As Laura Clawson recently posted up, manufacturing in this nation has begun to dry up only really in the last decade or so.
However she is slightly incorrect regarding this. Manufacturing has been at a steady decline since the mid sixties, however it is only more recently we are seeing it affect our manufacturing sectors at a rapid pace.
One could write a book on this, and many have, but I'd like to bring in into focus on a major reason why we've seen this trend. And.....as with everything economic and political the devil is in the details.
Join me after the micro econ squiggly for the real reason manufacturing has dipped the way it has and some suggestions on how we can get it back.
Tariffs and Free Trade
Dirty word I know, especially among those who clamor for free trade. It's so dirty of a word that we don't even legislate it that much beyond just giving other trade nations rock bottom deals. We do it through block boilerplate tariff rules using special status markers (we'll get to that in a little bit). Hell, we even had a president just sign a free trade deal with some Latin American nations.
I am getting ahead of myself however. Lets start from the beginning at the turn of the modern industrial revolution with that most iconic symbol, the Model T.
Ford was a visionary to some degree. He or more rather the people he put in charge were able to take processes that were already in use in varying disparate ways, things like steel manufacturing logistics, rail delivery times, machine assembly in line with hand assembly and get a product that initially took a month to build just 11, to a vast complex that could turn processed parts into a car every 93 minutes.
In 1914 an assembly line worker could purchase a Model T using just 4 months of entry level pay. The costs were kept low not just from streamlining the process of assembly, but also through streamlining the process of raw material delivery and mid level processing of raw materials.
Coal was mined in the coal belts, delivery via railway to the rust belt states, processed into both raw material and semi processed goods, then shipped to final assembly at vast complexes nearby. Very often some of the steel used in manufacturing a Model T was made right there in Michigan. McLouth Steel grew up around the auto industry and had plants at times literally across the street from where its raw steel was processed into goods for the burgeoning auto industry. Even the screws used in the assembly process were often made in or very near the auto plant.
What the hell does all this rambling matter, using intro into a history or Ford that many of you are already familiar with? Just keep reading, I'm going to get long and winded here but the details matter a lot.
Raw material and semi processed goods were made in the United States because generally it was often too expensive to import from other nations. Not always, but the tariffs were such that generally speaking until the year 1965 imports and exports generally held close to even or we ended up exporting excess. A lot of this had to do with burgeoning economies requiring raw material and favorable policies of tariffs to encourage manufacturing to export items.
In short, yes we used to build things. Or more specifically we used to build the stuff to make pieces for widgets and make materials for other people to make those pieces as well. Sure we had final assembly here in the US, like the aforementioned Model T. However by in large we often made parts. It was just an aforementioned passing to assemble here as well because tariff policies made it business idiocy to ship what would become widgets parts elsewhere just to ship them back to make said widget.
Then globalization stepped in.
Now we have a vastly different landscape.
Raw material creation has shrunk dramatically unless the material is specialized in nature. Examples would be specialized metal fabrication, or chemical treatment of already preprocessed goods. In 2002, the prominent dip in the graph provided by Laura, for instance we imported 29 million units of steel product compared to exporting 5.4 million. source
It's also no surprise that many of these raw processing jobs are often unskilled labor or partial skill labor jobs. Jobs that many often people right out of high school can get fairly easily.
The manufacturing jobs we do have, and indeed have been adding recently, are skilled or highly specialized skill jobs. The assembly and manufacture often involve highly complicated goods for consumption here, but lately often abroad. Things like turbines, refined petrol products, and complicated electrical items for fields like the Medical Community as a few examples. And the simple fact about these jobs is that they will NEVER replace those lost raw processing and semi processed jobs. They again are high skill placements, that often work along side many machines, and the assembly lines just require less people. And while my focus is on steel, you can see this trend in everything. From textiles to software development.
This slow decline started due to tariffs or rather the lack of them. Tariffs are the process by which taxes are collected on the importing and exporting goods. They are and still are at times to prevent exploitation of American industries by cut throat industries abroad. At least they were until what was an American Corporation with strictly American interests now became globalized. Until globalization a corporation at least had some allegiance to its nation state that it operated under. What allegiance does a global corporation have to a nation state?
This realization by larger companies that if they could just get tariff laws altered and changed they could then move their processes to nation states with more favorable labor pools. The moderate protectionist strategies of the 30's through the 60's was slowly replace by corporations lobbying to get free trade deals with other nation states. These free trade policies allow a business to import and export at will with no cost.
It all sounds great until again, you look at the devil in the details. With reduced tariffs both trading nations state lose revenue, the ability to regulate exploitative forces technically outside their sovereignty, and the nation states labor pool has a loss in the form of lack of jobs. Essentially free trade allows for a capitalist to exploit a nation to lower production costs and increase revenue, but it does so at the expense of both trading nations.
I won't go into depth of this history, but I do encourage everyone to read Kicking Away the Ladder by Ha-Joon Chang.
In any event, the reduction of tariffs on raw and semi-processed material ensured that a slow bleed of things like the steel industry and textiles began to be shipped elsewhere to places where labor could be exploited and the raw materials could be siphoned from the land.
Even still though, very often the final finished product was manufactured here. Processed parts like screws, sheet metal, raw clothing, etc.. was shipped back for production here. So this is the leveling you see in Laura's graphic. The population grew, so as a percentage to population technically we added no jobs, we just sent what growth would have been to other places. That was until some genius decided to give China the coveted trade award in the world, Most Favoured Nation status.
The Most Favoured Nation (MFN) or Normal Trade Relations as its not legislatively called, lets the nation named trade with the United States with VASTLY reduced tariffs on a wide range of goods from electronics. It has been suspended after the massacre of pro democracy protestors at Tiananmen Square in 1989. It had been open for only nine years since then, as it was suspended some time ago in 1951.
China regained this in partially in 1998 and cemented it in 2000 as it joined the World Trade Organization.
And it is this reason we have seen a great exodus of manufacturing jobs from the United States and other nations. You see, we are not the only ones affected by this mass exodus to China and other essentially third world manufacturing. We used to purchase quite a bit of textiles from Canada for instance. Essentially giving China and other nations this status allows them to undercut our labor market. China exacerbated this by manipulating their currency to even further make the disparity between say a Chinese screw and an American screw even larger.
How to fix it?
As complicated is the reasons where we are, getting out of it is going to be just as complicated. I will tell you this though, that Free Trade deal struck recently with Brazil might create a job, but for every job it creates it steals another two. it is totally the incorrect way to fix the issues we have here.
Now we do not need another Smoot–Hawley Tariff Act, that was a disaster. But I would say its time for us and other nations to start examining and dust off that protectionist play book and take some sort of balanced approach.
Thu Apr 12, 2012 at 5:30 AM PT: Spotlight, thank you. I wrote this literally during my breaks at work.
As noted in the comments below, there is going to be no single bullet that will fix this. However, it is very clear given the evidence the WHAT put us here, and despite having never been a real fan of protectionist strategies I feel its time we at least have this conversation.