Where should products be manufactured?
03/01/2007
With large sectors of manufacturing, including chipmaking, moving from the US and Europe to Asia, what impact is this having on national economies?
For developing countries, bringing in manufacturing, and then gradually moving up the technological ladder in the types of products made, is a route toward joining the ranks of highly industrialized nations. Japan was an early model, rising from an agrarian economy after World War II to become a major world economy. Similar success has been achieved in Singapore, Taiwan, and South Korea, with China now following the pattern.
Developing nations often use government subsidies to get new industries started, and then protect fledgling manufacturers with trade barriers and tariffs. They block imports and push exports, building up the capital needed to subsidize the new industries and build infrastructure. Most economists believe that as success is attained, free, balanced trade will emerge, with all players benefiting from a larger total pie.
Is that what’s happening? Some Asian countries that were once struggling are now seeing healthy growth with steady improvements in wages and worker benefits. But unbalanced trade continues, helped, in China’s case, by artificially pegging the yuan to the dollar. Excess capital, mostly US securities, is piling up in China’s treasuries as it manufactures a rapidly rising percentage of the products bought by consumers in Europe and the US.
In his recent book, The World is Flat, Thomas Friedman suggests that the Internet has changed the world economy so drastically that it really doesn’t matter anymore where things are made. As long as a nation does a good job of educating its people for the emerging high-tech world, it will prosper. In fact, the winning nations will be determined, not by their manufacturing plants, but by the number of innovative enterprises with efficient web-based supply lines and market links.
Still, this ballooning imbalance is creating uneasiness, even among economists. In The Hollowing of America, author James Cunningham, a former executive at AMD, National Semiconductor, Intersil, and TI, sees this imbalance as much more ominous. His subtitle: “America’s flight from manufacturing into a perilous world of economic fantasy,” encapsulates his thesis. The world has changed, but time-worn economic theories developed in agricultural, pre-industrial times won’t cut it anymore, he suggests. He is particularly critical of dependence on Ricardo’s theory of competitive advantage, which economist Paul Samuelson elevated to a “Law.” Ricardo did his work 28 years before the first sewing machine went into a factory, and it was based on examples such as which country was better for making wine or growing wheat. Today, manufacturing is shifting to countries where labor costs are less and regulations less stringent, and “comparative advantage” has nothing to do with it, he contends. Economists tout the upward shift in US productivity that took place starting about 1994, suggesting it was due to technology advances. But Cunningham postulates instead that this was when outsourcing took off, and the way the Bureau of Labor Statistics calculates productivity ignores overseas manufacturing. He points out that in high-tech, disruptive innovation requires knowledge of manufacturing techniques as well as design. Meanwhile, by adding all US debt-public, private, and corporate-he suggests that each American now owes about $130,000. He believes that highly industrialized nations cannot continue to live “the good life” for long while having almost all their goods made elsewhere, no matter how clever their entrepreneurs may be.
Globalization has many facets, and a vigorous, open debate about it is vital. Politics tends toward polarized positions, but all sides of a debate like this need to be considered to reach an optimum balance. Each nation can benefit from an expanding world economy, but artificial barriers and arguments based on false assumptions can muddle the total picture. Let’s work at getting it right
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Robert Haavind
Editorial Director