In 1897 a reporter was sent to determine if Mark Twain might have died since some rumors had been circulating to that effect. This prompted Twain to make his famous statement that “the report of my death was an exaggeration.” In 1907, the New York Times speculated that he had been lost at sea. A few days later, the Times published the now found Twain and he reported that “I will make an exhaustive investigation of this report that I have been lost at sea. If there is any foundation for the report, I will at once apprise the anxious public. I sincerely hope that there is no foundation for the report, and I also hope that judgment will be suspended until I ascertain the true state of affairs."
A similar situation has been occurring in Western Countries for some time now. Manufacturing, if we were to believe so much of the press and conventional wisdom, has vacated Western Europe and North America and moved to China, India, Mexico and elsewhere in general. It would be interesting to conduct an interview and see how many Americans agree with the statement that “China is the largest manufacturer in the World.” I suspect the majority would agree. According to the International Monetary Fund and the U.S. Bureau of Economic Analysis, the United States is still the largest manufacturer in the world with Japan second, China third, and Germany in fourth. If the USA was a country based on the manufacturing sector alone, it would be the 8th largest country in the world with a $1.64 Trillion economy. According to the U.S. Bureau of Economic Analysis (see graph, click to enlarge) manufacturing as a share of GDP has remained pretty much the same in North America at 11.5 percent measured in constant dollars over the past 60 years. Yes, China may well be the largest manufacturer in the world someday, or perhaps India, but either one should, rightfully, hold that position. This would not be a bad thing at all. They both have rising middle classes and far more markets to grow into.
Most of the noise that politicians make about “jobs going overseas” usually portraying “corporations” as evil villains, is just that: noise. Most American, European and Japanese companies have set up shop in China and India to serve the local markets not to flood the USA and Western Europe with cheap goods. Do companies pursue lower costs? Absolutely! Is that the main reason they locate in other countries. Not necessarily. Can governmental policies incent companies to locate elsewhere than their home countries? Yes. Governments that have lower tax rates, encourage R&D, build their infrastructures, invest in an educated workforce and lower their tariffs and duties, will, no surprise, attract manufacturers.
There has been a leveling factor with the globalization of markets and production over the past 30 years. Wage rates of developing countries rise with the demand for their lower rates eventually wiping out that advantage. Some of us can remember when Japan was considered a low cost country. While it is true that many companies moved production overseas with lower wage costs as the primary driver, many are rethinking prior decisions. General Electric recently moved their production of heat pumps from China to Kentucky. GE cited more competitive wages, better control over production and government tax incentives as primary drivers for their decision.
Rather than punish companies, governments should incentivize them. Better R&D credits, smart-grid infrastructures, and education investments are three simple ways that governments can positively influence growth. Rather than vilify manufacturers, they should recognize the real drivers and encourage them with prudent regulations and incentives.
References: The Manufacturing Institute, The Facts About Modern Manufacturing, 8th Edition, 2009. Jere Downs, Manufacturers find reasons to bring production back to U.S., Courier-Journal, April 17, 2010.
