How Important is Manufacturing to the United States?

For prospective on this subject, below we have summarized from recent material written by Louis Uchitelle, who writes on economics topics, including business issues, monetary and fiscal policy, and labor trends for The New York Times and other publications:

Ask Ronald Bloom, the assistant to President Obama for manufacturing policy, whether manufacturing within the United States matters to the administration, and he replies that it certainly does. The military, for starters, depends on American weapons manufacturers. Workers without college degrees, Bloom notes, make higher wages in manufacturing than they do in any other sector, and tens of millions of Americans have only a high school diploma. Then there is the issue of kick-starting a recovery as the economy emerges from recession. Manufacturing historically performed this role, but now its shrinking presence accounts somewhat for the sluggish recoveries from the last two recessions.

Finally, Bloom continues, there is the issue of research and development. Manufacturing has proved to be the most important breeding ground for innovation, and innovation can’t be separated from production. “If you let manufacturing go, over time that will have a negative gravitational pull on innovation,” Bloom says. “Recognizing this is very important. Many people said that we can have a strategy of ‘invent it here and make it there,’ but now they are realizing the two can’t be separated.”

By the standards of the day, that is strong language coming from the White House. The actual policies, however, haven’t been so strong. To be sure, the administration pushed through as part of its stimulus package a tax credit to encourage the production of solar panels and wind turbines in this country. The “buy America” clause in the stimulus served a similar purpose, requiring contractors to purchase American-made equipment, whenever possible, for the infrastructure projects that the federal government funded.

But President Obama could have done more. He could have appointed a secretary of commerce who would have campaigned more forcefully for manufacturing in America than Gary Locke, the current secretary, has done. He could impose tariffs and import quotas as Reagan did in the 1980s. He could also push Congress to cancel a corporate tax break that exempts from taxation profits earned abroad by American companies, until those profits are repatriated. The tax exemption is, in effect, an invitation to reinvest the profits in overseas operations, not back home. On another front, the president could bang the desk in favor of an international agreement that lowers the value of the dollar and thus makes merchandise exported from the United States less costly to buyers abroad.

So why isn’t there a drumbeat of public concern? Why has the once lusty debate over manufacturing’s importance all but disappeared? And why has making things – craftsmanship - lost importance as a form of learning and knowledge?

As Ron Hira, an electrical engineer and a professor of public policy at the Rochester Institute of Technology put it: “You have a culture within the elites of both political parties that says manufacturing does not matter, and industrial policy will do more harm than good.”

Another problem is clout. As manufacturing’s presence shrinks, so does its influence. Not that the nation’s manufacturers are milquetoasts when it comes to lobbying, but the voices from the growing financial and service sectors are louder, and globalization continues to be the flavor of the day. “If anything, business schools are teaching their students the importance of off shoring,” says Yoshi Tsurumi, a professor at the Zicklin School of Business, Baruch College, City University of New York.

Even labor has a diminished stake in defending manufacturing, since the portion of the workforce employed in the sector has shrunk to 10 percent today from 26 percent in 1960 and 13 percent as recently as 2000.

That decline can be reversed, but the will to do so - the laser-like focus on making things in America - may no longer exist or may be too compromised to be easily revived. The most powerful lobbyist on behalf of manufacturing is the National Association of Manufacturers (NAM). But its members include multinationals like Dow Chemical and Caterpillar with factory networks across the globe, thus dividing their loyalties. Even the NAM’s numerous small members aren’t as rooted in America as they once were which helps to explain the NAM’s support of free-trade agreements that suppress barriers to the movement of goods across borders.

Manufacturing in the USA - Going Forward by Reversing Direction

Labor costs in China and other developing nations have been so cheap that for U.S. firms manufacturing in Asia was irresistible. But labor cost in China have been steady increasing to the point where, when compared to the significantly higher productivity of the U.S. worker, it is no longer the bargain it once was. As the labor equation has balanced out, companies – particularly the small to medium-size businesses that make up the bulk of America’s entrepreneurial force – are taking a long hard look at the downsides of extending their supply chains to the other side of the planet. To reduce the inventory they have to carry, they must shorten lead times.

In a recent example – a customer (who just happens to be an SCD staff member) purchased new bedroom furniture; components of which were manufactured in South Carolina, but then sent to China for final assembly. It took 10 weeks to deliver three of the items that were not in stock and had to be backordered. The customer came very close to cancelling the order even though it had been specially expedited.

Quality also presents a significant issue. If a defect is discovered in items reaching customers in the United States, the fault could have occurred anywhere in the supply chain stretching all the way across continents. That makes the true cost of manufacturing off-shore in places such as China much more than the quoted price of the parts on the RFQ.

For reasons like this, companies are being forced to base their outsourcing decisions on more than just labor cost. Now labor costs (once the determining factor) are being ranked below product quality, fluctuations in shipping rates, and currency values. This kind of reevaluation is said to be the reason U.S. factories managed to add 136,000 new jobs last year – the first new jobs increase in manufacturing since 1997.

Final Thoughts

It would be an exaggeration to say that the U.S. is on the verge of recapturing its past industrial glory. Some of America’s biggest conglomerates and those that are committed to selling the cheapest goods possible will for various reasons continue to benefit from off-shoring. But for companies that actually build quality tangible goods “Made in America” is once again proving to be a viable and competitively sound strategy.

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