How the U.S. Lost Its Place as the World's Manufacturing Powerhouse ( WSJ)
A great misconception demystified...........
“How the U.S. Lost Its Place as the World's Manufacturing Powerhouse"- a Wall Street Journal article delves into the multifaceted decline of American manufacturing over the past several decades. This decline has been influenced by a combination of economic, technological, and policy-driven factors.
Historical Context and Decline
In the 1950s, manufacturing was a cornerstone of the U.S. economy, accounting for approximately 35% of private-sector jobs. However, by 2025, this figure has dwindled to around 9.4%, with about 12.8 million manufacturing jobs remaining. Several key factors have contributed to this decline:
Shift in Consumer Preferences: Post-World War II, American consumers increasingly favored services over goods, leading to a gradual transition from a manufacturing-based economy to a service-oriented one.
Globalization and Trade Policies: The integration of global markets and trade agreements facilitated the offshoring of manufacturing jobs to countries with lower labor costs. Notably, China's entry into the World Trade Organization in 2001 led to a surge of inexpensive imports, a phenomenon often referred to as the "China Shock," which significantly impacted U.S. manufacturing employment.
Technological Advancements: Automation and improved productivity have reduced the need for human labor in manufacturing processes. A 2015 study indicated that 88% of manufacturing job losses from 2000 to 2010 could be attributed to productivity improvements.
Economic and Social Implications
The decline in manufacturing has had profound effects on the U.S. economy and society:
Employment Shifts: Many workers displaced from manufacturing have transitioned to the service sector, which often offers lower wages and less job security. This shift has contributed to wage stagnation and increased income inequality.
Regional Disparities: Areas once reliant on manufacturing have experienced economic downturns, leading to community decline and reduced public services.
National Security Concerns: The erosion of domestic manufacturing capabilities raises concerns about the U.S.'s ability to produce critical goods, especially in times of global crises.
Policy Responses and Future Outlook
Efforts to revitalize U.S. manufacturing have included:
Tariff Implementation: The Trump administration's tariffs aimed to protect domestic industries by making imported goods more expensive. However, economists argue that such measures may not effectively restore manufacturing jobs and could lead to higher consumer prices and trade tensions.
Investment in Strategic Sectors: There is a growing consensus on the need to invest in key industries like semiconductors and renewable energy to bolster domestic manufacturing and reduce reliance on foreign suppliers.
Workforce Development: Enhancing vocational training and education can equip workers with skills relevant to modern manufacturing, potentially mitigating job losses due to automation.
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The Percepton of “Low Wages Leads to offshoring of Manufacturing” : We think this is a common misperception. It is not low wages abroad that drove manufacturing out of the US.
After all Japanese wages in the late 1980s matched or even exceeded American wages, and yet Japan nonetheless absorbed a great deal of manufacturing from the US. What is more, the most successful manufacturing exporters to the US were not the countries with the lowest wages, but often countries, like Japan and Germany, with the highest wages.
That's because what matters is wages relative to productivity.In poorer countries, where worker productivity is low, there is nothing about lower wages that automatically make then more "competitive". It is only when wages are low relative to the productivity of workers that their manufacturing products become globally competitive.
When economies compete mainly by putting downward pressure on wages, whoever is able to reduce the household share of GDP the most is the "winner". That's the kind of globalization that must result in rising income inequality. We saw much the same in the 1920s.
That is why economists like Keynes wanted a trading regime that limited the ability of economies to run beggar-thy-neighbor surpluses. He argued that their policies put downward pressure on global demand while allowing them a larger share of that demand. By restricting the ability of countries to run large, persistent surpluses, he wrote in "The General Theory of Employment, Interest and Money", this would ensure that “international trade would cease to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle.
It's not low wages, in other words, that create distortions in global trade. It is policies that prevent wages and household income from growing in line with productivity, including financial repression, weak labor unions, undervalued currencies, etc.
China is a perfect example of this.
Good analysis.