How America Lost Its Industrial Edge -- comments by Eamonn Fingleton  

Insight on the News - Issue: 06/24/03

How America Lost Its Industrial Edge
By Paula R. Kaufman

Economic commentator Eamonn Fingleton speaks bluntly about what he sees as the frittering away of the United States' manufacturing base and what he regards as the consequent stagnation of the American standard of living. For those who believe in the superiority of the current U.S. postindustrial strategy, a reading of the OECD Economic Yearbook makes for a distinctly chastening study. As Fingleton puts it: "The United States trails no fewer than eight other nations, all of which devote a larger share of their labor force to manufacturing."

Fingleton, who distinguishes between high-end and low-end jobs, insists that the former, advanced manufacturing, must be reconstituted if the United States wants to remain a superpower. And what are these eroded industries_ Semiconductor materials, ceramic packaging for semiconductors, charge-coupled devices (CCD), industrial robotics, numerically controlled machine tools, laser diodes and carbon fibers, to name only a few.

Where did the manufacturing of these items go_ In most cases, Japan now dominates the more advanced areas of these industries, says Fingleton, who lives in Tokyo. Moreover, he argues, by dint of superior know-how and large capital investments Japan now enjoys a global lock on key manufacturing processes.

Fingleton recalls an America where men and women went to work and made the nation great, the old-fashioned way, by producing products people wanted and needed. And he juxtaposes the loss of advanced manufacturing jobs in this country with what he regards as the overvalued dollar, America's compulsion to borrow huge sums of money to fund its deficits and an illusionary U.S. prosperity based on unsustainable debt. For now Japan and China, both running huge trade surpluses, pay the United States' bills, he says. Where does this leave the American worker_ He puts the answer simply: Out of work!

It is not true that Japan is in dire economic straits, Fingleton maintains. In a recent article in the London journal Prospect entitled "Japan's Fake Funk," he writes: "The Western consensus is that Japan is a basket case: It is not. That is a misreading by the West."

Meanwhile, he says, ill-conceived U.S. policies have failed to protect home-based American industries, leading to the transference of the most advanced technologies known to mankind. Fingleton says flatly that Japan has built up its industrial base at the expense of the United States, and that China now is chomping at the bit to do the same.

Insight: You speak of the transference of hard industries. What do you mean by that_

Eamonn Fingleton: I mean those engaged in advanced manufacturing. Specifically, industries that are both highly capital intensive and highly know-how intensive. They typically are many orders of magnitude more capital-intensive and know-how intensive than the most advanced of "New Economy" services, such as computer software developed in the last three decades.

Although Japan is known in the West for its leadership in certain consumer products such as cars and television sets, its area of greatest leadership is in much more advanced industries that largely are invisible to the consumer. Specifically, Japan leads almost right across the board in the sort of advanced materials, high-tech components and production machinery that are driving the electronic revolution. Some products may be assembled in the United States, but their key manufacture - the manufacture of the advanced components and materials - is done in Japan.

Q: Do U.S. manufacturers hide from the American people how dependent they are on foreign suppliers_

A: The impression given is that outsourcing is done within the U.S. and that available components come from many sources. But it is clear that most advanced components and materials now are outsourced from Japan. Corporate America is very guarded about its dependence on foreign suppliers, and this applies in spades to outsourcing by American defense contractors.

Q: So the United States has lost its edge in advanced manufacturing_

A: It is absolutely gone. The U.S. started losing its edge about 30 to 40 years ago. By the early eighties, America was already in serious trouble.

The sad truth is that advanced manufacturing accounts for only a very small part of the total U.S. economy and much of it merely is customizing equipment for the needs of the American market. Final assembly of manufactured products often is carried out in the United States and, to the extent that it is the sort of manufacturing that requires close proximity to customers, it likely will stay in the United States.

Meanwhile, high-tech manufacturing here largely has disappeared, particularly mass-production manufacturing. American companies can make almost anything if price is no object, and thus they can produce in small batches, for instance, for defense purposes. But they no longer master the mass-production techniques that are necessary to be cost-efficient in serving world markets.

Q: How vulnerable are Americans to job dislocation and unemployment because of what's happened to advanced manufacturing in this country_

A: I believe most of the job loss already has taken place. The blue-collar worker we all knew some 30 to 40 years ago was the backbone of the American economy. He or she was the best-paid worker in the world. But more and more Americans of average ability now are employed in "Mac-jobs" within the service industries. Typically they are not as well paid as in manufacturing.

The manufacturing jobs are gone, and the U.S. standard of living has been impacted badly by this. When I first came to the United States in the 1970s, I was stunned at how wealthy Americans then seemed. Since then, Western Europe largely has closed the wealth gap with the United States, so that living standards even in a country like Ireland that seemed poor a few decades ago are not far behind American levels.

Q: You describe significant job loss to Japan at the high end of the industrial food chain. Are low-end jobs endangered, too_

A: At the higher end of the food chain, Japan already has taken its bite: The jobs are gone. There now is a serious threat emanating from China, which is vying for the lower end of American manufacturing. Beijing is moving very fast and threatening what remains of the job base in the United States.

Q: What lies ahead for the American worker given this grim scenario_

A: Blue-collar workers have been hit hard and the erosion of their jobs will continue. But America is of course now overwhelmingly a service-based economy, and jobs in services largely are insulated from international competition. America as a whole is therefore feeling relatively little pain, even in currency markets.

East Asian economies are supporting the U.S. dollar as well as funding the U.S. trade deficit. As a result the dollar has not shown the effects of the hollowing out of American manufacturing, but we are about to see the free market play itself out in the currency markets.

Q: Why are East Asian nations supporting the dollar_

A: It is obvious to many in the U.S. financial sector that Japan, China and, to a lesser extent, Taiwan are supporting the dollar in an organized effort to benefit their own industrial policies. These nations want to promote their manufactured exports, and the lower their exchange rates are vis-à-vis the dollar the more profitable it is for their manufacturers to export.

The dollar now is vastly overvalued vis-à-vis the East Asian currencies. The best way to look at this is to ask yourself a question: How low would the dollar have to fall to enable the United States now to balance its trade deficit_ To answer that, you have to look at both the state of American export industries and the extent to which the United States now is dependent on imports for goods that it no longer can make - at least cannot make in mass-production volumes.

The numbers are shocking. In the late 1980s the U.S. dollar traded above Y140 [yen]. Today, the dollar trades at Y117. So we have seen some depreciation even since the Japanese bubble collapsed in 1990. But, for the United States to begin to win back export markets, we probably would have to see the dollar fall to Y60 or lower. A 50 percent devaluation against the Chinese currency also is necessary.

Q: Why did this "hollowing out" of the U.S. manufacturing base take place_

A: It began in the 1960s and became really serious from the mid-1970s onward. One key factor early on had been a U.S. government policy of transferring technology to Japan. There was an American tendency to underestimate the Japanese competitors. This was particularly apparent in the electronics industry, where American companies that won contracts to supply semiconductors to IBM, for instance, would be required by IBM to license a "second source" - a company that could continue to supply if the primary contractor were hit by an act of God.

American companies like Motorola and Intel invariably chose to license Japanese companies to do such second sourcing, on the theory that the Japanese were incapable of eating America's lunch.

Also, there existed a very powerful Japanese plan to extract technology from this country. By the early 1970s, Japan was the second-largest economy in the world, a market that could not be ignored. Firms such as IBM and others were eager to sell their products in Japan. But the Japanese insisted on a quid pro quo. If an American company wanted to sell in Japan, it would have to manufacture there. Then, when the company moved to the next stage of the technology, it often closed down its American factory and served the entire world market from its Japanese operation. Sometimes technology transferred to the Japanese subsidiary leaked to the company's major Japanese competitors.

It all adds up, and now America imports much of its manufactured goods, with the current account deficit at 4.7 percent of GDP [gross domestic product] and almost all of it related to manufacturing. By comparison, the worst trade deficit in the early 1970s when [Richard] Nixon took the U.S. off the gold standard was just 0.5 percent of GDP.

Q: And as a result Americans lost jobs_

A: Many jobs indeed. But there was also the myth known as the "New Economy," which for 20 years had been growing in fashion.

I was working then at Forbes magazine in New York and I recall how struck I was by the large number of sophisticated people I met who exclaimed that "the future is in services! Manufacturing is a commodity business! We need to get out of it!"

Indeed, America did get out of it. Having allowed its manufacturing base to disappear, the U.S. now is in possession of almost an entirely service-based economy - beating all standards of economic history. The manufacturing sector exports, on average, 11 times more, based on per unit of output, than do service industries. Herein lies the problem: The United States no longer produces the goods to pay for its imports. You have to fund the gap.

For 30 years the United States has run these trade deficits. In the early days, they were relatively small and explained away as a temporary phenomenon. They long since have ceased to be considered temporary even by the most trenchant advocates of laissez-faire.

They have major negative consequences for the United States, particularly in undermining America's ability to project economic power abroad.

Don't get me wrong: I am not saying imports are necessarily a bad thing. But when the United States must go to foreign central banks with its hand extended to fund huge trade deficits for decades on end, something is desperately wrong.

Q: How dependent is the United States on foreign capital_

A: Highly dependent. Two countries now are serious capital exporters: Japan and China. There is one huge capital importer: the United States.

The U.S. Treasury is more and more beholden to the Japanese Ministry of Finance, which is a power-driven organization. One doesn't want to be an alarmist, but there is the matter of sovereignty here. It is inappropriate that the world's superpower is dependent on government agencies in other nations to get it through the day.

Q: You argue that the information economy is not the key to future prosperity. Why isn't it_

A: You are referring to the subtitle of my book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity. The point I was making is that the prospects for the information economy, meaning the all-digital service economy that the American press was then talking about, were vastly overblown. Many of the services being created were basically worthless, a point that has been resoundingly vindicated by subsequent events.

I should make clear, however, that my argument carried no Luddite content. I pointed out that the Internet and many other manifestations of the information economy that were so hyped at the time were indeed great advances for the world in general. But the idea that America could somehow establish a hammerlock on such services and thus graduate to some ineffably higher level of prosperity by providing them to the world was the purest nonsense.

In reality, many of those services are highly labor-intensive and, to the extent that international trade can be conducted in them, they should be located in places such as India, Russia, Latvia and so on, where labor is much cheaper than it is in the United States.

Meanwhile, the United States would be well-advised to follow the lead of the Japanese, the Germans and the Swiss by maintaining and enhancing its position in advanced-manufacturing industries.

Paula R. Kaufman is a free-lance writer for Insight magazine.