When I was growing up, my parents told me, “Finish your dinner. People in China are starving.” I tell my daughters, “Finish your homework. People in China are starving for your jobs.” — Thomas Friedman
Much has been written about the rebound of the manufacturing sector in the United States, and underlying the optimism has been the feeling that China’s manufacturing advantages vis-à-vis the States’ are on the wane. A high profilestudy by the Boston Consulting Group made five principal points regarding this:
- Rising Chinese wage and benefits cut labor-cost advantage.
- Transportation, duties, supply chain risks, and industrial real-estate costs are driving down the cost savings of manufacturing in China.
- Automation and other measures to improve Chinese productivity act to undercut access to low-cost labor.
- Demands are increasing for goods within domestic China and the Asian market, resulting in Chinese capacity devoted to serving those markets
- Lower labor cost sources (e.g., Vietnam, Indonesia) are limited in their ability to absorb higher-end manufacturing that would otherwise go to China due to inadequate infrastructure, skilled labor resources, scale, domestic supply networks and political/intellectual property risks.
All these factors are seen as reasons why manufacturing may return to the U.S.
An article on VOX, the Center for Economic and Policy Research’s policy portal, makes clear why a focus on China is central in assessing the future of American manufacturing, albeit with a much less optimistic take. The authors examine to what extent the decline of American manufacturing is a result of the rise of China, estimating direct effects of import competition as well as labor market and buyer-seller indirect effects that operate at the local level. Among the findings:
- China’s abundant labor supply and relatively scarce supply of arable land and natural resources make manufacturing the primary beneficiary of reform-induced industrial restructuring. The global implications of China’s reorientation toward manufacturing—strongly abetted by inflows of foreign direct investment—are immense. China accounts for three-quarters of all growth in manufacturing value added that has occurred in low- and middle-income economies.
- For many U.S. manufacturing firms, intensifying import competition from China means a reduction in demand for the goods they produce and a corresponding contraction in the number of workers they employ. Looking across U.S. manufacturing industries whose outputs compete with Chinese import goods, we estimate that had import penetration from China not grown, there would have been 560,000 fewer manufacturing jobs lost through. Actual U.S. manufacturing employment declined by 5.8 million workers, making the counterfactual job loss from the direct effect of greater Chinese import penetration amount to 10 percent of the realized job decline in manufacturing.
- These direct effects of trade exposure do not capture the full impact of growing Chinese imports on U.S. employment. Negative shocks to one industry are transmitted to other industries via economic linkages between sectors. (When these effects are accounted for, estimates of trade-induced job losses are 985,000 workers in manufacturing and to 2 million workers in the entire economy. Effects of aggregate demand and the reallocation of labor take these numbers even higher.)
These are sobering figures, ones that the authors do not see being improved in a significant way by any resurgence of American manufacturing. They do, though, see some reasons for hope:
Perhaps the most encouraging sign is that the response of many companies to increased trade pressure has been to increase investment in innovation. The ensuing advance in technology may ultimately help create new markets for U.S. producers. However, if the trend toward the automation of routine jobs in manufacturing continues, the application of these new technologies is likely to do much more to boost growth in value added than to expand employment on the factory floor.
All the more reason to keep our children focused on their homework.