Mike B)
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http://www.nakedcapitalism.com/2008/08/us-export-boom-leaves-manufacturing.html
US Export Boom Leaves Manufacturing Largely Behind Posted by Yves Smith -- Monday, August 18, 2008
We have been skeptical of the idea that a weak dollar would be the boon for US manufacturing that many thought it would. The reason? The best possible outcome would be to see a resurgence in manufacturing, since manufacturing has higher potential for productivity gains than does the service industry (although getting back some of those service jobs that have been offshored would be nice too). In the long run, economic growth is a function of demographic growth and productivity increases.
So why did we think manufacturing would not come back? Consider what has been lost: plants have closed, workers with specialized know-how have moved on. Rebuilding those industries won't happen overnight. It would take a significant investment of funds for equipment, training, and start-up costs. With currencies volatile and China now less inclined to see the yuan rise, who is going to bet that the dollar will stay weak long enough for new entrants to make a go of it?
That isn't to say that manufacturing might not eventually come back to the US. But it will take sustained dollar weakness, perhaps even evidence of a shift away from the greenback as reserve currency. And the dollar is not the only part of the equation. High fuel prices are leading manufacturers to rethink their supply chains, with increasing emphasis on having more manufacturing and assembly closer to the customer. That consideration may bring some manufacturing back to the Americas, but it might wind up in Mexico.
As an aside, I have been told by people with good industry knowledge that the US ceded far more manufacturing than it needed to, that some public companies moved manufacturing overseas because it was what Wall Street wanted (this from C-level employees of said public concerns). Similarly, the US lost much of its shoe manufacturing because Interco went bankrupt under too much LBO debt and the speed of the unraveling led a manufacturer that could have been salvaged being liquidated.
That being said, existing US manufacturers could pick up more orders from overseas with a weak dollar. But the ones that would benefit are players with established international distribution. And per this article from the New York Times by Louis Uchitelle, even for those companies, the degree to which domestic factories have benefited is not as great as popularly believed.
>From the New York Times:
Exports are the bright spot this year in an otherwise bleak economy. But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal.....While the surge in commodities is a welcome relief, it is an unreliable prop for an industrial power.
"The historical data tell us clearly: don’t get too used to commodity export booms; as any third world country will tell you, they tend to go away pretty quickly," said L. Josh Bivens, a trade expert at the labor-oriented Economic Policy Institute..... "Over a long period," Mr. Bivens said, "commodities contribute right around zero to export growth."....
An analysis of trade data by the federal Bureau of Economic Analysis illustrates just how lopsided the gains have been between manufactured goods and unprocessed commodities.
All exports of goods and services in the first half of the year rose at a $52 billion annual rate, adjusted for inflation, up 7.1 percent. Commodities accounted for 41 percent of the increase and manufactured products contributed just 12 percent, the bureau reported. (The figures strip out such items as arms sales and exports to American territories, like Puerto Rico and the Virgin Islands.)
Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent of the nation’s exports, while commodities make up only 26 percent and services 30 percent. Indeed, not since the bureau began compiling detailed trade data in 1977 have commodities outpaced manufactured exports for two consecutive quarters.
Weakening demand abroad accounts for some of the decline. But the manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.
"We have achieved a worldwide manufacturing base, and we are not going to shut down our factories overseas," said Franklin J. Vargo, vice president for international economics at the National Association of Manufacturers. "But on the margin, we will shift a little bit of manufacturing back to the United States."....
The contrast with commodities, which cannot be shifted overseas, is striking. John Hardin Jr. and his son, David, focus their attention on growing as much grain as they can on 2,500 acres near Indianapolis, counting on exports to absorb their harvest. Meanwhile, Sarah Bovim, a Whirlpool Corporation executive, points to expanding global operations at her company, where production abroad has eclipsed its exports.
"We are looking to expand in emerging markets," Ms. Bovim said, "which means we are looking to set up shop there."...
Whirlpool is proud of its exports but intent on manufacturing more abroad. Ms. Bovim, who is Whirlpool’s director of Congressional relations and trade policy, speaks with equal enthusiasm about sales from the company’s factories abroad and those in the United States. Both are up, she says, and she cites sales of washing machines and dryers to make her point.
Machines that load clothes from a door on top are made only in the United States, principally at a plant in Clyde, Ohio, and are exported to satisfy overseas demand. A newer and increasingly popular model, one that is loaded from a door in the front, is made only at factories in Germany and Mexico.
Whirlpool recently opened its Mexican plant, deciding to bypass the United States....
Many American manufacturers argue that as factories spread across the globe, exporting is no longer an effective means of competing against sophisticated and ever more numerous local manufacturers. In addition, as American companies set up operations in, say, China, they insist that their suppliers locate nearby, for quick and efficient delivery — and that draws more manufacturers overseas.
It is certainly a reason that Parker-Hannifin, a Cleveland-based manufacturer of hydraulic pumps and industrial controls, is expanding overseas, said Tim Pistell, the chief financial officer. "Our customers just love for us to make our stuff near their new operations," Mr. Pistell said, "and if we do, they reward us with a lot of business."...
Currency fluctuations rarely alter these long-term commitments, and profits stay abroad. "Most of the money we make overseas, we keep there," Mr. Pistell said, "and then plow it back into growing the business overseas."
The Bureau of Economic Analysis, tracking this trend for all of America’s multinational companies, says 70 percent of the multinationals’ operations — measured in employment, investment and value added in turning metal into aircraft or wood into furniture or silicon into computer chips — take place in the United States.
That, however, is down from nearly 75 percent in 1999 and, as the shift overseas continues at many manufacturers, commodities inevitably jump to prominence from time to time. ********************************
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