US manufacturing success: the big lie?

Posted on 8 May 2018 by Nick Peters

Donald Trump was derided during the 2016 US presidential election for saying globalisation, and specifically China, had destroyed US manufacturing. The experts said he was wildly wrong, that the sector was in good health and that ‘Make America Great Again’ was populist nonsense.

Nick Peters reports on new analysis that suggests Trump was right and they were wrong, and questions whether we in the UK should start to worry.  

US Manufacturing - European Heathyards invests in new nuclear manufacturing facility - productivity
The real health of the American manufacturing sector has been questioned, something we have been led to believe has been doing very well in recent years.

We are becoming accustomed to questioning the basis on which the contribution made to the economy by manufacturing is calculated.

Most notably, a recent study by the Manufacturing Technologies Association (MTA) said that if you calculate the impact of manufacturing on the UK economy by adding together its direct value-add (≈10% of GDP), its indirect value-add through services such as logistics (a further 5%) and its induced value-add through the money spent by employees in the local and wider economy (another 8%), you get a very different picture to the narrow view taken by some in government of manufacturing’s importance.  

It was therefore something of a shock to read an article on the online American news service Quartz that questioned the real health of the American manufacturing sector, which we have been led to believe has been doing very well in recent years.  

I attach the full article for you to read, but the gist of it is as follows: 

  • The alleged boom in US manufacturing over the past 20 years is almost entirely due to computers. When they are stripped out, output figures pretty much flatline.Booming computer production, and leaps in computing power, disguised a dangerous slide in the sector. 
  • The 5 million jobs that experts said were displacedinto other areas of the economy through automation have actually been lost, with no appreciable gains to the economy through efficiencies. (The article does not mention advances in competitiveness or productivity in this context, as my colleague Steven Barr of Hennik Edge pointed out. In those terms, it is an incomplete picture.) 
  • Government policy in the 1990s, that led toChina joining the World Trade Organisation, opened US manufacturers up to relentless competition that they couldn’t meet, except by exporting their factories, jobs and, crucially, R&D to China, hollowing out the manufacturing base. The deliberate, strategic weakening of the yuan by the Chinese government kicked another prop from under America’s ability to compete. 
  • This quiet devastation of the US manufacturing sector went virtually unseen in the centres of American financial and political power, essentially because people there were riding awave of prosperity in areas such as law, accountancy, consultancy and financial services, all of which benefitted from growing economic power in Asia. Meanwhile, the American middleclass that relied on manufacturing for jobs, hollowed o    
  • Donald Trump was mocked during the 2016 election for saying the Chinese stole American jobs, but he was actually correct. And the people who voted for him, by and large, are those who the ones who lost their jobs. They knew the truth. (Trump has done little about it though, other than preach to the converted and try to trigger a damaging global trade war.)

So, is there a read-across to the UK? Is there a case for examining UK manufacturing statistics without, say, automotive and aerospace? If we did that, what would we find?

And would the picture be meaningfully altered if, as Steven Barr suggests, we drill much deeper into US productivity and competitiveness?

Indeed, do we in the UK even use the same kind of metrics as they do in the US, which skewed the data so disastrously? 

We’ll be looking at that in the coming days, but the lesson this holds for us all, I suggest, is that the picture is altogether more complicated than some would have us believe.

Yes, government economists in the Treasury have persuaded politicians to downgrade the importance of manufacturing to the economy by taking far too narrow a view of its impact. (Well done MTA! Now we must drive the message home.)

But are we also in danger of fooling ourselves about the health of our manufacturing sector by not questioning some of the potentially distortive factors behind our assumptions?

As I say, we shall pursue this and report back. In the meantime, enjoy the article. If you can…