In the American manufacturing sector, perception and reality often become confused. One reason: American manufacturing employment has declined from a high of 19.5 million workers in 1979 to 12.3 million today. In turn, many assume the U.S. industry has become hollowed out. Another reason: shoppers often claim they see few “Made in America” products on retail shelves and blame imports as the culprit. The reality of the situation, however, is more complex.

A Real Boost from Advanced Manufacturing

Today, advanced manufacturing technologies are infusing the U.S. sector with greater promise than ever. As a result, America is quickly becoming the most competitive manufacturing nation in the world, according to the 2016 Global Manufacturing Competitiveness Index published by Deloitte. The report predicts the United States will take over the number one position from China by the end of the decade, while Germany holds firm at number three.

The United States continues to improve its ranking from 4th in 2010 to 3rd in 2013 to 2nd this year, the study says. “As the digital and physical worlds converge within manufacturing, the report states, “executives indicate the path to manufacturing competitiveness is through advanced technologies, ranking predictive analytics, Internet-of-things (IoT), both smart products and smart factories via Industry 4.0, as well as advanced materials critical to future competitiveness.”

Misperceptions Continue

As the direction of American manufacturing unfolds, misperceptions about the current industry often dominate the media. Why is this?

As stated earlier, U.S. manufacturing employment has declined significantly since 1979. Many assume this is the result of moving U.S. factories abroad. But the primary reason has everything to do with technology, innovation and automation, which have empowered fewer employees to produce much more value in less time. This is reflected in the fact that “productivity in the manufacturing sector has been growing both absolutely and relative to other sectors of the U.S. economy,” say Theodore Moran and Lindsay Oldenski of the Peterson Institute for International Economics.

Another factor impacting the decline in manufacturing jobs is this: depending on the specific sector, “30 to 55 percent of manufacturing jobs in advanced economies are in service-type functions,” McKinsey Global Institute reports. As manufacturers continue to focus on their core competencies and contract various functions to suppliers, many of these service-related jobs, like research and development, marketing, design, sales, accounting and payroll, and packaging, are shifted to local accounting, marketing, payroll, and other highly specialized service firms that offer greater value. In turn, government statistics would indicate a decline in manufacturing jobs and an increase in the service sector.

More than half of U.S. imports are intermediate inputs used in the manufacturing of U.S. products. This helps U.S. firms remain globally competitive.

Another surprise to many: American manufacturing value-added output has not decreased. With the exception of recessionary periods, it actually has increased each year, jumping from $545 billion in 1979 to $2.1 trillion in 2014, the Bureau of Economic Analysis reports. And when accounting for inflation, the trajectory is the same.

What is occurring in the manufacturing sector already has occurred in the agricultural sector. According to the Bureau of Labor Statistics, in 1940, 9.5 million U.S. workers were employed on farms, but by 2014, this number had declined to 2.4 million. Yet, U.S. agricultural output skyrocketed.

When walking down the isles of many retail stores, few products carry the “Made in America” label. And there’s a good reason. Today, an increasing number of American manufacturers produce high margin, higher technology products that incorporate significant levels of intellectual property, such as medical equipment, pharmaceuticals, aerospace equipment, and computer chips, and no longer focus on consumer goods to the extent they did in the past. In turn, many consumer products are imported.

The Truth About Imports

Numerous Americans believe imports are bad for the economy for various reasons. One involves the negative impact of imports on gross domestic product (GDP). Thus, in 2015 real U.S. GDP was $16.3 trillion, according to the Bureau of Economic Analysis. One of the main line items, Net Exports of Goods and Services or the difference between exports and imports, was -$545 billion. As a result, many draw the conclusion that imports are damaging to the economy. In reality, it’s not that simple.

In The Spotlight

Imports offer American consumers greater choices, a wider range of quality, and access to lower-cost goods and services. They also create competition, forcing domestic producers to improve value by increasing quality and/or by reducing costs. Plus, since imports like inexpensive clothing allow the American family to purchase more goods for less money, stretching the dollar, more disposable income is available for other things, such as education, health care and mortgage payments.

Imports also help keep inflation down, which is one of the most important factors in raising our standard of living. And since more than half of all U.S. imports are intermediate inputs used in the final production of U.S. products, they also help U.S. manufacturers remain globally competitive.

Of course, attractive imports that compete directly with U.S.-produced products do cause U.S. job dislocations. But the number is much smaller than generally assumed. And even more surprising is the number of U.S. jobs created from imports. Research by the Heritage Foundation, a Washington, D.C.-based think tank, cites “the increased economic activity associated with every stage of the import process helps support American jobs. A lot of them.”

For example, the Heritage Foundation says over half a million jobs are supported by imports of Chinese-made clothes and toys alone. “These are jobs in fields such as transportation, wholesale, retail, construction, and finance, and in a myriad of other activities that are involved in turning a manufactured product into a good that is ready for use by the average American.”

The Real Impact of Investing Abroad

When U.S. companies decide to invest abroad, labor cost is only one of many factors considered. Other factors, which often are more important, include the availability of skilled workers, productivity levels, the quality of local infrastructure, political stability, rule of law, proximity to key markets, and ability to repatriate profits.

A 10% increase in employment at a foreign manufacturing affiliate is associated with a 3.8% increase of employment in its U.S.–based operation.

That’s why the United States, which does not offer cheap labor, remains the top destination of the world’s foreign investment. According to Daniel Ikenson, Director of The Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, “As of 2013, nearly $1 trillion of foreign direct investment was parked in U.S. manufacturing, by far the number-one manufacturing investment destination world-wide. Clearly, the most successful foreign-headquartered companies see a future for U.S. manufacturing.”

When U.S. manufacturers invest or produce abroad, the impact on the United States also is very different than public opinion might reveal. Hence, “foreign expansion of U.S. manufacturing multinationals has helped to strengthen, rather than weaken the U.S. manufacturing base even though it employs fewer workers,” Theodore Moran and Lindsay Oldenski claim. This conclusion is based on data from U.S. manufacturing multinationals over a 20-year time period. The bottom line: “U.S. multinationals that increase their investments abroad simultaneously increase the size and strength of their manufacturing activities in the U.S.”

For example, a U.S.-based manufacturer may establish a production facility in China to support its expanding Chinese business. In turn, the U.S. affiliate likely will import various components from its U.S.-based facility, as well as its deep intellectual property: creations of the mind that are incorporated into the objects. Through this process, the U.S.-based facility benefits.

When U.S. firms establish manufacturing facilities abroad, some plants in the United States may close as others open. However, Theodore Moran and Lindsay Oldenski’s data shows that the creation of jobs and the increase of sales abroad by U.S. multinationals are both associated “with more jobs at home overall.” And their statistics are impressive.

For example, a 10 percent increase in employment at a foreign manufacturing affiliate is associated with an increase in its U.S.–based operation of 6.2 percent in R&D spending, 3.9 percent in sales, 3.8 percent in employment, and 3.8 percent in exports. Similarly, a 10 percent increase in sales at a foreign manufacturing affiliate is associated with an increase in its U.S.–based operation of 8.2 percent in R&D spending, 2.5 percent in sales, 2.2 percent in employment, and 2.6 percent in exports. And this does not include the increases experienced by U.S.-based service firms associated with the foreign-based operation.

The misperception and myths surrounding the American manufacturing industry, no doubt, continue to perpetuate. Nevertheless, the reality is quite different.

This article appeared in Global Impact, a Great American Insurance Group publication.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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