Economics and finance, Trade and industry, International relations | Asia, East Asia, The World

17 November 2016

Donald Trump’s siren call to those on the pointy end of manufacturing job losses is unlikely to ever translate into a return to Americans ‘making things’, John Agnew writes.

The explosive growth of China’s economy since the 1980s accounts almost entirely for the shifting global centre of economic gravity. As China has industrialised, other countries such as the United States have lost manufacturing jobs. But making China the villain in the deindustrialisation of the United States, as President-elect Donald Trump has, is to miss all of the complexity of the current way in which world manufacturing actually works. Trump’s 2016 presidential victory in the US Electoral College had much to do with persuading many thousands of working-class people in states such as Michigan and Wisconsin that China’s growth had robbed them of their jobs. Trump promised he would bring those jobs back, but while global manufacturing businesses work the way they do, this could only ever be an empty promise.

This appeal to voters is built by focusing on the fact that as the numbers of well-paying manufacturing jobs have shrunk in the US and Europe, employment has been expanding in other places like China. These jobs based in new locations offer much lower pay, to the advantage of investors in, and managers of, the companies involved in the offshoring. Most of the world’s largest companies, as measured by foreign assets, are still European, American and Japanese.

The process of outsourcing manufacturing phases to offshore locations that have some advantage (lower wage bills, local resources, skilled labour, etc.) has advanced to the extent that one-third of US exports and just under one-half of imports take place within businesses or between them and their allied firms or subsidiaries. An increased share of world trade is made up of components and parts traded within businesses rather than the movement of raw materials from one country to another where they are turned into finished goods. This the case with the Apple products that Trump would like to see made entirely in the United States.

More on this: Sino Silicon Valley: Is China’s innovation dream coming true?

The strategy is about using new technologies that have shrunk the costs of moving things long distances, particularly over oceans, to increase profitability. As technologies that replace manual labour (such as robotics) undercut transport costs, then the advantages of offshoring may recede. This trend is already apparent today, even as the rhetoric directed at China heats up. But manufacturing jobs growth in the United States will not return. Manufacturing production, though, is something else again: it never declined as employment did and can certainly continue to grow in the future. Growth in old-style manual jobs does not follow then from the onshoring of manufacturing production. Politicians might care to make this distinction to their electorates.

As yet, though, many so-called global production networks, producing parts in some places and undertaking final assembly in others, still operate across international borders but are coordinated from a single headquarters. Thus, it is a mistake to see market “power” as either entirely dispersed or organised on a country-by-country basis. Transport costs are also still far from zero. If fuel costs were to increase substantially, for example, then some, currently popular, offshoring sites might quickly lose their appeal.

Much world trade, including that associated with the offshoring of production, is still between adjacent or nearby countries rather than trans-planetary. For instance, in conventional country terms, Canada and Mexico together are much more important trading partners of the US than is China.

Obsessing over China, as Trump and his economic advisors Wilbur Ross and Peter Navarro do, misses the fact that world trade should no longer be thought about simply in terms of countries trading with one another. If they wish to return to the bygone era when that was the case then they will have to impose severe restrictions on the use of technology and accept diminished wages for factory workers. This is the cost of Trump’s mercantilism. At the same time, putting high tariffs on goods imported from China, as Trump has promised, would just send US and other manufacturing investment elsewhere and not necessarily “back” to the US. None of this could possibly ‘Make America Great Again’ in the sense that the unemployed workers were told it could.

More on this: The Trans-Pacific Partnership: more than a trade agreement

The trans-Pacific and trans-Atlantic routes between container ports, together with the major oil routes from the Gulf to Europe, North America and Asia, are the highways of the world, privileging some places over others. The rapid delivery airfreight business (UPS, FEDEX, and so on) that has taken off over the past 40 years, enabling online retailers such as Amazon, would also not have happened without new technologies. These services likewise lock in some locations as better connected than others.

Multinational and local investment in China has led to some exaggeration about a tectonic shift in the world’s centre of economic gravity. There is certainly something significant in the idea that, if not a convergence, then there is at least a catching up going on as some regions, particularly China and South Asia, contribute much higher rates of economic growth and shares of world production to overall global patterns. From the 1980s to the present day, Europe and North America’s share of world growth has declined. At the same time, China and some other parts of the world (the “emerging economies”) are of greatly increased importance.

If in the 1950s the world economy’s centre of gravity, in terms of growth, lay north of Iceland in the Atlantic, it has now reversed course and is back in Central Asia just north of where it was in 1820. But this is a story of global production networks created and operated by global businesses across international borders. It is a story of mutual dependence, not a game where if one side gains the other loses. The reality stands in stark contrast to Trump’s view of the world, where national governments are seen as the equivalent of individual real-estate tycoons making bilateral deals.

The story told about the current crisis of joblessness for those in the United States who might in previous years have worked in manufacturing industries should, at a minimum, draw attention to how thinking about the world economy simply in terms of countries – China up and the US down – overlooks almost everything that has happened since the 1970s and, more importantly, what has really been behind it.

It’s not about China; it’s about the way global manufacturing businesses now work. To change that, those businesses would have to be destroyed in their current form. The California end of global supply chains would need to be sacrificed on the unlikely prospect of bringing the industrial Midwest back to life. Sounds like a bad deal to me.

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One Response

  1. Graham Douglas says:

    Thanks for this clear explanation.

    Sounds like a bad deal to me too.

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Agnew, John. 2016. "Trumping China - Policy Forum". Policy Forum.