The Future of Manufacturing: The United States Stirs

Manufacturing dominates global trade and is the basis for export-led development. A nation’s capacity to transform physical raw materials into products valued by end users all over the world has been the hallmark of economic development for more than two centuries. Although trade in intangibles and services has grown rapidly in recent decades, no country has yet been able to leapfrog successfully from exporting raw materials into the global information economy without “making stuff ” for international markets along the way.

Export-led development among follower nations puts pressure on leading nations. If the leaders can continue to innovate and differentiate their output, mutually beneficial exchange of the sort typically described in economics textbooks may result. However, “hollowing out” of the leaders (that is, the sudden decline of their key sectors) is not an impossible outcome, either theoretically or in practice; global economic leadership has changed hands from time to time throughout the course of modern history.¹ Where any particular historical episode comes out along the spectrum, from Pareto optimality to hollowing out, depends on many factors; one of the most important is the public policy response of the leading nation.²

The United States faces such a challenge today. As this paper describes, the U.S. manufacturing sector contracted severely in the 2000s, raising the prospect that important manufacturing industries—both high tech and low tech—might disappear from the country for good. The Great Recession that began in 2008, which was brought on by both domestic and international forces, punctuated this decline. The U.S. response to the recession staved off immediate disaster, and it has created momentum toward an effective response to the longer-term challenge. As I argue below, whether this momentum will be sustained is an open question, but if the United States does retain its leading position in manufacturing, the challenge may then be reversed. Export-led growth in follower countries could stall, thereby posing a new set of policy questions. This potential outcome, which to my mind calls for a collaborative international response, is explored in the conclusion of this paper.

The Death of Manufacturing in the U.S. has been Exaggerated . . . but not by Much

The U.S. became the global leader in manufacturing in the late 19^th century, surpassing Great Britain in output and productivity. After World War II, when its economic competitors lay prostrate, the United States dominated global industrial production to a historically unprecedented degree. In the second half of the 20^th century, these competitors recovered and new ones came on the scene, which diminished U.S. dominance. Nevertheless, the U.S. manufacturing sector remained the world’s largest through the end of the century.³ Moreover, it led the way in creating high-tech, high-value manufacturing industries, from computers to aircraft to biotechnology.

Something happened around the turn of the 21^st century. The slow decline in U.S. manufacturing employment, which had averaged .5 percent per year for the previous two decades, accelerated to 4.3 percent per year in the 2000s. In all, one-third of U.S. manufacturing jobs evaporated during the “lost decade.”⁴ Investment shriveled, and the capital stock of many U.S. manufacturing industries actually shrank.⁵ While low-tech industries were hit the hardest, high-tech manufacturing was not immune.⁶ The U.S. trade balance in advanced technology products, one indicator of U.S. competitiveness in high-tech manufacturing, turned negative for the first time in 2002; by 2010 it was running almost $100 billion in the red.⁷

This sharp downturn in the fortunes of U.S. manufacturing is explained in part by China’s growing role as the “factory for the world.” The Chinese government supported in a variety of ways the export of goods made both by domestic manufacturers and by international firms that built factories in China. Perhaps most important was China’s commitment to an exchange rate that substantially under-valued the yuan relative to the dollar throughout most of the first decade of the 21^st century.⁸ China’s rise provoked a herd...