Review: Dissecting America’s manufacturing retreat

November 1, 2013

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Those who believe that making physical things is a superior vocation will find themselves nodding through much of Vaclav Smil’s “Made in the USA”. Smil, a prolific Canadian academic, challenges the widespread view that in mature economies a shrinking factory footprint is inevitable – or even desirable. He blames short-termism and bad policy choices, not just changing economic tides, for the retreat of U.S. manufacturing. The book’s call for smarter industrial policy is appealing, but Smil comes too close to advocating protectionism.

Made in the USA uses mountains of statistics to chart the rise of U.S. industry from the aftermath of the American Civil War to its mid-20th century heyday. It pegs the rise of OPEC and related oil shocks of the 1970s and Detroit’s inept response to rising competition from Japanese automakers as key turning points in U.S. industry’s subsequent decline. He cites statistics showing the U.S. has shed about 5 million factory jobs since the 1990s.

Smil’s pro-manufacturing argument boils down to a multiplier effect: a team of engineers working to improve an automobile assembly line will spur more and better economic activity than a room full of bankers cooking up noxious mortgage derivatives. World-class manufacturing supports employment in research and development, specialised suppliers, and related services companies. Bankers and lawyers need a far smaller supporting cast, in Smil’s view.

Offshoring-obsessed bosses, intransigent unions and bumbling bureaucrats all get their share of blame for the decline of American manufacturing prowess. Complacent leadership and pricey workers crippled Detroit’s response to rising Japanese competition. From the 1970s onward, expensively-made, gas-guzzling American cars steadily lost ground to nimbler competitors. Government fuel standards that exempted sport utility vehicles meant the new regulations failed to nudge the industry towards the kind of product innovation needed to survive the fuel price spikes of the late 2000s.

The history is interesting, but Made in the USA scarcely mentions the flipside of U.S. manufacturing’s struggles – the rise of the middle class in China. A Chinese reader could be forgiven for asking why his compatriots don’t deserve to be rich, too. Smil’s answer might be: because China cheats. He wants the U.S. to take a harder line on intellectual property rules and currency manipulation by its trading partner.

Charitably, he is yearning for a return to balance after years of one-sided gains, in which U.S. manufacturers ceded the field to low-cost, state-backed competition, often enthusiastically embraced by Western corporate bosses. But saying that a country must be prepared to retaliate against “questionable, illegal, or discriminatory practices pursued by its trading partners” veers dangerously close to crude protectionism. And with the yuan rising and China’s overall trade surplus shrinking, the call looks a little outdated.

Smil is on firmer ground arguing for smarter industrial policy. The United States could clearly do more to promote exports and smaller manufacturers, stimulate research and development, reform education and make corporate tax rates more competitive. Germany, which has managed to preserve its domestic skills base thanks to strategic export promotion and a preponderance of mid-sized, often family-run specialist manufacturers who think about long-term rather than short-term profit, should be a model.

Made in the USA’s most valuable contribution may be in drawing contrasts. The United States of the early to mid-20th century was a rising manufacturing power with abundant, decent-paying middle-class jobs. Today’s United States is debt-ridden, import-dependent, materially rich and socially frayed. To correct the imbalances at the heart of these problems, America must either consume less or make more.

Cheaper energy – in the form of abundant shale gas – offers the country a chance to do the latter. But the industrial renaissance will be stillborn unless policymakers stop blithely treating manufacturing decline as inevitable.

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