Headwinds

There are still headwinds pushing against efforts to bring jobs back. While China has allowed its currency to appreciate a bit, it is still undervalued by as much as 30% to 40%, which means goods made in China are priced 30% to 40% lower than goods made here. That’s even before the effect of Chinese subsidies, trade violations, suppression of labor rights, cost savings from allowing environmental degradation and other advantages, including their massive investment in infrastructure, are taken into account.

The Wall Street Journal highlighted another problem for manufacturing: In spite of conservative complaints about debt, in truth the safety of U.S. currency makes it attractive and therefore “stronger,” especially now, with the worries over the euro. This “flight to safety” has the reverse effect of China’s currency manipulation. Where China manipulates its currency to make it “weaker,” the strength of the U.S. dollar increases the price in international markets of goods made in the U.S. The WSJ explains, in U.S. Factories Could Suffer From Dollar’s Appeal,

Being a safe haven can be a drag. The euro zone remains the albatross around the global economy’s neck. Any hint about default, a euro-zone break up or banking collapse sends skittish investors into the secure embrace of the U.S. dollar.

… A strong dollar may enhance the U.S.’s sense of pride. But it will be a headwind for U.S. manufacturing.

That isn’t because a weak euro will cut U.S. exports to Europe. The euro zone is in recession and won’t be buying much from any nation.

The challenge will come in emerging markets that have the money and pent-up demand for foreign-made goods.

… A weak euro will give European producers a price advantage in emerging markets. This is especially true for commodity materials, such as chemicals and paper, that compete on price more than brand-name preference.

Can insourcing brings jobs back? Michael Mandel asks at the Wall Street Pit, Can Insourcing Be A Major Source of Job Creation?

Can insourcing be a major source of job creation for the U.S.? The answer is yes, with a caveat. Widespread insourcing–or import recapture, as I like to call it–won’t happen without some help from government policy. In particular, the main role of the government is to provide better data about the relative cost of insourcing vs outsourcing.

Why would better statistics help create new jobs in the U.S. and accelerate insourcing? The reason is hysteresis. Hysteresis is defined as a “lag in response” when the forces acting on a situation have changed. Originally hysteresis worked in favor of keeping jobs in this country, because businesses didn’t want to switch their production to a country thousands of miles away, even if it might be cheaper.But now, with production firmly established in China, India, Mexico, and other low-cost countries, hysteresis is working against the U.S.

Mandel says that the loss of manufacturing ecosystem will make it difficult to bring these jobs back. We have lost suppliers, we have lost some of the “ecosystem” as we “hollowed out” our own manufacturing and our smaller manufacturers will find it very expensive to find the suppliers, etc. if they wish to return manufacturing here. Government can help this by providing better information:

Assuming that production costs really are converging, better information would make it easier for companies to justify the decision to bring jobs back to this country. Right now the safe decision for executives is to continue sourcing from China and India, since they are generally accepted to be ‘low-cost’ countries. It’s like they used to say, you can’t get fired for buying from IBM. It’s the same today–execs can’t get fired for buying from China and India, because everyone assumes that prices are lower there.

In For 2012 Let’s Restore Our “Industrial Commons”, I explained this phenomenon,

We have been dismantling our “industrial commons.” By sending manufacturing out of the country we have been taking apart the supply chains and abandoning the expertise and skills and culture that go with it.

Other Warnings

Last year former Intel CEO Andy Grove sounded a warning about this problem. In How to Make an American Job Before It’s Too Late. Grove wrote that we are not just losing jobs to China, we are losing the “chain of experience” that enables new companies and industries to form and to create new jobs and argues for a national economic strategy to preserve our manufacturing and technology base. He lays out a plan: “rebuild our industrial commons,”

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

We have to start now rebuilding the manufacturing ecosystem – the “industrial commons” that helps us make things here.

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