Indeed, nearly two decades after the United States began its fateful drift into full-scale post-industrialism, international economic comparisons consistently show that Americans have lagged in income growth in the interim. The result is that, as measured at recent market exchange rates, the United States has now been overtaken in absolute wage levels by at least four manufacturing-oriented nations-Denmark, Sweden, Germany and, perhaps most surprisingly of all, Japan, the supposed “basket case” economy of the 1990s.
And if capital intensity is not enough to boost and protect wages, advanced manufacturing’s requirement for proprietary production know-how gives many industry incumbents a critical advantage. Take a product like a notebook computer’s flat-screen liquid crystal display. LCDs are basically an adaptation of semiconductor technology, and are manufactured using similar equipment. Thus in theory many computer companies around the world could enter this fast-growing business. But in practice few have done so, with the result that the world market is utterly dominated by a handful of Japanese manufacturers-Tokyo-based Sharp alone enjoys a world market share of close to 50 percent. Why such market concentration? The key is yield, the percentage of flaw-free products in each production batch. Given that even a microscopic speck of dust can render the tiny transistors that control each dot on a screen dysfunctional, the quality-control challenge is enormous. A new entrant to the industry would probably be lucky to get a 10 percent yield of good screens, whereas established Japanese firms are believed to achieve yields of 90 percent or more.
All in all, America’s failure in the past two decades to take full advantage of manufacturing’s numerous rewards is alarmingly apparent in the nation’s deteriorating trade figures. The U.S. trade deficit in 1999 is likely to exceed $250 billion-an all-time record and an increase of about 50 percent on the startling $168.6 billion incurred in 1998. It would be an exaggeration to say that the nation’s manufacturing decline is the sole cause of the worsening trade trend, but it is clearly one of the most important contributing factors.
And what is really worrying about these deficits is that they are to a large extent incurred with nations like Japan and Germany, where wages run 20 percent to 40 percent higher than American levels. Other things being equal, when a lower-wage country imports a product from a higher-wage one, we can reasonably assume that the manufacturing technology concerned is one in which the importing country is lacking. Much of what American corporations import from higher-wage nations consists of components “outsourced” from foreign rivals. The U.S. firms got used to the practice in the 1970s and early 1980s when Japanese and German wages were still low by U.S. standards, and outsourcing components could be justified on the theory that it freed American workers to specialize in higher-level work. These days, however, American corporations that outsource to Japan or Germany are effectively admitting they lag in the technology race.
So what should the United States do to regain dominance in manufacturing? First, consider one of the key reasons for the country’s loss of its leadership position: other nations’ industrial policies, which almost always contain a strong element of explicit or implicit protection for home industries. The classic example is United States-Japan competition in electronics. While U.S. electronics manufacturers such as RCA and Zenith were largely barred from selling in the Japanese market, their Japanese competitors were welcomed with open arms in the American market-the inevitable result was that the Americans found it increasingly unprofitable to invest for the long term.
Though the party line these days is that such protectionism has largely been eliminated in key foreign markets, the reality is that other nations maintain industrial policies that put U.S. manufacturers at a disadvantage. For American decision-makers this creates an acute dilemma-and a particularly distressing one for today’s 50-something power holders, who in their youth espoused the soaring hope that the world could be taught to sing in perfect harmony. If they cling to the idealistic One-Worldism of the Flower Power era, they will continue to advocate one-way free trade-and in the process will condemn the American manufacturing sector to, at best, permanent underdog status. The alternative is to slam the brakes on globalism and go back to the sort of modest but sufficient tariff levels that prevailed in the Eisenhower years. Such a move would certainly raise screams from devotees of that ultimate pseudo-science, laissez-faire economics. But in the absence of convincing alternatives (and in particular of a real commitment to free trade on the part of America’s competitors), it must have a place on the agenda.