The U.S. has seen its share of manufacturing consistently on the slide — from almost 25 percent in 1970 to less than 12 percent at present. Growing trade deficits with China and Mexico and impending recovery from the recession since 2008 have resulted in the U.S. losing about 6 million manufacturing jobs by now.
The question largely asked is whether such loss of U.S. manufacturing jobs is due to several U.S. policies over the last two decades; namely, high corporate tax rates and incentives support for investments in manufacturing technologies or capacities? Perhaps not. Evidently, even if the U.S. was a closed economy, the drop was inevitable as the share of services sector in the global GDP, vis-à-vis that of agriculture and manufacturing, grew strongly.
Despite politics’ huge influence on economic policies, the basic objective of making profits is the most fundamental tenet of the any country’s economy. With the increase in per capita incomes and wages in developed economies, manufacturing certain products at home becomes unviable. For example, export dress shirts are procured from the Asian economies at $4 on FOB basis. It is practically impossible for the U.S. companies to match the price points while making such shirts at home. Stringent environmental regulations further shifted capacities from the West to the East in relevant industries. Thus, in last two decades, the U.S. manufacturers have significantly increased their global footprint across high-growth emerging markets. To drive up efficiencies and profits in competitively-intensive markets, the U.S. manufacturers have developed the necessary skill and network to successfully leverage global sourcing opportunities.
Moreover, not only the U.S. but almost all of the developed economies are witnessing the manufacturing’s share drop at their home markets as the world economy has been shifting from the ‘machine-age’ to the ‘digital age’. The influence of automation, robotics, and connected factories on manufacturing is pretty evident and is slated to grow phenomenally over the next two decades. Popularly known as ‘Industry 4.0’, such advancements will reduce labor requirements and can be identified as opportunities for the U.S. manufacturers to invest heavily in such technologies that will help reduce the proportion of labor costs to the overall manufacturing costs, an area where the emerging economies have a huge advantage.
Therefore, following a protectionist policy alone will not help the U.S. in the long run as the global shifts in manufacturing will always follow both demand dynamics and cost advantages. Initially, in 2017 intense lobbying is expected between Corporate America and the new Government, and a compromise solution is the one that is most likely to emerge. The U.S. manufacturers are heavily invested in Mexico and other emerging economies, and bringing back such jobs will neither be easy nor economical. To grow, the U.S. manufacturing sector needs a thorough strategy focusing on high-tech sectors and investments in automation. And, evidently, manufacturing of commoditized products will neither be a prudent strategy nor economical.
Kannan Sivasubramaian is Executive Vice President at Aranca.