For all the turmoil marking the first weeks of President Trump, the big boot is yet to drop. That’s when the angry heartland realises the factory jobs aren’t coming back, whatever Trump promised.
It will take time for that realisation to dawn on Trump’s followers. Minor events, such as the 700 Carrier jobs, will be well-publicised PR stunts and the overall employment picture will tend to overshadow what’s specifically happening in manufacturing. Employment momentum was building nicely over the past two years – nothing to do with Trump – as witnessed by the Federal Reserve starting to return monetary policy to something like normal.
But for those suffering nostalgia for the ideal of secure, high-wage manufacturing in the rust belt – it’s not going to happen. On one hand, manufacturing automation is not about to be reversed, while on the other, the US has lost the capability to feed, run and maintain many modern factories.
The most commonly-given reason for Trump’s “bringing the jobs back” chant being a lie is that most of the jobs weren’t “stolen” by China and Mexico in the first place and they therefore can’t be “brought back”. There have been various studies attempting to allocate responsibility between automation and cheap foreign labour. The highest score I’ve seen for automation’s role is a massive 85 per cent, as summarised by the Financial Times:
“The US did indeed lose about 5.6 million manufacturing jobs between 2000 and 2010. But according to a study by the Centre for Business and Economic Research at Ball State University, 85 per cent of these jobs losses are actually attributable to technological change – largely automation – rather than international trade.
“The think-tank found that although there has been a steep decline in factory jobs, the manufacturing sector has become more productive and industrial output has been growing. ‘Simply put, we are producing more with fewer people,’ notes Mireya Solís, a senior fellow at Brookings.”
Trump and his more dangerous associates, such as the Sinophobe head of his National Trade Council, Peter Navarro, would have voters believe jobs can nonetheless be taken from China by tariffs and bullying individual companies. And, pre-Trump, there have been papers written about the benefits of “reshoring”, about being closer to markets and capitalising on cheap gas, currency relativities and a supposed “Made In America” mood swing.
But there’s another factor mitigating against reshoring: America’s manufacturing capability has been hollowed out.
The US has lost the skills, the support services, the supply chain and talent for much of the manufacturing it hungers after. It’s simply too hard, too costly, too inefficient to try to rebuild it. It’s what Harvard Business School Professor Willy Shih likens to the “tragedy of the commons”, the loss of common grazing land that supported all the village. The US has witnessed the loss of much of its industrial commons.
For the past decade, Shih and colleagues have been researching what’s happened to American factories. What the Professor found is that in whole areas of manufacturing, the jobs can’t be brought back or new technology manufactured in the US because America simply doesn’t have the skills anymore
As long ago as 1997, he found at Kodak that, despite a highly-automated production line, the company could not make digital cameras in the US because there just weren’t the people with the knowledge to make the parts. In 2009, he co-authored a paper showing the Amazon Kindle could not be made in the US, even though the core technology was developed there.
“While the macroeconomic data on comparative labour and factor costs may be compelling, the actual process of reshoring – bringing assembly work back from abroad – is hard work,” Shih wrote in a 2014 MIT Sloan management review paper.
“This is especially true when the resources upon which a company draws (the supplier base, the workforce, and even the company’s own internal product design capabilities) have atrophied.”
A 2012 Harvard Magazine interview walks through the dispersal of American manufacturing talent. Shih does lay blame on cheap overseas labour luring manufacturing offshore, but now the result goes beyond wage rates.
“Once you allow those (manufacturing and engineering) skills to dissipate, throw away those capabilities, a lot of those decisions are very expensive or impossible to reverse,” he wrote. “My counsel is to be more thoughtful about that.
“I just wrote a case on a large multinational that has its engineering centre in India, with thousands of engineers and an average age of 27, and its home engineering operation in the US, where the average age is 47. The guys in India said the US operations hadn’t hired anybody in the past half-dozen years, so they don’t have fresh skills. Do you retrain, or start with the younger generation and try to keep their skills fresh? That’s a huge problem. I saw people at Kodak in film manufacturing who had amazing skills, but as technological substitution happens, those people can’t take their skills anywhere.
“The global market for tradeable goods decimated the lower-skilled jobs. I think it’s starting to attack highly skilled jobs, too. I don’t have good answers, but I think that’s the next huge issue.”
With the advent of President Trump and the threat of tariffs, Professor Shih’s work is attracting renewed attention.
And the problem extends further than high-tech – the US has serious problems now with recruiting, training and retaining suitable factory workers. American management and work ethic in many cases isn’t competitive with what corporations have become used to in Asia.
There’s a small example of that in Merchant House International – an Australian-listed, Hong Kong-headquartered, Bermuda-incorporated Chinese manufacturer of footwear and Christmas decorations. I wrote in 2013 about MHI reading the Chinese and American strategic winds and taking advantage of state incentives to open an automated American factory. That factory is yet to make a profit.
There are lessons from Shih’s work for Australia as well. Like the US, a large part of manufacturing looks set to rely on state aid in the guise of electorally-sensitive Defence Department work. The political love affair with making “things you can drop on your foot” doesn’t look like playing well left to its own devices.
Local protectionists and President Trump can make a song and dance about a few token jobs, but slapping tariffs on imports, making consumers pay more for goods, undermining comparative advantages and endangering world trade won’t achieve the impossible.
First published SMH Feb 2, 2017