What Donald Trump got wrong about US manufacturing

Winston Mok says his promise to bring back jobs to America is misguided, as the sector is in fact thriving – on hi-tech manufacturing – and any attempt to roll back globalisation would only hurt the US economy

PUBLISHED : Wednesday, 05 April, 2017, 1:35pm
UPDATED : Wednesday, 05 April, 2017, 7:13pm

Can President Donald Trump bring manufacturing jobs back to the US, as he promised in his presidential campaign? New jobs, perhaps. But not old jobs. And certainly not by starting a trade war with China. To think through how manufacturing jobs may be created in the US, it is important to first get a few facts and concepts straight.

First, US manufacturing is thriving. Standing at a historical high in 2016, US manufacturing output has grown by 45 per cent in real terms in the past two decades. The increased output was achieved with fewer workers through productivity gains from technological advances. The share of manufacturing in the US economy has remained little changed in the past 50 years. In contrast, after peaking a decade ago, manufacturing’s share in the Chinese economy has been declining. Manufacturing’s share of employment in China started falling even earlier, two decades ago. In fact, declining manufacturing employment is a global trend.

Second, the US has lost only limited manufacturing jobs to China in the recent past. Even before the rise of China as a manufacturing powerhouse, the US had been losing jobs to East Asia for decades. In the past decade or two, many of these jobs were consolidated from other parts of East Asia to China. In the process, these other Asian economies moved up the technology ladder to higher-value components.

When a laptop or smartphone is imported from China to the US, most of the value, other than the margins captured by brand owners or retailers, is contained in the critical components – made in Japan, Korea or Taiwan – in these devices. The value added by China can be very small. Some of the apparent US trade deficits with China are really indirect trade deficits with its allies – Japan, Korea and Taiwan – embedded in these products assembled in China.

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Third, China may be fairly described as enjoying unfair cost advantages, with its poor pollution controls and worker rights protection. With development, these social costs are becoming increasingly unacceptable, and China has made improvements in these areas. But closing these cost gaps won’t bring jobs back to the US.

Impeding free trade is certain to undermine US manufacturing competitiveness

Nor will imposing tariffs on imports from China. Margins may decline and consumer prices may rise. Some jobs may go to lower-cost countries such as Vietnam. For hi-tech products, production may move to Singapore or Malaysia, even Korea or Taiwan. But these jobs are gone from the US for good. In a globalised world, targeted tariffs against a few countries cannot result in positive domestic outcomes.

This brings us to the fourth point. Low labour costs are not everything. Despite their high labour costs, Japan and Germany remain competitive in manufacturing through superior technology, quality and productivity. A good network of suppliers is key. China started with low labour costs. Over time, it has developed world-class clusters in some sectors. In the meantime, the US lost its old manufacturing jobs to East Asia such a long time ago that the related clusters no longer exist there. Even if US labour costs were to be heavily subsidised, it is hard to see the return of some manufacturing sectors.

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Fifth, market trends will drive some manufacturing jobs to the US, ironically through investments by East Asian manufacturers. But many of these new plants will be automated. Thus, workers with different skills may be needed than those previously laid off. Job creation ultimately hinges on skill development.

Finally, US manufacturing is among the world’s most competitive. The US should nurture its high-productivity manufacturing, instead of wanting a return of low-value manufacturing. America’s strength is based on its manufacturers’ high research and development investments. This strength can be fully exploited if they can source components, and sometimes outsource production, globally. Thus, they must have unfettered access to all major markets.

Impeding free trade is certain to undermine US manufacturing competitiveness. Protectionism is no way to create jobs. And any trade war with China, as estimated by a leading US think tank, will only lead to the loss of millions of jobs in America.

Winston Mok, formerly a private equity investor, is a private investor