Machine Design
How to Save American Manufacturing

How to Save American Manufacturing

U.S. manufacturing has recently been characterized by the closing of big plants and a hemorrhaging of jobs. Here’s what it will take to turn things around.

“When I went to the office printer to retrieve a printed version of this preface, I had to load paper into the printer. On the wrapper of the ream of paper was a graphic of a kangaroo. Looking more closely, I saw that the paper was made in Australia. Importing paper? From Australia? Really? Is it that bad?”

Well, yes, it really is that bad. These are the words of author William Killingsworth in a soon-to-be-published book titled, Saving American Manufacturing: The Fight for Jobs, Opportunity, and National Security. Killingsworth, whose Ph.D. is from the Massachusetts Institute of Technology, is vice president of Manufacturing and Supply Chain Research at DESE Research, an organization which carries out theoretical and analytical research in defense, energy, space, and the environment. We recently had a chance to ask him about the causes of the decline and what can be done about it.

Machine Design: What originally prompted your concern about the state of American manufacturing?

Killingsworth: A few years ago I was doing a project for the U.S. Army Aviation and Missile Command on the strength of the U.S. industrial base. As I worked with manufacturers, I realized the supply chain was filled with single-source suppliers. If one company went down the tubes for some reason, the whole supply chain would come to a stop. I began to realize that many of our supply chains have an overreaching fragility. In aviation, for example, there are issues with foundries and forgings. It was an awakening for me to see the number of single sources.

In the book, you point out that U.S. manufacturing wasn’t in bad shape up to about the year 2000. That’s when a lot of manufacturing plants started to close and massive job losses began. What happened that year to cause this decline?

Before the year 2000, China’s trade status had to be renewed annually by Congress. The renewal was always controversial and uncertain. So companies were reluctant to invest in China or send work there because they were never sure they would be able to bring in Chinese-manufactured products. But in 2000, Congress enacted a law that gave China permanent normal trade relations. That meant the uncertainty was gone. Companies started making investments in China because they knew the trade status was permanent. And in 2001, China became part of the World Trade Organization (WTO). These two events started massive manufacturing-job losses in the U.S.

What specifically happened after the year 2000?

The number of U.S. manufacturing plants started dropping rapidly. Between the years 2000 and 2007, 50,000 U.S. plants closed. This was a different dynamic than just laying off employees during a slowdown and then bringing them back later. These plants just closed and never reopened. In almost every industry I examined, the majority of job losses came with closings in the two largest categories of plants, those having between 500 and 1,000 employees, and those having 1,000 employees or more.

You say that measurements of manufacturing output have masked a deteriorating manufacturing base. What’s so tough about measuring manufacturing output?

In general, it’s not tough to measure manufacturing output. What is tough is measuring the manufacturing output of computers and peripheral equipment. The Federal Reserve and the Dept. of Commerce don’t measure this kind of equipment in terms of the number of units shipped. Instead, they adjust sales numbers by their estimated improved productivity because of factors such as more memory or faster computing. That adjustment number is so big it masks other manufacturing numbers. Actually, the number of computers shipped in the U.S. has been declining, as have durable goods.

You also say that rising productivity figures for the U.S. are an illusion.

The Dept. of Commerce publishes a production index that does not track unit sales. When you look at the dollar value of shipments, rather than the production index, you see significant declines in U.S. computer and telecommunications goods. And there has been a commensurate increase in imports from China. But the production index is still climbing because of the adjustments made for better technology.

How much of the U.S. decline in manufacturing is due to currency manipulations?

Probably a significant portion of it. China is keeping its currency very undervalued. Consequently, its products are inexpensive in the U.S. while our products are expensive when they get to China. The undervalued currency makes it hard for U.S. manufacturers to export to China. And this sort of currency manipulation supposedly violates trade agreements and WTO rules.

Why have U.S. legislators ignored this problem?

The only thing I can see is that most of these job losses have been associated with larger firms, the multinationals. And these firms are very active lobbyists. Even recent Tea Party members who have been elected to Congress have supported trade pacts when you would think they would be of a mind not to. But the money really flows when trade pacts are under discussion.

There has been talk recently of a U.S. manufacturing renaissance. Have you seen any evidence of this?

There have been a few positive developments but on the order of 10,000 to 20,000 jobs, nothing near the 6 million that have been lost.

I think a more substantial movement has been to leave China and move manufacturing to Mexico. Our trade deficit with Mexico is substantial and growing, particularly in autos and auto parts. Delphi is now one of the largest employers in Mexico with over 50,000 employees there. 

It all sounds dire. How do we fix this?

We’ve got to level the playing field with respect to currency. We can do that in a few different ways. We can buy Chinese currency and that will drive up its value. We can also begin taxing the earnings on Chinese purchases of U.S. bonds, but we need those purchases to finance our debt. One thing that amazes me is the amount of focus on the trade deficit for oil. Our trade deficit for stuff we import from China is $75 billion greater than our deficit for importing oil. It is insane.

But we have to go after currency manipulation. We should go to the WTO and argue our case. I don’t think the U.S. has been as aggressive as it should be in filing grievances with the WTO. President Obama didn’t file a single grievance in 2013. We simply have to get tougher in enforcing these agreements. We play by the rules but nobody else does.

Are currency values the only place we need to make adjustments?

I have to think that when U.S. firms buy companies offshore to avoid taxes here, you need to take a hard look at taxes on manufacturing companies. There should also be tax credits for creating manufacturing jobs.

I also think the National Network for Manufacturing Innovation (NNMI) that President Obama created is a step in the right direction. NNMI is modeled somewhat after the Fraunhofer Institutes that have helped keep German manufacturing healthy. I would like to see more of these because the federal government requires that state and local governments match some of the NNMI funding. This creates a true public-private partnership where everyone has skin in the game. 

Resources:

Business Expert Press, http://www.businessexpertpress.com/books/saving-american-manufacturing-fight-jobs-opportunity-and-national-security

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