Being a Midwesterner, I know that many of the middle class manufacturing jobs that had been at the heart of our economy are either gone or going, and they are not coming back.
--- Eli Broad
As the Spanish passed their empire to the Dutch, who in turn passed their empire to the British, there was one common theme that runs through it all. As each empire got rich, they paid the backwater place that was good at manufacturing to do their work. The people that did their work, later rose from the backwater to become a strong power of their own and eventually replaced their former masters. The Spanish never mastered manufacturing, but they got gold and silver from America and paid the Dutch to build warships. The Dutch in turn paid the British to do the same after they took over from the Spanish and got rich.
America have made out like a bandit in our push for globalization. You just have to look a the growth and the profits made by the S & P 500 to see that. Since 1980, the SP500 index have grown 15x. During this time, the Chinese also gain quite a bit. While the American corporations earned out sized profits, the Chinese have learned a lot of know how and able to build the world's most complete supply chain. On the sweat and blood of their diligent workers, they have also grown rich. When I left China, they were making 36 yuan a month for the entry workers. Today, their per capita GDP is $10000 a year. Based on Purchase Power Parity, they are even richer at $18000. Loss of the American manufacturing sector and the stagnation and shrinking of American Middle Class is the price we paid for the high profits from our corporations.
We were not worried when they were making Nike shoes and Christmas ornaments. We are panicking now that they can make telecom equipment, cell phones computer chips. They also are making carriers and fifth generation fighter planes. Trump wanted to see a return of manufacturing to America. Failing that, he wanted to see manufacturing at least moved out of China.
Is it possible to rebuild the manufacturing in America? First, let me state that manufacturing have not all left America. The high end ones like Boeing, GE, GM, Caterpillar are still here. In fact, the Chinese are still trying to catch up in many of these areas like commercial aircrafts, jet engines and medical equipment. They have a firm lock on the lower and middle segment of manufacturing and are moving up the value chain. The trouble is, America has very high welfare for the low income people and a very large segment of the population with lower IQ. This is a deadly combination for in-sourcing manufacturing. Already today, newborn babies from Hispanic and Black population outnumber Whites and Asians. With Black Americans and Hispanics both have a mean IQ of 85 or so, this implies a future work force with this demographics will have 2/3 of the population at or below an IQ of 100. We have a high tech sector, a financial sector and high end manufacturing sector using up what limited smart people we have, so to bring back low to middle end manufacturing will rely mostly on the lower half of the bell curve. We have many examples where corporations have tried to bring in manufacturing to America. The picture is quite discouraging. A Chinese glass maker opened a glass manufacturing plant in Ohio. Under the pressure of a competition, the American work force achieved 80% of the target. Their Chinese counterpart achieved 120%. Obviously, the target was lowered to make American work force look better. We can imagine in normal circumstances, the American workforce is 50-60% as productive as their Chinese counterpart with this test. For the glass plant, it made sense to do this due to proximity to their customer and the cost of shipping the product to the U.S. Foxconn, with the urging of President Trump, started building a plant in the U.S. to make flat screens. Three years later, that plant lie empty with no sign that it will be functional anytime soon. In this case, the company is very eager to make this work, but it failed. One of the reason is the difficulties of hiring the right work force. These two examples are special cases where the factory owner have a very high incentive to move to U.S. in spite of the high labor cost and the low productivity of the workers. As we see, only one of the two succeeded. This means the run of the mill factories simply don't stand a chance. We can see how increasing welfare without a way to motivate the low income people to work harder will make this situation even worse.
Since we have a big consumer base, would taxes help force relocate these plants here? There are at least two things that stood in the way of this happening. First, the Chinese this year just past America to become the biggest end use consumer market in the world. Since the rest of the world is not doing a trade war with China, the combined market of China and the rest of the world still dwarf America's market. For a company to move to the U.S., with half the productivity of China, based on the trade policy of a president that could be on the way out, it does not work out for most manufacturers. The Trump Administration even offered to pay for the moving cost to move factories back to the U.S., but so far there do not seem to be any takers.
In addition to their big consumer market, the Chinese have another huge advantage; a complete manufacturing eco system. This makes factories that are located inside the eco-system highly efficient and the ones outside it at a huge disadvantage. In fact, after Covid-19, the Chinese took a look at their economy and found that those industries relying on a local supply chain fared much better compared to those that rely on a more global supply chain. Since they are the first to get Covid under control, they have moved to attract manufacturing from around the world to ensure that their supply chain stays local and more robust. Knowing how well they have executed thus far, we can see that their supply chain advantages will be much more formidable coming out of Covid-19. Combining this with their push in automation and AI manufacturing, their advantages are indeed quite formidable.
What about moving manufacturing out of China to other countries? Actually, that has been happening for quite a while now. Even there, the target countries have become an extension of the Chinese supply chain rather than to replace them. An article used the following example to illustrate how difficult it was for another developing country to displace China. Take the manufacturing of the disposable lighter. It only retails for a couple of dollars. Why isn't this done in a different (and lower labor cost) country? Well, the lighter fluid and shell are made of chemicals, it requires a sophisticated chemical industry. The developed countries have this but the labor cost is too high to make a $2.00 lighter. Most developing countries are not able to align the money, talent and planning to build up this industry. The lighter stone is a specialty steel which requires a strong and advanced steel industry. Again, most developing countries do not have the ability to create a sophisticated steel industry. Now you can ship these components to the developing countries, but the cost is prohibitive due to the lowered margins of the lighter and there is not enough profit left for someone to setup a factory there. For that reason, the most successful target country that received the outflow of Chinese manufacturing, Vietnam, have become the low end extension of the Chinese manufacturing. Their factories are entirely dependent on Chinese suppliers who performed the high value added steps.
The success of Chinese manufacturing have other implications. Due to their booming ship building and electronic industry, the Chinese are able to to build their warships at a third of the cost compared to the U.S. and are able to do this with great speed. In 2018, the Chinese launched 203200 tons of warships, dwarfing the U.S. at 58600 tons. The lost of our ship building industry have placed our naval development on a difficult path.
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