US Export Boom Leaves Manufacturing Largely Behind

We have been skeptical of the idea that a weak dollar would be the boon for US manufacturing that many thought it would. The reason? The best possible outcome would be to see a resurgence in manufacturing, since manufacturing has higher potential for productivity gains than does the service industry (although getting back some of those service jobs that have been offshored would be nice too). In the long run, economic growth is a function of demographic growth and productivity increases.

So why did we think manufacturing would not come back? Consider what has been lost: plants have closed, workers with specialized know-how have moved on. Rebuilding those industries won’t happen overnight. It would take a significant investment of funds for equipment, training, and start-up costs. With currencies volatile and China now less inclined to see the yuan rise, who is going to bet that the dollar will stay weak long enough for new entrants to make a go of it?

That isn’t to say that manufacturing might not eventually come back to the US. But it will take sustained dollar weakness, perhaps even evidence of a shift away from the greenback as reserve currency. And the dollar is not the only part of the equation. High fuel prices are leading manufacturers to rethink their supply chains, with increasing emphasis on having more manufacturing and assembly closer to the customer. That consideration may bring some manufacturing back to the Americas, but it might wind up in Mexico.

As an aside, I have been told by people with good industry knowledge that the US ceded far more manufacturing than it needed to, that some public companies moved manufacturing overseas because it was what Wall Street wanted (this from C-level employees of said public concerns). Similarly, the US lost much of its shoe manufacturing because Interco went bankrupt under too much LBO debt and the speed of the unraveling led a manufacturer that could have been salvaged being liquidated.

That being said, existing US manufacturers could pick up more orders from overseas with a weak dollar. But the ones that woud benefit are players with established international distribution. And per this article from the New York Times by Louis Uchitelle, even for those companies, the degree to which domestic factories have benefitted is not as great as popularly believed.

From the New York Times:

Exports are the bright spot this year in an otherwise bleak economy. But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal…..While the surge in commodities is a welcome relief, it is an unreliable prop for an industrial power.

“The historical data tell us clearly: don’t get too used to commodity export booms; as any third world country will tell you, they tend to go away pretty quickly,” said L. Josh Bivens, a trade expert at the labor-oriented Economic Policy Institute….. “Over a long period,” Mr. Bivens said, “commodities contribute right around zero to export growth.”….

An analysis of trade data by the federal Bureau of Economic Analysis illustrates just how lopsided the gains have been between manufactured goods and unprocessed commodities.

All exports of goods and services in the first half of the year rose at a $52 billion annual rate, adjusted for inflation, up 7.1 percent. Commodities accounted for 41 percent of the increase and manufactured products contributed just 12 percent, the bureau reported. (The figures strip out such items as arms sales and exports to American territories, like Puerto Rico and the Virgin Islands.)

Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent of the nation’s exports, while commodities make up only 26 percent and services 30 percent. Indeed, not since the bureau began compiling detailed trade data in 1977 have commodities outpaced manufactured exports for two consecutive quarters.

Weakening demand abroad accounts for some of the decline. But the manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.

“We have achieved a worldwide manufacturing base, and we are not going to shut down our factories overseas,” said Franklin J. Vargo, vice president for international economics at the National Association of Manufacturers. “But on the margin, we will shift a little bit of manufacturing back to the United States.”….

The contrast with commodities, which cannot be shifted overseas, is striking. John Hardin Jr. and his son, David, focus their attention on growing as much grain as they can on 2,500 acres near Indianapolis, counting on exports to absorb their harvest. Meanwhile, Sarah Bovim, a Whirlpool Corporation executive, points to expanding global operations at her company, where production abroad has eclipsed its exports.

“We are looking to expand in emerging markets,” Ms. Bovim said, “which means we are looking to set up shop there.”…

Whirlpool is proud of its exports but intent on manufacturing more abroad. Ms. Bovim, who is Whirlpool’s director of Congressional relations and trade policy, speaks with equal enthusiasm about sales from the company’s factories abroad and those in the United States. Both are up, she says, and she cites sales of washing machines and dryers to make her point.

Machines that load clothes from a door on top are made only in the United States, principally at a plant in Clyde, Ohio, and are exported to satisfy overseas demand. A newer and increasingly popular model, one that is loaded from a door in the front, is made only at factories in Germany and Mexico.

Whirlpool recently opened its Mexican plant, deciding to bypass the United States….

Many American manufacturers argue that as factories spread across the globe, exporting is no longer an effective means of competing against sophisticated and ever more numerous local manufacturers. In addition, as American companies set up operations in, say, China, they insist that their suppliers locate nearby, for quick and efficient delivery — and that draws more manufacturers overseas.

It is certainly a reason that Parker-Hannifin, a Cleveland-based manufacturer of hydraulic pumps and industrial controls, is expanding overseas, said Tim Pistell, the chief financial officer. “Our customers just love for us to make our stuff near their new operations,” Mr. Pistell said, “and if we do, they reward us with a lot of business.”…

Currency fluctuations rarely alter these long-term commitments, and profits stay abroad. “Most of the money we make overseas, we keep there,” Mr. Pistell said, “and then plow it back into growing the business overseas.”

The Bureau of Economic Analysis, tracking this trend for all of America’s multinational companies, says 70 percent of the multinationals’ operations — measured in employment, investment and value added in turning metal into aircraft or wood into furniture or silicon into computer chips — take place in the United States.

That, however, is down from nearly 75 percent in 1999 and, as the shift overseas continues at many manufacturers, commodities inevitably jump to prominence from time to time.

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11 comments

  1. Walker

    “Similarly, the US lost much of its shoe manufacturing because Interco went bankrupt under too much LBO debt and the speed of the unraveling led a manufacturer that could have been salvaged being liquidated. “

    And a result, the whole mid-tier shoe market is gone. You either buy crap that falls apart on you in no time at all, or you pay $500+ for a pair of shoes.

    I used to buy a new pair of Dexter shoes ever 18 months. When they moved to China the life-span dropped to 3 months (this is not just one pair; I tried several before giving up). As they did not drop the price, this was a 6x increase in total cost of ownership. They lost a lot of loyal customers in that move.

  2. Moopheus

    “And a result, the whole mid-tier shoe market is gone. You either buy crap that falls apart on you in no time at all, or you pay $500+ for a pair of shoes.”

    That turns out to be not entirely true. I’m wearing a good pair of shoes made in Colorado by a company called Thoroughgood, cost me about $80, and have held up pretty well over the past year, and I go through shoes like butter. But I have to get them mail order. Likewise with my jeans; made in North Carolina, reasonable price, excellent quality. But not found in local stores.

    Exports of course are only half the weak-dollar story; the weak dollar should in theory also help domestic manufacturers compete against imports. I make a conscious effort to find domestic sources of things I want to buy, but a lot of people just buy whatever is put in front of them. Not only do some manufacturers need to establish international distrubution, but even domestic distribution can be limited. The big retail chains don’t carry the goods. I’d hope that increasing transport costs would encourage that to change.

    Also, I don’t see manufacturing going to Mexico as all bad–if the Mexican economy could provide better jobs, that would help alleviate the immigration problem.

  3. Peripheral Visionary

    The shift of manufacturing from China to Mexico is not bad news for the U.S. Manufacturing in Mexico will bring much-needed employment and investment, and any improvement in Mexico will inevitably benefit its largest trading partner to the north, and will alleviate immigration pressures. It will be a long time before the U.S. economy is brought back into balance, but strengthening Mexico will be a good step in the right direction.

    And I have to interject on the subject of shoes; for the clothes I wear to the office, I’ve switched to (U.S.-made) Allen Edmonds. Granted, they are typically $300 a pair, but can be found from online discounters for much less. But the extra is well worth it; taken care of, they will last for years, and look superb, far superior to any of the foreign-made junk on the discount store shelves. The mid-tier market may be disappearing, but the high-tier market is worth the money, and not completely out of reach.

  4. mxq

    The US has to pay (literally) for this structural shift away from mfcting. Up until now, the US has had nothing but the upside of cheap labor.

    Via money:

    “A tough, new Chinese labor law went into effect on Jan. 1, making it compulsory for employers to offer employment contracts, a social security program and overtime pay.

    The labor law was driven by internal political dynamics, such as rising public discontent over low wages, lackluster labor rights and rising economic inequality, says MinXin Pei, senior associate in the China Program at the Carnegie Endowment for International Peace. Its effects are already being felt: Numerous studies, including two recent ones by the Economist Intelligence Unit report and Booz Allen Hamilton, indicate that wages in China are rising by 10% to 15% annually.”

  5. Bob_in_MA

    Yves, great post. I read a study a while back that showed companies don’t adjust production to currency moves until they are persistent for several years.

    Those exporters gaining price advantage just let it pad profits for years before lowering prices. Coke and McDonalds are doing great in Europe, but not because they captured market through price reductions. They simply are making a lot more profit in $ terms.

    If the dollar has bottomed, six months from now these companies will be facing slowing demand in Europe, currencies working against them and tough comparisons yoy.

    Personally, I don’t believe the dollar has bottomed and frankly I’m not sure it makes all that much difference.

    On the subject of shoes, I buy two pairs of Converse All-Stars every eight months or so. Every few years I have to buy a pair of boots or something, but that’s pretty much it. Very comfortable, but as the soles wear down there’s a point where they start to squeak and can no longer be worn to libraries or fancy restaurants.

  6. roger

    Excellent post. This kind of thing – “Consider what has been lost: plants have closed, workers with specialized know-how have moved on. Rebuilding those industries won’t happen overnight. It would take a significant investment of funds for equipment, training, and start-up costs” – is what I call trading away the residual – Solow’s term for the factor that makes up more than half of GDP growth. It is more than human capital – it is whole networks of tacit knowledge, all of which are necessary to create the driver of capitalism, innovation. If a nation, for instance, trades away its car industry, then it is unlikely to get it back, or to be the site where innovations in car manufacture and design happen. In fact, this is tacitly recognized by economists. The argument for free trade used to be, a la Mancur Olsen, that a nation shed its less skillful manufactures because it achieved a new plateau of innovation. The argument was entirely productivity based. The new argument is entirely, and farcically, consumer base – we trade away manufacturing so that we, as consumers, can get cheaper goods. Shifting the benefit entirely to consumption actually destroys the entire reason for this particular industrial policy, not that economists – whose metric of wealth is really how wealthy a particular policy makes the CEO class, their patrons and idols – would ever notice.

  7. Kiste

    “Those exporters gaining price advantage just let it pad profits for years before lowering prices. Coke and McDonalds are doing great in Europe, but not because they captured market through price reductions.”

    Coke and McDonald’s don’t export to Europe, everything is produced locally.

  8. PrintFaster

    The US is facing economic catastrophe due to the loss of manufacturing at the same time capital is being destroyed at a rate ever seen before.

    There will be no manufacturing until there is more capital, and there will be no more capital until there is more manufacturing.

    The only way out of this is massive government indebtedness due to either war, or massive infrastructure contracting. It will not do to simply hire more government drones and do-gooders; they will simply drag down industrial development and export growth.

    Sadly, because of the green and BANANA (build absolutely nothing anywhere near anything) movements,
    infrastructure rebuilding is impossible. The greens have made war the answer.

    At this stage, since economics is turning to international economic warfare, and the state of the US insfrastructure is not going to be improved, let us all stock up on essentials, and get ready to clean our guns.

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