Is Now the Time to Re-evaluate Where Products Are Manufactured?

China manufactures the majority of the typical products that we (the US population and most of the developed world) purchase, consume and otherwise acquire. Maybe that is not entirely true, especially with autos, as we purchase a great many products from Japan and Europe. But we must recognize that many of the parts that go into an assembled automobile are manufactured in China, even Japanese cars, and China has begun to export cars, primarily to the underdeveloped countries, in a big way, much the same way Japan and Korea first did in years past. Even gasoline is now exported from China to under developed Asian countries because of the rapid expansion of Chinese refineries in the past three years.

This reality was brought home again and again to me when I was getting my PhD in Japan (2003 to 2005). One of my fellow PhD candidates was a woman business professor from Harbin, China. I wanted to bring her a gift to thank her for teaching Pat Galloway and me how to make and cook Chinese dumplings. We asked what we could bring her from the US. She thought for a long time and then responded, “There is nothing I can think of because you get everything from China.” Ever since that night I have evaluated and focused on this phenomenon from a geopolitical standpoint. Now there is talk coming out of Washington DC about how we should reinvigorate rust belt manufacturing. So, is this the right time to re-evaluate where products are manufactured

The US economy is gathering momentum and starting the long process to return to growth. There is much discussion in the media about the strong corporate profits as the first quarter results are showing. Yet, there is also a lot of discussion about the slow return of jobs as the jobless rate hovers at approximately 10%. There is the usual bashing of China as well, much as was done in the 1980’s about exporting jobs to Japan during that severe recessionary period. All these events create high-level arguments that underlie most of the political rhetoric behind the concept of re-creating "new" jobs by bringing manufacturing “home.” This rhetoric ignores reality and history.

First, the US economy creates most jobs from small businesses or through evolution of technology based firms. Small businesses primarily offer management technology or specialized and focused consulting. Larger firms are focused at the current time, for instance, on nanotechnology based products, supply logistics, and the like. Both provide jobs that reflect the fact that the US work force primarily relies on employees who have a high level of knowledge. Despite criticism of our education system, we forget the fact that most sought after higher education by foreign students is American. I have to ask, what benefit comes from bringing back rust-belt jobs which do not require education and a knowledgeable work force, and also lower wages.

Second there is another important historical fact that politicians often over look. The global financial system as we know it was created as the US and their allies emerged from WWII. In the aftermath of the World War, Germany and Japan had been crushed, and nearly all of Western Europe lay destitute. Bretton Woods at its core was an agreement between the United States and the Western allies that the allies would be able to export at near-duty-free rates to the U.S. market in order to boost their economies. In exchange, the Americans were granted wide latitude in determining the security and foreign policy stances of the rebuilding states. The US took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement. For the Europeans, Bretton Woods provided the stability, financing and security backbone Europe used first to recover, and in time to thrive. Most Americans actually focus on other outcomes of Bretton Woods. The strategy proved so successful that the US quickly extended it to Germany and Japan, and shortly thereafter to Korea, Taiwan, Singapore and others. The US began with substantial trade surpluses with all of these countries, simply because other counries had no productive capacity due to the devastation of war. After a generation of favorable trade practices, surpluses turned into deficits, but the net benefits were so favorable to the US that the policies were continued despite the increasing economic deficits that the US experienced.

Bretton Woods is the ultimate reason why the Chinese have succeeded economically for the last generation. As part of Bretton Woods, the US opened its markets, eschewing protectionist policies in general and mercantilist policies in particular. All China has to do is produce and it will have a market to sell to. But in every case there comes a point at which the beneficiary country must transition from wasteful export-driven economies to the development of an in-country, consumer driven demand and must shift from currency control which provides the money to increase capacity cheaply. This happened for the Japanese in 1990 and the Southeast Asian countries in 1997, and is beginning to happen to China as the US asserts itself.

Thinking about these two history lessons gives us the answer to the question: is now the time to re-evaluate where products are manufactured? As our economy recovers, the US consumer is and will be the best educated and earn the most income if we continue to do what we have done for the last 65 years. With each market wrenching economic contraction the US renews its productivity and thus expands its economic horizons. Returning to manufacturing which we have shed and which requires little expanding knowledge would indeed be foolish. And abandoning Bretton Woods would be equally foolish. The US population represents approximately 5% of the world population and still accounts for over 25% of world GDP. It may take time to recover even as the recovery accelerates, but there will be and could not be any benefit that comes from a trying to re-capture rust-belt manufacturing!