The American Interest
Analysis by Walter Russell Mead & Staff
New Outsourcing Destination: USA

For decades, the booming factories and massive, cheap workforce of East Asia has been both the greatest fear and the greatest envy of the growing ranks of American declinists. What, then, are they to make of a recent article in the FT, which describes manufacturing business moving back across the Pacific to the U.S.? According to the report, Chinese wages have risen dramatically over the past decade, and they have been matched by increasingly stringent regulations that have eroded the country’s competitive advantage. America, meanwhile, boasts higher productivity, falling unit labor costs, and a reputation for quality unmatched by its Asian competitors. Ten years ago, outsourcing was a no-brainer, now many companies are beginning to think twice.

This news may come as a shock to the fashionable and vocal chorus of declinists, but Via Meadia is less surprised. Even the worst financial crisis in generations has done nothing to change the fact that America’s fundamentals are strong. America rose to power on the back of its innovation and its dynamism, two qualities that are in more demand now than ever in an increasingly fast-paced global economy.

We got fat and lazy with decades of easy dominance after World War Two; the shock of new competition was a painful one.  But America is responding in the traditional way: adjusting, reforming, innovating, bouncing back.  Some amazing things are happening around the world, and Via Meadia welcomes the rise of Asia, the renewal of Brazil and many other signs of progress from all over.  But the US still has one important export that we make better than anybody else: the future still bears the label “Made in the USA.”

Published on January 19, 2012 6:32 am
  • bob sykes

    This does not mean that manufacturing employment will increase. We are in a long-term process of automation that increases worker productivity and decreases worker numbers.

    Our manufacturing economy is already larger than the entire German economy, and it is much larger than the entire Japanese economy.

  • Kenny

    Perhaps a lot of the manufacturing outsourcing was needed to starve out the unions that were killing domestic industries.

    Now with those unions, if not gone, then at least a shadow of their former selves, it is more fesiable to manufacturing in the U.S. than when the unions where king of the hill.

    Too bad a similar process can’t be found to shrink the bloated pubic-sector union work force.

  • Jim.

    @bob sykes:

    Whether or not this trend increases the number of people employed, this will help everyone. Even our service industry — increasing the value of exported goods supports the value of the dollar, which helps service industry types’ buying power when they buy imports.

    More productivity may not help people directly, but it helps everyone indirectly.

  • Jim.

    By the way, hearing that Chinese wages are trending up is some of the best news anyone can have. Not only does it mean that the Chinese are being lifted out of grinding poverty, but it also leads directly to the trend Mead and FT mention here.

    Now, if we can just ensure that energy and raw materials extraction keeps pace with the growth in cash wages, we should see huge gains in overall human average standard of living.

  • a nissen

    I know this is “the American Interest,” but how about a little more objectivity? A story appeared in our local newspaper (of all things!) about the fortuitous railroad with the most useful direct routes into and out of Mexico, a huge competitive advantage given all the manufacturing now seeking shorter hops to market.

    Shades of Jeff Rubin’s 2009 “Why Your World is About to Get a Whole Lot Smaller” is it not? As to objectivity, Rubin’s audience clearly was not limited to the good old U.S.A.

    Not to mention what David Orr called to our attention way back in 1992: “Communism has all but collapsed because it could not produce enough; capitalism is failing because it produces too much and shares too little.” Don’t think Orr limited “capitalism” to his native country either.

  • Mick The Reactionary

    Do you have any data professor? Any facts?

    Hot air is not the same as fact.

    In FT article there is one, JUST ONE, anecdote about furniture maker, who will, maybe, potentially, any day now, if things will go well, move unknown number of jobs (low wage? medium wage? any benefits?) to the USA.

    Wow. Manufacturing resurgence.

    Oh, wait.

    There is a Chinese entrepreneur who has become a standard bearer for “re-shoring” production in the US. Her high-tech, absolutely crucial for US economy candle making business employs 5% of its staff in USA.

    Who could dream a more optimistic scenario?

    GO USA!

    And pay no attention to this pesky fact:

    “Since 2004, about 85 percent of all research and development job growth has been in U.S. firms’ foreign outposts.”

    http://www.newsobserver.com/2012/01/17/1786614/study-one-quarter-of-high-tech.html.

    US corps sent 85% of R&D jobs abroad.
    But Chinese candle maker employs 5% of workers in USA.
    We are definitely Number ONE.

    Just ask Prof Mead.

  • http://facingzionwards.blogspot.com/ Luke Lea

    Told ya’ manufacturing has a future in this country. ;) If (when?) we insist on a balance of trade with China it will grow even more — a lot more.

  • http://facingzionwards.blogspot.com/ Luke Lea

    For those interested here is a good link by a former Goldman Sachs investment banker and a ten year resident in Peking on China’s dilemma when it comes to its unsustainable trade surpluses with the US. Excerpt:

    [i]China has an extremely high investment rate, perhaps the highest ever recorded for a medium or large economy. Countries with high investment rates should normally run trade deficits, since there is so little left over of their production for them to consume that they must import the balance. This is what happened, for example, to the US during most of the 19th Century.

    But China has probably the highest trade surplus ever recorded. This means that an extraordinarily large portion of its production is invested, and another extraordinarily large portion is exported. So what about consumption? The only way a country can run an extraordinarily high investment rate and an extraordinarily high trade surplus is if consumption is extraordinarily low.[/i]

    In other words, if China is to have a balance of trade with the US it must increase its internal consumption. Ives Smith explained why this might not be so easy to do:

    [i]Having a consumer economy requires infrastructure, namely retail stores and storekeepers. But if you have storekeepers in advance of consumerism, they just go broke. This is not easy to solve, although it clearly does happen over time. But the idea that you can make it happen quickly in a dirigiste manner does not seem likely.[/i]

    Thus from an American point of view the choice in the near term may between our own economic welfare (manufacturing employment, re-industrialization, wage rates) and theirs. Old-fashioned protectionism will be back on the table.

  • Jacksonian Libertarian

    The American Global Trading System, that replaced the British Global Trading System, has grown into the largest and most efficient market in human history. It is responsible for uplifting billions of people out of abject poverty, and exposing them to the superior American Culture.
    The US owns the liquidity to this system with $4.5 Trillion in foreign bank held Treasuries. Every export model economy on Earth is just beginning to realize, how they have overpaid for those Dollars, and how little they would be worth if paid off. Paying off those Treasuries (a simple accounting entry at the Fed for the fiat currency Dollar) would make the US an export model economy instantly, and in the best way possible (we wouldn’t be manipulating our currency, they already did that, and we would be rebalancing the global market place and making it stronger). US businesses, which are the survivors of decades of brutal foreign competition, would gobble up world market share in every major industry. Market share that would last long after the impulse that created it dissipates.
    And they thought they were cheating us with their currency manipulations, and we didn’t know it. It just goes to show that you can’t con an honest man, but conning a crooked nation is a piece of cake.

  • http://facingzionwards.blogspot.com/ Luke Lea

    It’s so easy to forget that China is not a liberal capitalist democracy. They are neither liberal, capitalist, nor a democracy. We are reaping the consequences.

  • Brian Goldfarb

    Some 3 decades ago, it was noted that following the first surge of movement across the Rio Grande, there was a new development. As wages just across the border rose from $5 a day to $5 an hour, US manufacturers took one of two routes. Some, maybe many, moved further into Mexico, to the Yucatan Peninsula, where wages were still low. Others moved back to the States, where the advantages of a skilled, highly educated and flexible labour force outweighed the disadvantage of a relatively high wage bill, whether per hour or per week.
    Plus ca change, re China.

  • Mrs. Davis

    Luke, try em not i.

    If wages alone were the issue, there are probably other low wage markets manufacturers could go to. But there are other factors besides wages that I bet companies are considering: concentration of risk and political stability.

  • http://facingzionwards.blogspot.com/ Luke Lea

    @ Mrs. Davis — Agreed.

  • Mick The Reactionary

    There are 10 comments here beside my own discussing alleged return of manufacturing to the USA.

    Not one commenter has bothered to provide even one data point to support the alleged surging of US manufacturing.

    Not one.

    Level of this discussion is just depressing.

    What are you talking about people?

    Does the alleged phenomena even exist?

    Mead is a brilliant political writer. Great propaganda pieces.

    But does political science means all political hot air and no trace of science?

    I could be naive but I expected a much better product from the Prof.

    And much better comments.

  • a nissen

    Don’t know if #14 counts my comment, in that I did not claim return to U.S. But just in case, here is my reference:

    http://seattletimes.nwsource.com/html/nationworld/2017193066_mexrail09.html

    I see original source is Bloomberg News.

    “Escalating shipping and labor costs in world manufacturing centers such as Asia have encouraged Nissan, DuPont and other companies to shift capital spending to Mexico. Many of the goods will head to the U.S., the destination for about 80 percent of Mexico’s exports.

    Cross-border merchandise trade totaled $341 billion by the end of September, about 18 percent higher than the same point in 2010, according to the Bureau of Transportation Statistics.”

  • Mrs. Davis

    Not one commenter has bothered to provide even one data point to support the alleged surging of US manufacturing.

    OK

    When Mark Krywko and his son, Jason, launched Sleek Audio, a small business making in-ear headphones for iPods and other audio devices from a Florida town near St. Petersburg, they asked several U.S. manufacturers for quotes on how much it would cost to make their product. It was, of course, oh so much cheaper in China, so they contracted with a factory in Guangdong province and launched their first product in 2007.

    But last year, fed up with low quality, too much travel, communications problems, shipping delays, rising costs, and — worst of all — a ruined shipment of 10,000 sets of earphones that cost millions and nearly brought the company to its knees, the father-and-son team made a big business decision: quit China and move their manufacturing back to the U.S. “It became very difficult and taxing on us,” says Jason. “Now we control the quality of the product. No more waiting for production has been a wonderful thing.”

    more

    Companies that are bringing manufacturing operations back from China — such as GE, Caterpillar, and NCR — are mostly reopening plants or adding shifts at plants that are already open. Steel imports from China have decreased 20 percent, and US steel production has increased 10 percent, mostly by adding labor at already open plants.

    more

    Caterpillar, which has a major presence in China, is building its next plant to make excavating equipment in Texas, tripling its capacity for such equipment in the U.S.
    Ford is repatriating 2,000 jobs from China after reaching an agreement with the United Auto Workers that it says it can live with.
    NCR has already brought its production of automated teller machines back from China to shrink the time from production to market, to stitch divisions closer together and lower operating costs.
    The toy maker Wham-o (and this is my favorite) is repatriating half of its production of Hula Hoops and Frisbees, most from China, some from Mexico.

    more

    Mars Chocolate North America announced that it will open its first new U.S. factory in 35 years. The $250 million chocolate factory in Topeka, Kan., will create at least 400 jobs for local residents.

    I could be naive but I expected readers intelligent enough to read Dr. Mead knew how to use Google to find evidence to refute a claim they believed to be incorrect.

  • J. F. Smith

    Last spring we had a weird situation when we found out that the Southern California company Space-X could build space launch vehicles (rockets) cheaper than the Chinese. Hearing this, the president of the Chinese company choked on his lunch. Yes, we can compete with the Chinese on price. We already beat them in at least one area.

  • Kris

    I’ll take this opportunity to express a pet peeve: For the love of whatever deity you like, could people please stop confusing the health of the US manufacturing sector with the number of people it employs? It would also be nice if said people didn’t expect the highly anomalous post-WW2 situation to last forever.

  • Mick The Reactionary

    @Mrs. Davis

    Commenter provides links to several anecdotal data points about expanding employment and/or manufacturing capacity in the USA.

    Off the point without statistics and content.

    To support a hot air piece the Prof has written you have to show one or both:

    1. How manuf employment in US has grown in the last X years (X could be 1 or 2 or 3 …) above and beyond the usual after-recession-recovery rehiring of personnel.

    2. Statistical evidence that manuf employment growth in US relative to employment in China and others is higher than it used to be X years ago (X = 1 or 2 or …).

    Factoids like this fictitious factoid WILL NOT COUNT:
    Say Apple iPod-3 is a great success. Apple (total world-wide employment 60000) expands production.
    Apple main subcontractor FoxConn (current employment in China 800000) hires 10000 new workers. Apple hires 10 new people to handle quick warranty repairs.

    Good for 10 people who now have good jobs, proves nothing about manufacturing resurgence.

    While factoid above is a fiction, in fact Apple real-life example shows how Apple-like business models, while could be wildly successful for their stockholders and employees, are virtually irrelevant to US labor market.

    Apple is a wildly successful US corp which provides an excellent employment for 30-40K people in US, many of those jobs are very high value. Many (most?) of those jobs can be performed only by top 5% of US workforce.

    All the while at least 500000 people abroad have jobs because of Apple. And those jobs range from low manufacturing assembly, logistics, etc jobs all the way to chip production, manufacturing engineering, etc

    So for every job Apple creates in US, 10-20-30 jobs are created abroad.

    While an excellent company, you cannot improve the lot of working Americans with Apple-like business models.

    To have a dent in declining US standards of living we would need hundreds of Apples, and that is impossible. I doubt that even Prof Mead will base his economics plan on that.

  • Mick The Reactionary

    @Kris:

    “could people please stop confusing the health of the US manufacturing sector with the number of people it employs?”

    Most people are not confused. Most people first and foremost are interested in good jobs being available for many/most.

    Health of manufacturing is important in many ways but most people don’t think about it.

    How many people are concerned about farming in US?

    It is there, it is very important, it is working well and it employes something like 1% of Americans with no hopes of increasing employment.

    So we don’t think about.

    If manufacturing would work real well and employ 1% with no hopes of expansion, we would stop thinking about it.

    “It would also be nice if said people didn’t expect the highly anomalous post-WW2 situation to last forever.”

    Since we are into reading other people thoughts, let me read some:

    Most people would very happy if we would return to situation in 1985 or 1990 or 1995 or 2005.

    When exactly post-WW2 era has ended? Not in 2005, is it?

  • Mrs. Davis

    To support a hot air piece the Prof has written you have to show one or both:

    1. How manuf employment in US has grown in the last X years (X could be 1 or 2 or 3 …) above and beyond the usual after-recession-recovery rehiring of personnel.

    2. Statistical evidence that manuf employment growth in US relative to employment in China and others is higher than it used to be X years ago (X = 1 or 2 or …).

    In fact neither is necessary. The word “employment” does not appear in the esteemed professor’s post. It is a post about manufacturing. Just as our more productive agriculture sector produces more and better food with fewer agricultural workers, so our re-emergent manufacturing sector will produce more and better goods with fewer workers. In both cases this is a matter of increased productivity, a word the professor does use.

    The fictitious Apple example is both fictitious and a strawman.

    The US has only 2 million farmers. China has 300 million. Does this mean China’s farmers are better off?

    When exactly post-WW2 era has ended?

    It is difficult to determine “exactly” when this occurred but somewhere between February 4, 1965 and August 15, 1971.

  • Kris

    Mick@14: “Not one commenter has bothered to provide even one data point to support the alleged surging of US manufacturing. Not one.”

    Mrs Davis @16 then provides several data points.

    Mick@19′s response? “Off the point without statistics and content.”

    If you want us to jump through hoops for you, the least you could do is be specific and consistent in your demands.

    Regarding your comment @20, I have no idea what your own position is. If manufacturing were working as well as farming, would you yourself be happy with the situation? Are you contending that manufacturing is doing significantly worse than farming?