Why manufacturing matters to economic superpowers


Manufacturing matters. Although it has become increasingly automated and globalized in recent decades, it still holds a special place in the national psyche in the United States and other major exporting countries, such as Germany, China. and Japan.

This is in part due to its disproportionate benefits to the economy. In the United States, for example, although the manufacturing industry accounts for only 11 percent of gross domestic product and 8 percent of direct employment, it drives 20 percent of the country’s capital investment, 30 percent of productivity growth, 60 percent of exports and 70 percent of business R&D, according to figures from the McKinsey Global Institute. The share of manufacturing in the economy of many other developed countries is much higher.

No wonder the debate about where things are made is both emotional and political. This debate has come to the fore in recent years, not only because of the technology and trade wars between the United States and China and supply chain shortages in the pandemic, but also because of human rights. man. Western brands, including Nike, H&M and European luxury producers find themselves in an increasingly difficult position to use cotton produced in Xinjiang, some of which can be harvested and spun by forced Uyghur labor.

American and European companies are under tremendous pressure to boycott cotton from Xinjiang and use local alternatives. Yet when they do, they risk a backlash from the Chinese, who appear to have added Uyghurs to the list of “no-talk” areas like Tibet, Taiwan and Tiananmen. I suspect the brands side will largely depend on how important China is to their overall revenue and future growth.

But the textile industry has been less and less globalized for some time. In the United States, sectors including textiles and the furniture was among those hardest hit by China’s World Trade Organization membership, since they are both labor intensive and tradable.

However, the math has changed now that wages and domestic demand have increased in China. Long before the concerns of Xinjiang, clothing supply chains were evolving. Chinese producers exported 71% of finished garments in 2005. In 2018, it was only 29%.

This change comes at the same time as other winds favorable to the regionalization of the garment. More and more brands are going directly to consumers, bypassing expensive brick and mortar stores. It also increases investments in software, which will increase efficiency, shorten production cycles and thus shift the labor / transport cost / productivity trade-off further in favor of local production.

Whether such relocation is important to national economies depends a lot on industry. A fascinating study by MGI, to be released on April 15, examines 30 major manufacturing sectors in the United States. It finds that 16 of them stand out for their economic and strategic value, as measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. Clothing is not on the list. But semiconductors, medical devices, communications equipment, electronics, automobiles and auto parts, and precision tools are.

Of course, some of these industries are divided according to national criteria, often more for political reasons than economic ones – evidenced by the Flea wars between the United States and China. While the United States still has an advantage in chip design, domestic production capacity has declined significantly over the past three decades. This is one of the reasons for the shutdowns of the US auto industry that began in February, when post-pandemic production began to restart. That same month, President Joe Biden called for a national review of supply chain vulnerabilities.

Her administration has already said she would like to see more domestic production of semiconductors, medical supplies and other strategically important elements. But, according to MGI President James Manyika, “the size of demand for domestic production is important, especially in industries where there are scale and learning curve effects,” such as semiconductors. , which are manufactured at much cheaper in Asia. The United States could create more demand for locally made chips, but only if the government guaranteed investments through guaranteed federal supply, as it did for semiconductors in the 1950s and 1960s.

In view of the push towards “Buy American” under Biden, as well as the use of the federal balance sheet to support union work in government contracts and health infrastructure, this is not inconceivable. Indeed, some members of the defense community (who need high-end chips for military equipment) as well as the progressive left (who want the United States to lead cutting-edge clean technology, which could also create demand for semiconductors) would like the United States and China to decouple supply chains for chips.

Where would that leave Europe? Sitting very uncomfortable between two economic superpowers. It does not matter in terms of national competitiveness what fast fashion suppliers and luxury retailers do in Xinjiang, although the moral issues involved may well have implications for brand value.

But it doesn’t matter what governments do to support domestic demand or control supply chains. I suspect that these decisions will start to revolve less around simple calculations of cost and efficiency, and more around a broad debate on national competitiveness.

rana.faroohar@ft.com



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