What is the future of manufacturing?

Our trade deficit with China ran $103B last year. Here, we're talking about TWO companies raising that deficit by 30% all by themselves.

Many economists say we've already passed the point at which our trade deficit has begun to suppress wages, and, thus, to have a multiplying effect across the economy. Even the old hidebound, free-trade dogmatists at _Business Week_ have finally acknowledged it.

Talk to the planners and purchasing people at other large American manufacturing companies and you'll see that most of them plan to expand their parts purchases from China to an astounding degree. I've talked to several who, on the average, plan to increase purchases from China by around

30% next year alone. Multiply that one out for a few years, and consider how much manufacturing capacity in the US is about to go idle.

Look up the numbers, and also those for our relative trade positions with Mexico and Canada. The big difference is that we maintain much more reasonable import/export ratios with those two countries. The dollar amounts of deficits are still large (although the two together are less than that of China by itself), but the ratios suggest that a dollar of goods imported from Canada or Mexico stimulates a much greater volume of exports to those countries.

That's probably sustainable. Our current account ratio with China probably is not.

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

So there is some multiplicative factor involved. Say it's between one and four. Someplace in there. So the 8% bump in unemployement really is going to be bigger than that. By at least a factor of two.

Jim

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I wish it were that simple, but it's not. For example, manufacturing people often say that manufacturing creates service jobs, and that's certainly true. When you build a plant, you need plant maintenance, and accounting services, communications and transportation, and so on.

But we seldom hear the other side, which also is true. That is, service jobs create a demand for manufactured goods. If you start a landscaping service, you need mowers and backhoes and shovels.

My own view is that services and manufacturing are symbiotic, in one of the few legitimate applications of that word. They grow together. Separating the two, in terms of which stimulates the economy more, probably is an impossible task.

What you're saying about a decline in one type of job decreasing demand for another type, however, is clearly true. When services decline, manufacturing is likely to decline, and vice-versa. And a net decline in manufacturing, even if the goods not produced are fully replaced by imports, is going to cause a net decline in demand for services in the importing country.

The big question is whether the economy is growing enough and evolving enough to replace those lost jobs with new types of jobs and new types of economic activity in general. It's hard to get a handle on this because we have little unequivocal experience with it under our present economic realities. The '90s bubble distorts it, and the recession of the last few years distorts it the other way. There appears to be no way to normalize for these ups and downs, so you can see the underlying dynamic. In fact, the ups and downs *are* an important part of the overall dynamic.

Economics, anyone?

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

Uh oh. Just out of curiosity, who *are* the people who understand how manufacturing works, and are any of them in a position of power in the present adminstration?

Double uh oh. This sounds like the case where you connect a large tank and a small tank up with a pipe. The small tank was nearly full and the large tank was nearly empty at the start. Once the valve in the pipe is opened, the small tank is nearly empty, and the large tank went up maybe a teeny bit. According to the 'rozen hydraulic theory' of economics all one has to do is multiply the US citizen's present wage by 1/20, and add in the small iota based on whatever small raise the workers in china will get, and that's how it's gonna be in about 10 years or so. (if you use that hydraulic theory you have to give me credit!)

Fire sale? Sounds like the titanic going down. Pardon me, I have to go fiddle the deck chairs....

Jim

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Yes, there are some people in the administration who have a handle on it. Strengthening our manufacturing is not part of their agenda. Without some more inside information than I have, I don't want to point fingers. Maybe it will come, or maybe not.

That's a damned good theory. If I thought they'd get it, I'd try it on some Congressmen.

Actually, it only applies if everything is a zero-sum game, and if neither China nor we could produce any economic growth despite our trade imbalance. But that's not the case at all. China is growing rapidly, and the growth, although it's now highly dependent on trade as an essential element, isn't necessarily measured by the trade itself. They have real growth going on as well, and so do we.

As I said, don't carry these ideas to some conclusion in which all the marbles wind up in one corner of the playing board. There are counterforces, and self-limiting phenomena, and so on.

On one level, some economists say all we're talking about is an uncomfortable acceleration of a natural trend that's going to happen anyway. But, on the level I'm writing from, it's more than that. It's a distortion of the usual forces of competition that's undermining trade itself, as well as causing an accelerated and unnecessary destruction of some important parts of our manufacturing base.

The problem at the macro level is highly debatable. At the micro level, it's clearly destructive, and not just to the dead wood that needed to be cleared anyway. It's cutting into healthy tissue.

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

Ed, I have been going to China every single year at least once, since

1989. I spend at least 15% of the year there, Have two offices,plenty of staff, and have learned the culture to a point of comfort.

I have seen China grow immensely during this time. As a matter of fact, I have never seen anything or read anything like it in history.It has been amazing. 2-3 years ago, China built a second international airport on the far side of Shanghai, called Pudong. It is at least 30 miles from the center of the city. Withing a few years, you will see all skyscrapers all the way to that airport. It has already begun. Mixed in those skyscapers will be factories and residences. Those factories will become the most modern facilities in all of Asia, with the very best of infrastructure to support them. I know China well. Real well. Thats my job. To monitor their economy and keep my offices rolling between the graft, corruption and business.

My wife worked for years for a prominent economist, so Economics is a staple in my house.

Since the beginning of time, companies have always been reinventing themselves. It is a law of nature. Look at Corning? From dishes and glass to fiberoptics. Now it will be something else. They are smart and aggressive. Because of it, they dont feel the downturns for very long, because they are always preparing.

Other than the current basis for free trade, what would you propose that would advance economies of the world? If you are negative about having companies fight to innovate and reinvent themselves, I can only imagine how positive you would be for a different method of economics. What method works? Protectionism? Ask South America and Asia how that has worked. China alone will import record number of goods this year. While they have surpluses with us, they dont with everyone. They are buying foreign goods at an amazing growth rate. They have learned that Protectionism gets one nowhere, except inflation, wasted resources, and more debt. Its all a matter of economic history.

In what is probably the best-researched analysis of the subject, John MacArthur's _The Selling of Free Trade_, the author reaches exactly the same conclusion.

MacArthur was analyzing the politics behind NAFTA, but the same general principles apply to China, with one exception: There really is a big potential market in China. Maybe. Someday.

But most US and European manufacturers that are investing there talk about a potential market that they expect will develop in 5 to 10 years. When was the last time you heard about a publicly traded company making a sizable investment that will return nothing to the bottom line for 5 to 10 years? It's evident that most of the Western companies that have establsihed themselves there are after the low manufacturing costs and not, except in a few cases, the market. The Shanghai-GM operation was ostensibly set up to serve the Asian market, as GM claimed to anyone who would listen a few years ago. Now they're exporting to North America, and their chief exec in China has made no bones about the fact that they're out to compete in the US market. To paraphrase James Carville, "It's the wages, stupid."

More likely, a continued hollowing out of middle-class wages in the US.

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

It's not clear to me that those are necessarily two different things, depending on degree.

Jim

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I don't ever recall Ed advocating protectionism. Quite the opposite.

I'm gonna go out on a little bit of a limb here, and make a guess that most of whatever they did import, they did not import from the US.

Jim

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This for me is the really infuriating part. The better we do, the harder we get hit. And to the uninitiated, (at least discussing the job flight) it looks like our own CEOs that are handing them the sticks!

Jim

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Seems to me that Walmart is *hiring* American workers to staff all the stores they're opening to sell all those inexpensive goods. Walmart is one of the fastest growing companies in the US.

Gary

A doubling of job seekers in the marketplace can do that. When women entered the workplace, they diluted the value of labor by providing a glut of supply. With households bringing in more currency, they naturally chased more goods, driving up prices. The end result of all that supply push and demand pull is that everyone wound up in about the same place with respect to standard of living as the inflated currency buys about the same amount of goods as before.

Gary

I suppose it could, but did it? There was a lot of discussion about it in the late '70s, but the idea was pretty well dismissed because there was no correspondance between unemployment and the numbers of women enterring the workforce. The correspondance that was a lot clearer was the decline of unions.

I always remember one anecdote, from my college roommate, who had been a teacher but who quit and took a job at Dodge, driving cars off the end of the assembly line to the parking lot for $22/hr. That was almost twice what he had been making as a teacher.

Ed Huntress

Is this an "opinion," or do you have the numbers to support your idea? You can find them at the Dept. of Labor website. See you next week.

Ed Huntress

Only two possibilities? Perhaps that's because of the way the issue has been framed by the ideologues, who have overwhelmed the debate for so long. And those ideologues tend to be people who have a financial interest in the outcome.

The steel industry is far from transparent. The fact is that U.S. primary steel producers are too small to compete on world markets. Until now, they've been unable to consolidate because they're all carrying enormous legacy liabilities in the form of unfunded pension obligations and retirement healthcare plans. No one with the capital to do it will touch them.

The idea behind the tariffs was to give them some profitibility, which would interest investors in buying them up and consolidating them. It hasn't worked so far, and it may never work. But it's a good example of how such things are seldom what they seem.

"The solution is evident"? So, what's the solution?

What does it mean when the "strong" get there only by paying their workers

80 cents/hour? What other "strength" do the Chinese have? Have they innovated any manufacturing technologies? Do they have geographic advantages? Resource advantages? More efficient production? Is their competitive edge explained by better schemes of industrial organization and efficient automation, like the Japanese have innovated? No. They have low wages, and a command-and-control economic structure that focuses on exports. Period.

And their low wages are attracting astronomical amounts of FDI (foreign direct invertment). The new "paradigm" seems to be, as Alan Tonelson puts it, a race to the bottom.

The goals of economic development, the old "paradigm," run towards improvements in labor productivity, economic opportunity, and innovations in products and manufacturing. So the equation has been stood on its head. The real question now, for a country that wants its economy to grow, is what goals they should establish. Keep cutting wages? There's a winner for you...

It isn't a matter of belief. It's a matter of facts. And one key fact is that the Chinese are addicted to their state-run enterprises, which are their employment buffer that keeps a lid on unrest, even while they run their banking system into the tank. Their banks are insolvent. If they opened up their state banking system to competition, as they've promised the WTO they will do, there would be a run on those banks tomorrow, and they would collapse within a week. All of their money is loaned out in non-performing loans, which can never be paid back. They knew they would never be paid back when they loaned the money -- to state-run enterprises, exclusively. There's no way to call those loans in. The money is all gone.

For both practical and ideological reasons, China's government is unable to do anything about it. They can't get off of the merry-go-'round they've created. They're sweating it. So is the world banking community.

Not. VW has by far the largest market share in China, at 40%. From "The Business Times," August 4, 2003: "China, the land of $50 VCRs and $3 haircuts, remains too uncompetitive a place to make cars for export. And it could take up to five years before the country exports cars, according to a top VW executive yesterday."

From Automotive News Europe, July 16, 2003: "Volkswagen, which has complained frequently about the high cost of auto parts in China, will follow the example of Ford Motor Co. and General Motors and begin sourcing parts here for its global operations."

Opinion is a kind of low-level ailment, bg. The cure for it is facts. Unfortunately, they require some effort to research.

But they can really help clear your head.

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

Actually three I know of in the same format. Fair trade is actually middle ground between free trade and outright protectionism.

Lousy decision. Look at the consequences to this action. As if these metalworkers here were not already fighting an uphill battle. Bush was thinking of the political ramifications, not the economical. He doesnt know better. >

Change or die. Its cold, but has always been true. The milkman, diaper man, Knife sharpening truck, etc. If they didnt change the paradigm, they starved.

Nothing, If you produce a different item in that same industry or another.

What other "strength" do the Chinese have? Have they

Maybe. I dont see the relevance here.

Do they have geographic

Over most countries, yes.

Resource advantages? Over most countries, yes.

More efficient production? Is their

This is true for the most part.

This is true.

Why hasnt it been stood on its head? You listed economic opportunity. Moving production for certain items is good economic opportunity. Innovation is lacking. That si the basis for my argument. It is lacking.

The

Goals? Provide sound govt economic planning - we dont Provide ample economic infrastructure - we dont Provide money and resources for research and dev. - we need more.

Chinas banks have been in garage sale mode for the past three years selling off bad assets in a fire sale, even to foreigners. The loans are being written off and they are working on getting the program on track.

But you are mistaken to think there is no competition. Froeign bnaks now work in local currency, give loans and sell financial instruments. I suggest you get your facts straight.

"A shipment of 252 Xiali economy cars manufactured in north China's port city of Tianjin is on its way to the United States market. Tianjin is the leading manufacturing center for economy cars in China.

The cars, produced by Tianjin Auto Group in cooperation with Toyota, are the first batch of Chinese-made economy cars to be exported. They are part of a deal signed in April between the manufacturer and American Automobile Network Holdings Inc., which will be the sole agent for Xiali economy cars on the international market.

According to the deal, the American company will be responsible for selling at least 25,000 Xiali cars during the next five years"

GM Shanghai is also exporting cars to the Phillipines (I have a relative who recently left GM Asia to work for one of their major parts suppliers - at least 5 factories in China now).

I suggest that you take some medicine for that ailment Ed.You need some more research to come up with facts.

BG

True, but here he is stating that he believes free trade does not work. Well, what is the alternative? 2 others are commonly practiced, outright protectionism, or "fair trade", which is a go between the two others. Fair trade basically stands for protect what you need to protect, when you want to, on a limited basis.

If he is looking for another method, he can wait a century or so, when someone may come up with a different economic structure.

Within 5 years Most of the developing countries will have decreased any import duties to reasonable levels, as a result of WTO membership. There will always be fights and squabbles, but thats humanity's factor. At that time, where does the argument free or fair or protectionism stand? Another method? The argument loses its relevance in a matter of time. The process is already in place. China's duty for metalworking equipment and tools I believe is currently 17% max, scaled down for different divisions.

Stong limb, Jim. They do not purchase that much from the USA on scale. However, my point is that they are amassing large amounts of foreign currency, but their trade surplus is a pittance compared to Japans (diue to large imports from Asian countries who have the surplus over China for their own trade balances). South America has been outright protectionist for years and look at the shape they are in. We have to bail them out every 5 years and still they dont learn.

Well now, I don't think housewives showed up in the unemployment stats until after they got an outside job, then *lost it*. So the initial influx of women into the workforce wouldn't have been reflected in unemployment statistics. They'd have shown up in employment statistics, though, and they did.

That influx of labor meant that pressure to increase wages was relieved at the same time there was a greater amount of money per household chasing available goods. So prices rose while individual incomes didn't rise at a corresponding rate. The end result, a man alone could no longer earn enough to keep up with the Joneses (as both Mr and Mrs Jones were now working).

Once the two wage earner household became the norm, and prices settled to what two wage earners could afford (remember that prices reflect what the market will bear, not necessarily what the product cost to produce), the single wage earner household was screwed. Unless the single wage earner was far above average, his household would be relatively poor compared to the two wage earner household.

Gary

Yes, but there are a *lot* more of those jobs than there were manufacturing jobs. Sure, some of those high pay low skill assembly line jobs are gone, there aren't as many auto workers with cabins at the lake and a big boat, but more people are earning enough to shop at Walmart (many getting an employee discount too).

Gary.