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Viewpoint: The Unmaking of Americans

The stock market loves the New Economy. But does our retreat from manufacturing in favor of e-commerce spell economic disaster?

In recent decades it has become increasingly fashionable for American opinion leaders to belittle the economic importance of manufacturing. If we are to believe such prophets of the New Economy as commentator Michael Rothschild and Megatrends author John Naisbitt, manufacturing is now a distinctly second-rate activity that should take a backseat to post-industrial businesses like software writing and moviemaking. Their opinions are increasingly endorsed by pundits in everything from the Wall Street Journal to Wired.

It is time this view was challenged. The truth is, it is a highly dangerous myth that is rapidly weakening the United States’ ability to lead the world economy. Not only do those who advocate post-industrialism-let’s call them post-industrialists-overestimate the prospects for information-based products and services, they greatly underestimate the prospects for manufacturing.

When the post-industrialists talk about manufacturing, it is clear they are referring mainly to such unsophisticated activities as the snap-together assembly work carried out in the television-set factories of the developing world. By implicitly defining manufacturing in such disparaging terms, they set up a straw man-for there is no question that, in an increasingly integrated world economy, most types of assembly work are so labor-intensive that they can no longer be conducted profitably in high-wage nations like the United States. Overlooked by the post-industrialists, however, is the fact that assembly is only the final stage in the production of modern consumer goods. Earlier stages are typically much more sophisticated-the making of advanced components such as laser diodes, liquid crystal displays, lithium-ion batteries and flash memories, for example. Then there is the production of the high-tech materials that go into such components. Semiconductor-grade silicon manufacturing, for instance, is concentrated mainly in such high-wage nations as Japan and Germany. And still more sophisticated than the fabrication of such components and materials is the manufacture of the production machinery used in the process. Perhaps the iconic example of such machinery is the stepper-the highly precise lithographic device that prints circuit lines on silicon chips.

Manufacturing components, materials and production machinery is generally both know-how-intensive and capital-intensive. As such it can be conducted effectively only in the world’s richest and most advanced economies-and workers engaged in such work are thereby shielded from low-wage competition from developing nations. The United States once dominated this type of production, but these days, as is abundantly clear from the nation’s mounting trade deficits with Japan and Germany, it is at best an also-ran. In steppers, for instance, GCA, the once world-beating American player, closed its doors in 1993, leaving the field almost entirely to Japan’s Nikon and Canon and Europe’s ASM. In high-tech materials, the United States is now similarly dependent on imports. And in crucial new components such as laser diodes and liquid crystal displays, the country was never a contender in the first place.

Why does all this matter? Because, conventional wisdom to the contrary, advanced manufacturing offers fundamental advantages over post-industrial services in building a rich and powerful economy.

Manufacturing’s most obvious advantage is that it creates an excellent range of jobs. Whereas post-industrial businesses like software and financial services tend to recruit mainly from the cream of the intellectual crop, manufacturing harnesses the skills of everyone from ordinary factory hands to the most brilliant scientists and the most capable managers. In fact, as Bennett Harrison of New York’s New School (and a longtime TR columnist) pointed out in his book Lean and Mean in 1997, unskilled workers “barely off the farm” can readily be trained to operate computer-controlled presses and similarly sophisticated production machinery. In Harrison’s terms, today’s high-tech production machinery is not “skill-demanding” but “skill-enabling.”

Manufacturers also score over information businesses in their export prowess. That’s because, for one thing, manufacturers usually avoid the piracy problems that so drastically reduce American information businesses’ receipts from abroad. Moreover, manufactured goods are generally universal in application and, as such, contrast sharply with information-based products, which are in most cases quite culture-specific. Whereas a typical information product may have to be adapted for different languages and customs in different markets around the world, a typical manufactured product requires little if any adaptation. In many cases, information businesses don’t find it worthwhile to adapt their products for foreign markets, and even where they do, they tend to have the adaptation done abroad, thus generating costs that cut deeply into the net revenues remitted to the United States.

A third key advantage of advanced manufacturing-the most important of all-is that it delivers higher incomes. Not only does the large amount of capital required for the enterprise offer workers protection against competition from cheap labor, it can also powerfully boost worker productivity. A good example is the contribution that expensive robots make in enabling Japanese auto workers to achieve the world’s highest productivity levels. Higher productivity in turn is, of course, the royal road to higher wages.

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.

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