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American Industry Is on the Move

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
January 8, 2013
Financial Times


Last year Jeff Immelt, the boss of General Electric, declared that outsourcing was "mostly outdated as a business model". GE's venerable Appliance Park in Louisville, Kentucky, is opening a string of new assembly lines to build refrigerators, water heaters and washing machines, bringing home jobs from China and Mexico. President Barack Obama has trumpeted this wave of "insourcing", while Hal Sirkin of the Boston Consulting Group foretells a US "manufacturing renaissance". Even as the news from Washington reeks of heedless brinkmanship, the news from the people who actually make stuff sounds refreshingly hopeful.

How real is this renaissance? It is tempting to dismiss it out of hand. Manufacturing has experienced a steady relative decline in just about all advanced economies. Between 1980 and 2010, German manufacturing value added fell from 30 per cent of gross domestic product to 21 per cent, according to World Bank data, while Japan's fell from 27 per cent to 19 per cent. But there are a few exceptions. After its financial crisis in 1992, Sweden boosted manufacturing value added as a share of output and held on to the gains for more than a decade.

The question is whether Sweden's conditions exist in the US. The first requirement is a weak currency. After its peak in 1992 Sweden's real effective exchange rate fell 27 per cent, according to the Bank for International Settlements. Since the dollar peaked in 2002, it has fallen 21 per cent, enough to make a major difference. In 2000 US wages were almost 22 times higher than China's. By 2015 that multiple will have declined to four.

The other Swedish ingredient is a productivity boom. In 1995 Sweden joined the EU and opened its economy to foreign investment. The country's industrial champions responded by investing twice as much in vocational training as their EU rivals and restructuring aggressively. Between 1996 and 2009, this yielded a cumulative boost to manufacturing productivity of 57 per cent, according to the OECD. By contrast, Germany managed only 17 per cent.

If Sweden sounds impressive, here is the surprise: over the same period American manufacturers piled up an even larger productivity gain of 69 per cent. Again, competition contributed: the US joined the North American Free Trade Agreement and the World Trade Organisation, and its continent-sized economy generates plenty of internal competition. But in the US case, the impetus from trade and competition has been powerfully reinforced by a jolt from technology.

Despite much fashionable chatter, this is not mainly about fracking. The new extraction technology has cut the price of natural gas in the US to a fraction of the Asian level, but, as the McKinsey Global Institute observed recently, the industries that are most energy-intensive are not actually very trade-intensive. US paper mills and oil refineries will enjoy the cheap gas bonanza but not much production in these sectors is likely to shift to US shores.

The more important technological jolt comes under the heading of "big data". On Friday an exhaustive survey of management practices at 30,000 US manufacturing establishments was released. Two of the authors, Nick Bloom and John Van Reenen , had previously shown that US companies were, on average, better managed than foreign rivals. A striking conclusion of their study is that US manufacturers continue to get better, particularly when it comes to capturing and analysing data on everything from customer behaviour to production-line efficiencies. And there is plenty of scope to improve further. A minority of survey respondents embraced most state-of-the-art management incentives and monitored performance against clear targets. But a quarter of respondents adopted fewer than half of these practices.

So the stage is at least half set for a US manufacturing revival, even if obstacles – poor education, poor infrastructure – remain. But what might a revival mean? Not, unfortunately, a cure for unemployment. Since a trough in January 2010, the US has generated just over half a million new manufacturing jobs but the bounce mostly reflects the collapse during the recession. For an advanced economy to create manufacturing employment independently of a cyclical rebound is almost unheard of. Even as it boosted manufacturing as a share of output between 1993 and 2007, Sweden lost almost a 10th of its manufacturing jobs.

But a manufacturing turnround is clearly desirable. Precisely because manufacturing workers can be displaced by machines, it is factories that drive productivity: in the US, manufacturing accounted for about 17 per cent of output between 1995 and 2005, yet contributed 37 per cent of economy-wide productivity gains, according to McKinsey. Higher productivity means higher pay for surviving employees: American manufacturing workers are on average paid better than American service workers. And consumers benefit from the productivity windfall. Since 1985 the quality-adjusted price of US durables has scarcely budged while the cost of services has more than doubled.

A US manufacturing renaissance is possible, not certain. But Americans are right to celebrate the early indicators – from Siemens, which has just begun shipping US-made turbines to Saudi Arabia; from Toyota, which exports US-made cars to 21 countries; and of course from that chief insourcer, GE's Mr Immelt.

The writer is a senior fellow at the Council on Foreign Relations and an FT contributing editor.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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