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Tuesday November 30, 2021

Made in America

September 04, 2020

The writer is an Islamabad-based columnist.

In his August 27 late night speech during the Republican Party convention, US President Donald Trump put forward “Made in America” as the basic agenda of his administration in case he was re-elected later in November this year.

What does this catchphrase signify? And why is it so important so as to constitute the rallying cry for the country’s Grand Old Party, as it eyes another four years in the globe’s most powerful office?

In a word, ‘Made in America’ aims at bringing back manufacturing and jobs back to the US. Once the world’s manufacturing powerhouse, the US has witnessed erosion of its industrial prowess bit by bit. By the turn of the century, the US share in global manufacturing had ratcheted down to 28 percent. At present, it accounts for 17 percent of global manufacturing. Be that as it may, all along, the US has remained the world’s top economy. So, what happened?

The answer consists in the familiar pattern of economic development. As an economy makes strides on the road to development, both per capita income and wages go up. This has two broad implications. An improving standard of living allows consumers to switch their expenditure increasingly from essential and manufactured goods to luxuries and services. The rising wages drive up the cost of production, making for replacement of labour with capital. The net result is a growing share of services in the total economic output at the expense of manufacturing and increasing capital intensive production. The uptick in cost of production pushes mega enterprises to relocate part or whole of their manufacturing offshore.

This is what the US has experienced over the years. During the 1950s, manufacturing accounted on average for nearly 30 percent of the economy or gross domestic product (GDP). In subsequent decades, the share of manufacturing in the GDP declined. By the turn of the century, it had scaled down to 15 percent. The downswing continued into the 21st century; at present, manufacturing makes up only 11 percent of the national economy. By the same token, the share of manufacturing in jobs has come down from nearly 35 percent during the 1950s to less than 9 percent at present. Thus, the decline of manufacturing in the US is a long-run phenomenon. At the same time, the share of services in GDP has continuously risen to reach 77 percent in 2019.

This shuffling of the numbers has had substantial implications for the US as well as internationally. The decreasing share of the US in global manufacturing has been accompanied by an increasing share of other economies, notably Japan and China. However, in recent years, it is China that has emerged as America’s nemesis. At present, China constitutes 28 percent of the total manufacturing, leading by a long way the other major manufacturers, namely, the US, Japan, and Germany, which make up 17, 7 and 6 percent respectively of global manufacturing.

The ascendency of China in manufacturing has also been aided in large measures by the rise of global value chains (GVCs), which has been easily the most seminal feature of international trade and investment since the 1990s. Driven by cost minimization and buoyed by ever refining ICT technology and lowering of transport cost, multinational enterprises (MNEs) tend to carry out their production in different parts of the world. Take Apple’s products; iPhone is conceived and designed in the company’s home country – the US. Their components are supplied by countries such as Japan, Germany and South Korea, while the fabrication and assembly take place in China. The post-production stages, such as branding and marketing, are again performed in the US. The GVCs, which account for more than 70 percent of international trade, have been the harbinger of made-in the world products.

A billion-plus domestic market, relatively low wages, political stability, and sound work ethic have combined to make China an international production hub or world factory and a hot spot for the world’s leading MNEs. China’s matchless manufacturing credentials have enabled it to become the top exporter of goods, surpassing the US and Germany, and consistently run a huge trade surplus.

In 1980, the country’s share in global merchandise exports was less than one percent, which exceeded 13 percent at the close of 2019. The spectacular export performance has anchored China’s consistently high growth rates over the past three decades. Having dethroned the US from the status of being the globe’s biggest exporter and manufacturer, China is poised to overtake the North Atlantic giant as the world’s top economy during the next decade.

In this situation, where made-in-the-world is the norm, what chances does ‘Made-in-America’ stand? Evidently, the purported policy seeks to reverse the course of economic history. The US is well past the manufacturing stage of development. Being a post-industrial society, its core competence or competitive advantage consists in highly sophisticated services, such as product design, branding and marketing, top skilled labour, and intellectual property (copyrights, patents, trademarks).

Although the US has consistently faced a deficit in merchandise trade, it has been running a surplus in trade in services (TIS). In 2019, globally the US ran a $923 billion deficit in merchandise trade and $300 billion surplus in TIS. Likewise, with China the US ran a $366 billion deficit in merchandise trade and $36 billion surplus in TIS. Globally, China, which ran $480 billion surplus in merchandise trade, incurred a $217 billion deficit in TIS.

The data bring out the relative strength and weakness of China and the US. A remarkably developed and prosperous society – the US – where people enjoy a high standard of living and per capita income exceeds $65,000 and where by implication wages are among the highest in the world will find it enormously difficult to compete in manufacturing, where cost minimization is consequential. Instead, it had better give a full play to its core competence – innovation and high-skilled services.

Trump, however, has a simple answer to this objection: walk on or renegotiate those trade agreements which in his book put American manufacturers in a disadvantageous position. Where this is either not possible or where a renegotiated deal will take a long time to finalize, scale up tariffs on imports from the principal trading partners to offset their advantage in low cost production. It was keeping that in mind that he had the North Atlantic Free Trade Agreement (Nafta) between the US, Canada and Mexico renegotiated on avowedly better terms for American manufacturers.

Again, it was on that premise that he unleashed a trade war with China in 2018. His administration can boast that the higher import taxes not only helped the US narrow its trade deficit with China from $443 billion in 2018 to $366 billion in 2019 but also compelled China to sign a trade deal and increase its purchase of American goods by $200 billion a year. If re-elected, Trump will slap those American enterprises with punitive tariffs which opt to relocate their production facilities offshore.

Such measures will force the other major economies to either retaliate or make a strategic retreat. In either case, these measures will have both winners and losers. Higher import taxes will drive up prices in America, which will hit consumers hard. At the other end of the scale, import competing industries will be shielded from competition with more efficient foreign suppliers. Instead of playing to their strength, Americans will be competing in those industries in which they are inefficient. They may secure some gains, but theirs’ will be a Pyrrhic victory. Nineteenth century mercantilism will be resurrected as the countries will increasingly adopt beggar-thy-neighbour policies, stoking political tensions. Unilateral or tit-for-tat measures may sound the death-knell for the rule-based multilateral trading system represented by the World Trade Organization (WTO), which is already in disarray.

Whatever may be the economic logic behind ‘Made in America’, Trump, who is drawing flak for his mishandling of Covid-19, is playing to the gallery. Let’s wait and see whether Made in America helps him stay in the White House for another term.

Email: hussainhzaidi@gmail.com

Twitter: @hussainhzaidi