Can an Economic Recovery Occur Without a Robust Manufacturing Sector?

From Alan Tonelson in the Jan 2010 issue of Harpers:

So, Tonelson identifies a number of ways in which American manufacturers are at a very real disadvantage compared to foreign firms, and suggests that because of the manufacturing sector’s large share of the trade deficit, and the increasing domination by foreign businesses of what are supposed to be the U.S.'s strongest sub-fields, no recovery can occur without radically altering the course of domestic and trade policies. The trade that is occurring between the U.S. and other countries is not on a level playing field because of price controls, VATs, and the general lower labor costs and absence of regulation in developing countries.

To be succinct, the service sector is too easy to outsource, so it can’t be the major component of the U.S. economy if we want a real recovery.

I was going to say that the internal economy can be based in services & refurbishing of old goods, while the nation’s international role could be based in shipping & agriculture. But you’re right, so long as we are consumers of new manufactured goods we need domestic manufacturing.

That guy seems to be ignoring the elephant in the room, which is the fact that our labor costs are just staggeringly higher than in other countries, like say China, Mexico or even Eastern Europe.

That puts US manufacturers at a pretty serious disadvantage for commodity-type items like televisions, shoes, clothing, textiles, etc… where the cost of labor is a major piece of the total cost of the item.

Sure, we could make our manufacturing more competitive, but it’s not like it would create a bunch more jobs and bring back the 1950s and 60s type of blue collar manufacturing work. What it would do is mean more automated factories, which wouldn’t employ very many more people, although it would work from the wealth creation perspective.

On an aside, that’s what spooks me about China; their government has no problem with stacking the deck in their own favor on anything, which screws us to their favor.


No, no,** bump**. I think he fully acknowledges that. He certainly understands that the labor cost differential is key here. The logical conclusion is to create a trade policy that takes those differences (and the need for well-paying jobs in the U.S.) into account. Hence, no more unfettered “free trade.”

But it would create jobs. Also, there are still many fields in which not everything can be automated. The key comparison with China, though, is that it attract foreign investment, but then “presses … foreign businesses to transfer their capital and best technology to domestic firms, thus ensuring that advanced (and especially export-oriented) innovation and production develop and expand in China.” As the world’s reigning consumer nation, the U.S. has enormous market power to pull this off.

Yeah, but isn’t that what a government is supposed to do?

OTOH, they need a well-paid American workforce before they can sell anything in America.

I recall a story from the 1950s or '60s: A Ford exec was showing a UAW leader a Ford plant’s new automation, and, gesturing triumphantly at the machines, smirked, “So, how are you going to organize them?” The labor leader responded, 'How are you going to sell them Fords?"

The destruction of the middle class is due much to our shipping our industry out ,lock, stock and intellectual property. It won’t come back. We are educating them to do American jobs. They don’t do it as well as we do yet, but they will. They will do it cheaper. That will also end. But since they have new factories and equipment and their workers are more up to date, we will not be able to compete. When we sent our industry packing, we dealt a huge blow to the middle class and our national purchasing power. It did make some industrial leaders filthy rich though.

And they continue to profit from this situation. But why do you think we can’t change it? I’m not talking about the practical difficulties that are inherent in any policy shift, but the nascent structural problems. If we implement protectionist trade policies to offset the labor cost differential, why do you think the U.S. still won’t be able to compete?

I do wonder about one thing, though: This might help the U.S., but would it really end the economic crisis both within the U.S. and worldwide? I remember reading somewhere (will look for a cite) that the U.S. credit glut (and resultant trade deficit with China) can only be fully addressed if the Chinese (and lesser developed countries) become more active consumers. IOW, the world economy grew with the expectation that there would be enough consumers buying stuff. But the concurrent stagnation in the growth of a middle class in LDCs resulted in overproduction.

Then the guy doesn’t know what he’s talking about and you should basically ignore him. If what you are saying represents his stance, then he’s advocating trade protectionism, which is a Bad Thing™. One has but to look at the history of such protectionist measures to see how they generally turn out.

Pretend for a second that the US put such measure in place. Our workers would get to retain their high salaries, but our products would be protected through legislature so that the would be competitive with those manufactured by countries who’s workers make a 1/3 as much. What do you suppose other countries would do? What do you suppose this would do to prices here in the US?

How? If you put trade protectionist measures in place, then OTHER countries would do the same (stupid) thing…so, we still wouldn’t export any more goods or services than we do today. Everyone would simply be manufacturing goods and services for their own local market…which would give those manufactures a local monopoly. This would cause prices to rise, and consumer spending to drop, which would, in the end, cause MORE unemployment. This would be a Very Bad Thing™.


Below is a post that I made back in August detailing some of the damage done to the manufacturing sector in this recession. The Federal Reserve cite agrees with the numbers that Alan Tonelson cites. However, I think it is important to keep one thing in mind: when manufacturing was hit in this recession, it was knocked down from an all time high in output. Further, manufacturing has been in more-or-less steady recovery for the past six months.

I bring these points up because there is a pervasive myth that US manufacturing has been disappearing since the '70s. This is not true. Further, all of the reasons given for fearing the demise of manufacturing have been true for much longer than the current recession. Given all this, why should I assume that manufacturing now has any real problems (besides those directly related to the recession)?

It is precisely this kind dogmatism and blind faith in the free market that is the cause of so many of our current problems.

Go back and read the article. Most other developed countries already have protectionist policies in one way or another.

And, as has been pointed out so many times on this board and elsewhere, if a majority of people are not paid decently, they won’t be able to buy the products that are made–thus leading to oversupply.

Now, this is interesting. If this is the case, what do you think accounts for the discrepancy? Could it be merely a definitional issue (e.g., what kind of business is considered to be in the manufacturing category)?

Thanks for this, Dr. L.

It’s neither dogmatic or blind faith…in fact, I’d say that advocating protectionist trade measure is pretty much in those two categories, especially in light of their historical track record.

And so does the US. And they hurt us, as they hurt those other countries who implement them. However, what you are seemingly advocating would go beyond the level of protectionism the US has for, say, the agricultural industries, into whole new levels…which would go from being merely painful to, perhaps, total melt down. Some time, go back and see how the levels of protectionism you seem to be advocating worked out in the early 30’s.

Yes, but many posters on this board are completely clueless about these issues. Myself, I’m only partially clueless about this stuff, but I know enough to realize what would happen if the US ramped up trade protectionism to try and protect our home grown manufacturing industries. It would be catastrophic to not only our economy but probably to the worlds economy as well.


Okay, question for ya, XT:
Do you agree that the reason other, less developed countries can make products for less is primarily the relatively lower wages, and that these lower wages are due primarily to insufficient regulation (e.g., of carbon taxes, as stated in the article; or occupational safety measures, etc.) and anti-union policies that prevent collective action? Because they are basically doing the same work.

If so, then enacting policies that level the playing field and take that net advantage from those countries would disincentivize outsourcing and lead to those jobs being created here, with the attendant higher wages.

And if that advantage disappears, real competition (based on product innovation) would ensue.

Which is just another way of protecting first world manufacturing and basically not giving developing nations any chance to compete.

Sure, but so what? Occupational safety? When the choice is between subsistence level agriculture and attempting to develop industries that could one day bring their economies into higher spheres of economic development? Carbon taxes? All well and good, I guess, if you happen to have the capital to invest in the technology to do it. Sucks if you are trying to jump start and boot strap your economy from basically nothing, ehe?

Again, look at the history. WE took decades to arrive at all those things…centuries in the case of the Euro’s (and us too, depending on which specific we are looking at). And what you want is to say, in essence, ‘Well, we got ours already. If you want to compete then you have to jump to our level to get in the game, or we are going to slap heavy tariffs on your ass until you do.’ This is just another way of ensuring that no one (besides another first world country) CAN get in the game. Convenient, no?

And what will be the ACTUAL result? Well, products will cost more. After all, if US companies could compete on a price basis with China’s cloth manufacturing, say, then we’d ALREADY be doing it. So, since we can’t, what you propose is to make cloth, to use this example, cost more…for everyone in the US. And what if the we still can’t compete, or if we can’t ramp up fast enough and there are short falls? Or if, more likely, given the new semi-monopoly on the local market, US manufactures put in fully or mostly automated facilities? Well, that means that we still don’t get those supposed manufacturing jobs you seem to want, but that the goods and services still cost more, since now we’ve tacked on those tariffs, which will be passed on to the consumers.

No, I don’t see how any of the above would work out in the real world. Higher wages AND more jobs here? Plus cheaper products and a pony too? If it were this easy then EVERYONE would be doing this, no? The ironic thing is, that if WE did it, everyone probably WOULD do it…and the result would be to take us back to the wonderful roaring '30’s.

Why do you suppose that only those without an economic clue would be advocating such a plan? Or, to put it another way, do you know of anyone who is a trade and economics expert who believes that ‘enacting policies that level the playing field’ (or, IOW, put in sever trade tariffs targeted at developing nations) are good and reasonable measures?


Not at all. In fact, if you look at what the people in those countries want, it tends to be a very anti-free trade position.

They don’t have to be mutually exclusive. And LDCs should not have to permit the destruction of their natural resources in order to prosper.

And now those technologies have already been developed and readily available, so…what’s the problem?

On the contrary. As I said, most people in the “third world” want more government intervention, provided that the government does so to protect workers from corporations, rather than the other way around. The only beneficiaries of the current order are the very wealthy. The American middle class has diminished greatly, and the effect on the average third world citizen has been far worse.

If these factories can be automated, then they could just as easily be used anywhere in the world, so I don’t see how that changes the equation.


Nope. I never said the products would be cheaper. I would expect that the price would increase slightly.

How so? :confused:

I never said that one would have to be economically uneducated in order to support free trade. Only that there is a number of different theories, and more than approach to these problems.

Sure. I assume that by “expert” you mean someone with a university degree in economics, right? But it just seems strange to me to discount the opinions of this Tonelson simply because he’s coming from a different school of thought than you do.

No, what they want is economic development which will bring new opportunities to them…depending on which countries we are including here. The Chinese, for example (and I’m talking about the people here) are much more interested in economic development and a rising standard of living than they are in environmental issues, safety issues or unions. The people in India would feel remarkably similar.

True, and in a lot of cases being short sighted can have sever repercussions (Haiti, for example). However, most developing nations are starting off at such a sever disadvantage that they almost HAVE to play to their strengths, one of which is that their labor is simply cheaper and that they have less environmental regulations (or they selectively chose not to enforce those they do have, like in China) if they want to jump start their industries and draw in the venture capital necessary to build the infrastructure and bring in the manufacturing.

Well, I know the answer to this, but let me turn it around. What’s the problem? Why AREN’T nations like China, who surly have access to this type of technology, building all their new infrastructure using such technologies? Why aren’t other emerging nations going all out to build using these kinds of technologies? Hell, for that matter, why don’t companies in first world nations scrap all their old tech and build all new? What’s the problem, as you say?

Horseshit. If that’s the case, then why do so many people in, say, China, flock to the cities and the manufacturing jobs instead of staying in the country and eeking out a living on the farm? Are they being forced to move to work those jobs at gun point? And those in India? In the Pacific Rim? In Central and South America? This isn’t to say that the rich and the corporations AREN’T gaining huge benefits too, but it’s irrational to think that ONLY they derive benefits from these kinds of jobs. Hell, as exploited as the people of Haiti have been, they STILL are deriving tangible benefits from US companies who have built manufacturing facilities there.

Why would you build a fully automated facility to produce goods and services in the US or Europe in some logistical backwater? You aren’t making sense. You build manufacturing facilities in developing countries to take advantage of cheaper labor. If you are going to directly compete by building automated facilities, you do it in countries with the logistics and infrastructure to take advantage of the huge investment you are putting out to BUILD such a facility.

The bottom line though is that you aren’t going to develop a ton of new manufacturing jobs in the US to make shirts or manufacture all the other things that are currently being built in developing countries. Those days are past. You have to play to your own strengths, and in the US, that means we need to emphasize our technology, to build niche or cutting edge products and capture markets with those developing products before developing nations take the ideas in a year or 5 and figure out ways to make it cheaper, faster and more widely available.


I would expect that prices would increase substantially.

Because protectionist measures like those you seem to be advocating are what caused the world wide depression in the 30’s, of course.

But none of the serious one’s support the kinds of trade protectionism that, again, you seem to be advocating. Certainly there is real, meaningful debate about the causes and potential solutions to the current recession in the US, and economic policy and progress world wide but I don’t know of any expert who is seriously contemplating such a stance.

Well, a degree helps, to be sure. But when I say ‘expert’ I mean someone who has an in-depth understanding of the subject…something I don’t claim to have, btw.

As for Tonelson, I don’t know him from adam, and I will fess up and say I haven’t really read through your cite (I’m writing this from a bar, to be honest), and am basing my own comments on what you’ve written in this thread. I’ll say that if this guy IS advocating trade protectionism, it’s not a matter of his being in a ‘different school of thought’ from me, it’s more along the lines of him being ignorant of the basics, and not really part of any serious debate on this subject. I might be being overly harsh, and perhaps trade protectionism has become a serious ‘school’ in economics and international trade circles when I wasn’t watching, but if so I’m unaware of the radical shift in thinking…


I’m not an economist and like you said, I consider myself pretty clueless too considering how complex these issues are.

But asking the US to engage in ‘free trade’ sounds like unilateral disarmament.

That article says two major reasons the US is at such a disadvantage is our tax code doesn’t work too well because of the VAT, and because China manipulates their currency. Throw in energy independence because we spend hundreds of billions on foreign oil (which requires government intervention to get that field off the ground) and those 3 things play a major role in our trade deficit. If we could become energy independent, fix our tax code and get China to stop undervaluing their currency, our trade deficit would dramatically go down. But all 3 require government interventions.

China’s economy has grown dramatically and they have saved a lot of money. One thing they did with that money was try to corner the market on rare earth metals, which are necessary to build 21st century energy and consumer goods.

China’s goal with that rare earth metal monopoly is basically to start cutting exports to the rest of the world to give China a head start on R&D (since they will be the only ones with the raw materials to do the R&D). Also, by monopolizing the raw materials they will be able to force manufacturers to set up shop in China since manufacturers won’t be able to get the raw materials anywhere else. If new mines or refineries open up, China will use it’s clout to flood the market and drive them out of business.

Many of us, having to live in the middle of a great recession due to poor decisions by a deregulated financial market, do not believe the arguments that free trade is superior. While we preach ‘free trade’ China is manipulating their currency and cornering the market on raw materials and using that leverage to maintain that monopoly.

That’ll only raise prices domestically. It’s been pretty well proven that people prefer low prices over buying domestic. And all you’re doing when you enact anti competitive policies is to redress whatever problem at the expense of the consumer (i.e. they’re paying that extra salary cost).

You pretty much proved my point right there. The Chinese have no interest whatsoever in playing nice in the sandbox with the rest of the kids; even by the somewhat rough rules. Fair labor laws, minimum wages, not blatantly stealing technology, copyright enforcement, etc… are all things that most Western countries have, but that the Chinese pretty much ridicule. They don’t give a fuck that a US firm may have invested millions in some piece of equipment or technology; they’ll copy it and then produce goods with it at a fraction of what the US firm could, because they have extremely low cost labor by comparison. (the Chinese minimum wage is in the ballpark of $100-150 PER MONTH, while ours is more in the ballpark of $50 PER DAY).

Personally, I tend to think that we should have free trade policies that open up to the extent that the other country opens up with us- i.e. with the UK and Canada, it would be open, but with China, it would only be as open as they are with us; i.e. not much.

It is not just labor. It is environmental too. They will go where they can pollute because it costs money, to prevent and stop environmental harm. There are more lax rules for products too.
Lots of sports equipment is made using child labor. It is not a moral decision. It is strictly financial .