, and you're effectively paying for them with fewer goods at high prices. That looks like a good deal. However, it doesn't account for jobs lost, nor for the effect of having some other country pile up your currency in their foreign-currency reserves. This isn't a case of straight barter; the answer to this latter question is too complex to deal with here. (Isn't your wife an economist or something? You need her help from here on. )

Secondly, the theory says that currency values will adjust to re-establish parity. In other words, the value of the dollar will drop and the Chinese yuan will rise. But that isn't happening. Part of the reason is that China doesn't allow currency exchange at other than the official rate. The rate is pegged, in other words. The larger reason is that the US dollar is overvalued anyway, and the yuan is undervalued anyway, because of several things we're both doing intentionally. It's all a big farce, and it's very complex to discuss.

All three of the above.

The US has 287 million people, mature markets, and nearly flat population growth. China has 1.4 billion people, hungry and rapidly growing markets, and so much room for material growth that population growth won't matter for decades, in terms of market potential.

In the short run, the US market is the important one because we have the money to buy all that stuff, and the Chinese have much less money. As for the longer run, you can draw your own conclusions.

That's unwise. You don't want to *restrict* India's growth, or China's. You want them to grow as rapidly as possible. You also want our economy to grow, but not at their expense. That would be counterproductive for us. All of the hash will settle when a tool & die maker in China is making $40,000/year. If markets were truly free, that would happen quickly, the theory says. But the theory wasn't written to account for economies with 800 million hungry peasants who will take a manufacturing job at almost any wage -- when there just aren't enough jobs to go around.

The problem is that their capabilities are growing, and our manufacturing is taking the hit for it, without the attendant and necessary rapid growth in China's wages. That's why I led off my last China article with the quote from John Meynard Keynes: "In the long run, we're all dead."

Some are, some aren't. Microsoft has a big one in China. Lots of r&d is starting up in India, but it's not being financed with foreign capital the way it is in China.

Yes, plus they wanted to tie their costs to the prevailing costs and market prices in the host countries. They started to do it when the yen was rising sharply in value, and it's paid off for them -- for their multinationals, at least. Whether it's really done anything good for the Japanese people as a whole is another question.

There is a tax bill in the House now that would give tax relief to U.S. companies that do their manufacturing in the U.S. I doubt if it will pass, because the RNC is married to conservative free-trade theory.

You're just an ol' radical, Jim.

There is no "free trade," and pretending that there is will do some structural damage to our economy and our society as a whole, now that we have enormous trading partners, like China and India, that are both relatively poor and technologically capable. At the same time, conventional protectionist measures won't solve anything in the long run, or even in the medium run. What we need is some new ideas.

-- Ed Huntress (remove "3" from email address for email reply)

I don't know much, except that they make a lot of small ones, and making them was a big state-run enterprise a few years ago. I'll bet you could find the numbers with some research effort on Google.

It's big ones in the cities. It appears that it isn't really a big deal to them, except that they decided they didn't want a bunch of overbearing hogs on their city streets. I hear that they're likely to relax the restriction for PR purposes. You're likely to see more of that. They're following the Japanese pattern, which is to give trade concessions where it doesn't really matter to them but where they feel they can gain some positive public relations by doing so.

-- Ed Huntress (remove "3" from email address for email reply)