5 Myths About the Death Of the American Factory
By Gilbert B. KaplanSunday, June 29, 2008; B03
Sure, U.S. banking is in trouble, but the longer-term and possibly more damaging threat to the nation's prosperity is the decline of the manufacturing sector. Late last year, the number of U.S. manufacturing jobs dropped below 14 million for the first time since 1950. It's hard to find anything else that takes us back to a time before most baby boomers (remember them?) were even born. On top of that, the United States lost another 49,000 manufacturing jobs in April alone. Hard to believe, but the last factory built in this country may be something we'll see in our lifetime, or certainly that of our children. No wonder this is an issue in the presidential campaign, especially in big manufacturing states. To get to the bottom of the problem, though, we have to cut through the many myths that have been fabricated about the industry over the years.
1. It's all about cheap wages. American workers are just paid too much.
For most manufacturing sectors, that's just wrong. Labor costs are already less than 10 percent of the cost of making many products, including steel and semiconductors. Many of the real cost disadvantages the United States confronts are self-imposed. Our government doesn't rebate taxes to corporations when they export manufactured products, the way other countries do: A Brazilian steel company, for example, can get a 17 percent tax credit for every ton of steel it sends abroad. In addition, many foreign countries keep their currencies valued extremely low against the dollar. Most economists believe that China undervalues its currency by as much as 40 percent. That makes Chinese goods very cheap here and U.S. exports very expensive in China. This is a key driver of the $260 billion trade deficit with Beijing. We should deal with these issues in our international trade negotiations, but we haven't.
2. U.S. manufacturers can save themselves by investing in innovation.
Okay, but how much are you going to invest? U.S. private-sector companies can't put as much money into technology and research and development as foreign governments do to build up their sectors. As the chief executive of a technology firm with whom I've worked for many years says, "We're the best company in the world, but we can't compete with foreign governments." Consider Airbus. The European Union has put more than $15 billion into building this aircraft company from the ground up. Whatever you may think about the recent U.S. Air Force decision to buy tankers from Airbus rather than Boeing, one thing is clear: Through its subsidies, the E.U. has managed to build a highly competitive aircraft industry. South Korea has put more than $12 billion into its semiconductor industry to similar effect, severely harming the U.S. semiconductor manufacturing base.
3. Trade laws and trade agreements level the playing field for U.S. manufacturers.
If only this were so. This should be the main goal of our trade negotiations. The manufacturing sector is hurting more than any other, but we're using our political capital -- in the Doha round, for example, the latest World Trade Organization negotiating round -- to help the service and agricultural sectors. Little is being done for basic manufacturing. There are international trade laws under which U.S. companies can file cases to offset unfair practices in China, Japan and other countries, but they're difficult to use, expensive and haven't solved the problem. In 2006, despite a manufacturing trade deficit of more than $600 billion, U.S. manufacturers filed only eight new trade cases. If these statutes were really working, we would see hundreds of new cases each year, instead of watching U.S. companies decide that it's better to give up and just move manufacturing plants abroad -- something I've recently heard executives in both the textile and electronics sectors say they're thinking about doing.
4. Good management can make U.S. manufacturers lean enough to fight in the international economy.
I wish it were that easy. Even the best management can't overcome some of the structural disadvantages we face. Take health-care costs. In Europe, these costs are absorbed by the government. In the United States, manufacturers have to pay for them. General Motors, for example, has estimated that the cost of health care adds about $1,600 to the price of each of its vehicles. How can you compete when you have to add that cost to all the other challenges a U.S. manufacturer faces? Then there are environmental-compliance costs. One recent study shows that these costs are about $77 billion a year for U.S. manufacturers. China, Taiwan and many other foreign jurisdictions have no environmental costs of any significance, because they either have no environmental laws or don't comply with them. The United States also has laws and regulations to keep our products and workplaces safe that we don't require our trading partners to comply with.
5. We make high-tech goods here, so we're okay. It's only schlock items that come from abroad.
Really? The truth is, very few high-tech companies are building new plants in the United States. The name on the box of the computer you just ordered may be Dell or HP, but the computer itself was probably made in Asia. The fancy light-up screens on your cellphone and iPod -- liquid crystal display screens, or LCDs -- are all made in China, South Korea, Singapore and Japan. Even our greatest semiconductor companies, such as Intel, are building new state-of-the-art facilities in China. And what about the most sophisticated high-tech product in the world -- microlithography machines used to make semiconductors? These machines are a true enabling technology -- a technology from which everything else follows. It's too bad that not a single one is made in the United States. We depend on Europe and Japan for them.
Despite all the bad news, the United States still has a manufacturing sector and still produces about $4.5 trillion worth of goods a year. But we're also consuming fewer and fewer of our own products each year, and factory workers' slice of the pie is getting smaller by the month. If we don't address this problem soon, the last thing we'll be producing in America may be paper. After all, we have abundant forests, clean water and a dedicated work force with generations of experience in the art of paper-making.
And yet, given all the downsides -- foreign companies raking in tax benefits and government subsidies, currency differentials that provide foreign exporters with a 40 percent break on their sales, complex trade laws -- why make anything in this country at all? It'd be easier to disassemble the paper mills, pack the equipment in enormous wooden crates and send it off to China -- probably on the same cargo ships that, in time, will carry massive rolls of paper back to our shores.
gkaplan@kslaw.com
Gilbert B. Kaplan is a partner in the international trade practice of King & Spalding in Washington
Sure, U.S. banking is in trouble, but the longer-term and possibly more damaging threat to the nation's prosperity is the decline of the manufacturing sector. Late last year, the number of U.S. manufacturing jobs dropped below 14 million for the first time since 1950. It's hard to find anything else that takes us back to a time before most baby boomers (remember them?) were even born. On top of that, the United States lost another 49,000 manufacturing jobs in April alone. Hard to believe, but the last factory built in this country may be something we'll see in our lifetime, or certainly that of our children. No wonder this is an issue in the presidential campaign, especially in big manufacturing states. To get to the bottom of the problem, though, we have to cut through the many myths that have been fabricated about the industry over the years.
1. It's all about cheap wages. American workers are just paid too much.
For most manufacturing sectors, that's just wrong. Labor costs are already less than 10 percent of the cost of making many products, including steel and semiconductors. Many of the real cost disadvantages the United States confronts are self-imposed. Our government doesn't rebate taxes to corporations when they export manufactured products, the way other countries do: A Brazilian steel company, for example, can get a 17 percent tax credit for every ton of steel it sends abroad. In addition, many foreign countries keep their currencies valued extremely low against the dollar. Most economists believe that China undervalues its currency by as much as 40 percent. That makes Chinese goods very cheap here and U.S. exports very expensive in China. This is a key driver of the $260 billion trade deficit with Beijing. We should deal with these issues in our international trade negotiations, but we haven't.
2. U.S. manufacturers can save themselves by investing in innovation.
Okay, but how much are you going to invest? U.S. private-sector companies can't put as much money into technology and research and development as foreign governments do to build up their sectors. As the chief executive of a technology firm with whom I've worked for many years says, "We're the best company in the world, but we can't compete with foreign governments." Consider Airbus. The European Union has put more than $15 billion into building this aircraft company from the ground up. Whatever you may think about the recent U.S. Air Force decision to buy tankers from Airbus rather than Boeing, one thing is clear: Through its subsidies, the E.U. has managed to build a highly competitive aircraft industry. South Korea has put more than $12 billion into its semiconductor industry to similar effect, severely harming the U.S. semiconductor manufacturing base.
3. Trade laws and trade agreements level the playing field for U.S. manufacturers.
If only this were so. This should be the main goal of our trade negotiations. The manufacturing sector is hurting more than any other, but we're using our political capital -- in the Doha round, for example, the latest World Trade Organization negotiating round -- to help the service and agricultural sectors. Little is being done for basic manufacturing. There are international trade laws under which U.S. companies can file cases to offset unfair practices in China, Japan and other countries, but they're difficult to use, expensive and haven't solved the problem. In 2006, despite a manufacturing trade deficit of more than $600 billion, U.S. manufacturers filed only eight new trade cases. If these statutes were really working, we would see hundreds of new cases each year, instead of watching U.S. companies decide that it's better to give up and just move manufacturing plants abroad -- something I've recently heard executives in both the textile and electronics sectors say they're thinking about doing.
4. Good management can make U.S. manufacturers lean enough to fight in the international economy.
I wish it were that easy. Even the best management can't overcome some of the structural disadvantages we face. Take health-care costs. In Europe, these costs are absorbed by the government. In the United States, manufacturers have to pay for them. General Motors, for example, has estimated that the cost of health care adds about $1,600 to the price of each of its vehicles. How can you compete when you have to add that cost to all the other challenges a U.S. manufacturer faces? Then there are environmental-compliance costs. One recent study shows that these costs are about $77 billion a year for U.S. manufacturers. China, Taiwan and many other foreign jurisdictions have no environmental costs of any significance, because they either have no environmental laws or don't comply with them. The United States also has laws and regulations to keep our products and workplaces safe that we don't require our trading partners to comply with.
5. We make high-tech goods here, so we're okay. It's only schlock items that come from abroad.
Really? The truth is, very few high-tech companies are building new plants in the United States. The name on the box of the computer you just ordered may be Dell or HP, but the computer itself was probably made in Asia. The fancy light-up screens on your cellphone and iPod -- liquid crystal display screens, or LCDs -- are all made in China, South Korea, Singapore and Japan. Even our greatest semiconductor companies, such as Intel, are building new state-of-the-art facilities in China. And what about the most sophisticated high-tech product in the world -- microlithography machines used to make semiconductors? These machines are a true enabling technology -- a technology from which everything else follows. It's too bad that not a single one is made in the United States. We depend on Europe and Japan for them.
Despite all the bad news, the United States still has a manufacturing sector and still produces about $4.5 trillion worth of goods a year. But we're also consuming fewer and fewer of our own products each year, and factory workers' slice of the pie is getting smaller by the month. If we don't address this problem soon, the last thing we'll be producing in America may be paper. After all, we have abundant forests, clean water and a dedicated work force with generations of experience in the art of paper-making.
And yet, given all the downsides -- foreign companies raking in tax benefits and government subsidies, currency differentials that provide foreign exporters with a 40 percent break on their sales, complex trade laws -- why make anything in this country at all? It'd be easier to disassemble the paper mills, pack the equipment in enormous wooden crates and send it off to China -- probably on the same cargo ships that, in time, will carry massive rolls of paper back to our shores.
gkaplan@kslaw.com
Gilbert B. Kaplan is a partner in the international trade practice of King & Spalding in Washington
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