Is American Manufacturing Doomed?

Everything Americans buy seems made in China nowadays yet Americans factories are among the most productive in the world.

The average American may be excused for believing that his nation’s manufacturing industry is doomed to extinction. Newspapers and politicians like to point at China, where wages are low and production rates booming. Indeed across East Asia and in Central Europe, factories are built and expanding because labor is cheap while American banks and automakers were in such huge trouble two years ago that only hundreds of billions of dollars in bailouts from the federal government could save them from bankruptcy.

Manufacturing as a share of the American economy has declined by up to a third in the last twenty years. Halfway across the world countries as China are boasting impressive growth rates meanwhile. Politicians like to connect these two to argue for increased public investment in the “industries of the future” or against removing trade barriers that supposedly prevent cheap Chinese consumer goods from flooding the market.

Yet since 1987, real American manufacturing output has increased by more than 80 percent. According to the Bureau of Economic Analysis, the market value of manufactured goods, over and above the costs that went into their production, reached a record high in 2007, breaking the record set in 2006, which broke the record set in 2005, which broke the record set in 2004. The recession has affected all industries but the trend is clear — American manufacturing is thriving.

Manufacturing as a share of gross domestic product has been on the decline since the early 1950s when it represented about a quarter of the economy. Today manufacturing accounts for just over 10 percent of American GDP while services blossom. Manufacturing is not in decline; other sectors of the economy have simply been growing at a much faster pace.

It is true that manufacturing is losing jobs. The reason is that factory work in America is increasingly mechanized and increasingly specialized.

American workers don’t make clothes and toys anymore — which may leave the American consumer with the impression that all he buys is made in China. In reality, American factories have moved up the scale, producing chemicals, pharmaceuticals, sophisticated airplane and automobile components, and more.

According to data from the United Nations Industrial Development Organization, American factories remain the most productive in the world.

While the doomsday scenarios about American manufacturing are false, the industry will increasingly have to share its advantage with the rest of the world. In East Asia, countries as Japan, South Korea and Taiwan have industries matching America’s in terms of product quality while pharmaceutical companies are moving research and development to places as Singapore and Thailand where regulations are more flexible.

Even China, where millions remain impoverished, is set to lose its cheap labor advantage in the near future and readily investing in more advanced production and technology. India is dependent much more on services than it is on manufacturing.

Shutting off the United States from international trade or investment won’t mend the enormous trade imbalances that currently make America a net consumer compared to the export economies of China and Germany.

Nearly half of all the goods America imports is imported by companies which often use those goods for further production — part of which is exported again. Without a free flow of goods and investment, American manufacturing would likely suffer far more than it currently does from foreign competitors.