Globalization and new technologies are having a profound impact on the U.S. manufacturing industry. This is affecting business worldwide and may demand new strategies for your firm.

The Impact of Converging Forces

During the 1980s, the U.S. manufacturing industry appeared to be in rapid decline. However, since then, this sector has made an astonishing comeback.

The integration of traditional manufacturing, new technologies, national markets, and improved supply chain management has transformed American manufacturing. As a result, productivity has climbed to new highs, and due to the American ability to change and improve, innovation is flourishing. For instance, the use of muscle on the factory floor is a thing of the past. Today, self-directed workers operate in teams and apply more sophisticated skills to create and run new processes.

Manufacturing Growth Outpaces Economy

The U.S. manufacturing sector has grown faster than the rest of the economy, according to the National Association of Manufacturers. From 1992 through 1997, manufacturing real gross domestic product (GDP) grew by 5.2% per year, compared to 3.1% for the overall economy. And manufacturing output contributed 29% of GDP growth in the 1990s, much more than its 21.5% contribution in the 1980s.

Federal Reserve Board statistics show that total manufacturing output rose by 55% between 1992 and September 2000. During this period, domestic output of durable goods almost doubled, output of motor vehicles and parts rose by 75%, output of fabricated metal products increased by 36%, output of machinery and equipment climbed by 160%, and output of electrical machinery rose by 500%, says the CATO Institute, a Washington, D.C. think tank.

Manufacturing Exports Continue to Grow

Approximately one-sixth of total U.S. manufacturing output is exported, according to the National Association of Manufacturers. And for some industries, the percentages are much higher. For example, 54% of U.S. aircraft production is exported, 49% of machine tools, 46% of turbine and generator output, and 45% of printing machinery.

Although U.S. manufacturing exports continue to grow, tariffs on industrial goods in developing countries remain high. In fact, the World Bank says the applied average tariff rate in developing countries on industrial goods is 13%, as compared with 3% for industrial countries. And non-tariff barriers add to the frustration. Being competitive in this environment is difficult at best.

Globalization, Wages and Employment

Data from the Bureau of Labor Statistics from 1992 through 2000 indicates that manufacturing employment increased 2%, about the same rate as total non-agriculture employment. However, the number of U.S. manufacturing jobs has dropped from its high of 20.3 million in 1980, representing 22% of non-agricultural employment, to 18.5 million in 2000, representing 14%. And since the 1970s, wages of less-skilled workers have fallen relative to those of more skilled workers. What is responsible?

International trade has had a minimal effect on job loss, and as the International Monetary Fund concludes, a modest effect on wages and income inequality. Thus, as the U.S. demand for less skilled workers decreases, wages for the less skilled also decrease.

Technology Is the Real Displacer of Jobs

Productivity in U.S. manufacturing grew by 4.4% annually from 1996 through 1998, according to the National Association of Manufacturers. And due to automated technology, fewer workers are required to complete the same task. There are many examples of this. The CATO Institute reports that in the last two decades tens of thousands of telephone operators and bank tellers, for example, have been displaced from their jobs, not by imports, but by computerized switching and automated teller machines.

Scholars and leaders of industry alike have argued that even if a greater level of protectionism were implemented, low-technology jobs would still disappear. Robert Reich, former U.S. Secretary of Labor, stated that “Even if millions of workers in developing nations were not eager to do these [low-technology] jobs at a fraction of the wages of U.S. workers, such jobs would still be vanishing. Domestic competition would drive companies to cut costs by installing robots, computer integrated manufacturing systems, or other means of replacing the work of unskilled Americans with machinery that can be programmed to do much the same thing.”

Imports Put Few Jobs at Risk

There is no doubt that international trade sometimes causes employment to increase in some sectors while decrease in others. But exaggerated fears of massive job losses due to imports are misplaced. Contrary to public belief, only a very small percentage of American jobs are at risk from imports.

The CATO Institute states that less than 2% of total non-farm workers are at risk from imports. The Institute contends that workers in non-manufacturing sectors compete with few, if any, foreign goods or services. And in the manufacturing sector, only a very small number of workers are in industries considered import-sensitive, defined as having an import penetration of at least 30%.

The Economic Report of the President, provided to Congress in February 2000, came to a similar conclusion and determined that “roughly 10% or less” of worker dislocation is attributable to trade. Since 1980, the annual volume of imports to the United States has more than tripled. During that same period, the number of Americans employed has increased by 41 million.

Outsourcing and Foreign Direct Investment

Outsourcing has become a common practice of U.S. manufacturers designed to improve productivity — but to some extent, has artificially changed the manufacturing employment picture. Why?

Jobs of an in-house accounting department of a manufacturing company, for example, are categorized as “manufacturing jobs” by the Census department. But if the company eliminates the in-house accounting department and contracts these services to an outside firm, the newly created jobs are categorized as “service jobs” by the Census department. This, to some extent, artificially lowers the manufacturing job count.

Stated in Deloitte & Touche’s report, Global Investment Trends of U.S. Manufacturers, “high-wage countries captured 87% of U.S. foreign direct investment in 1999.” This negates the popular fear that in general, U.S. manufacturers are seeking low-cost facilities in order to cut labor costs, which in turn, displaces U.S. jobs.

How Does This Impact Your Global Strategy?

Although U.S. manufacturing activity is currently decreasing due to slowing U.S. economic growth, the industry is continuing to evolve at a rapid pace. The impact on your business may be significant, possibly forcing you to reassess your global strategy.

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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