The loss of American jobs has become a potent political issue. Politicians promise to reverse the trend of offshoring and to restore American workers to their previous position as the premier workforce in the world. Many tout new reshoring initiatives, claiming that jobs will return as wage differentials shrink, the quality of foreign goods falls, and shipping costs increase. Others propose new punitive legislation with penalties for moving jobs to foreign countries while erecting trade barriers to ensure that domestic products can compete with lower-priced foreign goods.
Unfortunately, their promises are empty and fail to consider the underlying causes of offshoring, the probable consequences of trade barriers, or the increased pace of technology. In efforts to gain public favor, existing and wannabe office-holders vow to turn back the clock and return American manufacturing to its heyday in the 1950s. Simple, quick fixes for public consumption ignore the relentless expansion of globalization and the economic interdependence of world economies.
Manufacturing’s Role in the American Economy
According to the Center for American Progress, manufacturing is critical to the American economy, and its success or failure affects the economy as a whole, our national security, and the well-being of all Americans. In his book “Were You Born on the Wrong Continent?,” Thomas Geoghegan goes further, claiming without a strong industrial base, democracy dies.
A study by the Economic Policy Institute confirms the following regarding manufacturing:
- It is the largest and most important sector of the U.S. economy (35.4% of total gross domestic product in 2013).
- It supports 1.4 additional jobs for every one job directly employed in manufacturing.
- It employs a higher share of workers without a college degree than the economy overall.
- It pays workers a wage premium over non-manufacturing workers ranging from -2.4% (Nebraska) to 24.4% (Montana). On average, the premium across the United States is 10.9%.
- It accounts for more than 60% of U.S. exports.
- It is essential to “rebuilding the country’s infrastructure, reducing greenhouse gas emissions, and lowering the nation’s reliance on fossil fuels.”
According to Manufacturing.net, “Manufacturing was the primary reason for post-World War II growth of the middle class, and they are still inextricably linked today.” American manufacturing provided middle-class workers good paying jobs, and their factories were the main employers in American cities throughout the northeastern United States.
The area once referred to as the “Manufacturing Belt” or (“Factory Belt”) is now known as the “Rust Belt,” as job losses significantly impacted cities such as Detroit, Gary, Youngstown, Buffalo, and Toledo. Even companies whose names are synonymous with the towns and cities where they began (such as Hershey, Pennsylvania, and Kohler, Wisconsin) have offshored manufacturing jobs to the detriment of their communities. The collapse of the sector increased unemployment drastically in the forsaken communities, leading to urban decay, deteriorated services, and ghettos.
State of American Manufacturing Jobs
Many of America’s largest companies, once renowned for their manufacturing prowess, have become little more than “brand names with sales forces,” according to Dr. Paul Roberts, former assistant secretary of the U.S. Treasury and associate editor of The Wall Street Journal. As a consequence, the American economy is weaker while income inequality continues to expand due to U.S. workers being forced to compete with foreign workers who earn lower wages, and are often exploited.
Manufacturing Job Losses
According to the National Association of Manufacturers, there were 12.3 million manufacturing jobs in the United States at the end of 2015, accounting for 9% of the workforce. In the last 10 years alone, the U.S. has lost more than 1.8 million manufacturing jobs; since 2000, the losses have totaled almost 5 million jobs, according to CNN Money.
Figures compiled by former U.S. House Representative Betty Sutton (D-OH) from BLS statistics indicated that in the period from 2001 to 2010, the nation lost more than 15 factories a day. While the public has excoriated large companies such as Nike, Dell, Ford, IBM, and Apple for their offshoring activities, public and private companies continue to transfer manufacturing, most recently for operations in Mexico, to retain competitive parity or increase profits.
For example, in February 2016:
- Carrier, a United Technologies subsidiary, announced the closure of two plants in Indiana and termination of 2,000 to move production to Monterrey, Mexico where $3 per hour workers will replace the average $20 per hour wage in Indianapolis.
- Cardone, a family-owned business and Philadelphia’s largest remaining manufacturer, announced that it will shift manufacturing of brake calipers to Matamoros, Mexico leaving 1,336 workers without jobs.
- Dematic Corporation, a manufacturer and supplier of integrated automated technology, announced the move of manufacturing from their home base in Grand Rapids, Michigan, to Monterrey, Mexico, causing a loss of 300 of 300 Michigan jobs.
Despite claims that displaced workers can easily find employment with retraining and employment assistance, the numbers suggest otherwise. According to a 2016 BLS study, only 63.5% of displaced workers found work within two years of termination. Ron and Anil Hira, authors of “Outsourcing America,” claim the record for reemployment of displaced workers is abysmal, and those who are lucky enough to find jobs take significant pay cuts.
Reduced R&D Capacity
Business leaders have long recognized the link between manufacturing and research. Manufacturing is the incubator for technology and science, but it requires proximity to facilities where ideas can be tested and feedback produces innovation. The loss of manufacturing capability reduces a country’s ability to develop breakthrough technologies and new, improved products.
Hank Nothhaft, the retired CEO of Tessera Technologies, notes is his 2011 book “Great Again” that “in our arrogance and our own naiveté, we told ourselves that so long as America did the ‘creative’ work, the inventing, we could let other nations do the ‘grunt’ work – the manufacturing. We did not yet understand that a nation that no longer makes things will eventually forget how to invent them.”
Other business leaders interviewed in a New York Times article agree:
- Stephen S. Cohen, co-director of the Berkeley Roundtable on the International Economy at the University of California, Berkeley, states, “In order to innovate in what you make, you have to be pretty good at making it – and we are losing that ability.”
- Franklin Vargo, former Vice President of the National Association of Manufacturers, warns, “At some point we will go below critical mass and then the center of innovation will shift outside the country and that will really begin a decline in our living standards.”
- Alan Tonelson, a research fellow at the United States Business and Industry Council, argues that “it is hard to imagine how an international economy can remain successful if it jettisons its most technologically advanced components.”
While U.S. companies continue to invest in R&D, a growing number rely on research facilities located overseas where production occurs. In a Bloomberg article, Andy Grove, former president and CEO of Intel, bemoaned the loss of high-tech manufacturing such as televisions, cell phones, solar panels, and lithium-ion batteries to overseas firms due to exported research. He questioned, “What kind of society are we going to have if it consists of highly paid people doing high-value-added work – and masses of the unemployed?
Historians consider World War II an “industrial war,” between two of the world’s greatest economies – Germany and the United States. America would prove to be the only country in the world with the capacity to fully equip its armies, but those of its allies as well. Its ability to out-produce the rest of the world combined and convert from civilian production to military production faster than its enemies or allies was the key to victory.
Manufacturing is critical to the security of the county. However, the “continued migration of manufacturing offshore is both undercutting U.S. technology leadership while enabling foreign countries to catch-up – if not leap-frog – U.S. capabilities in critical technologies important to national security,” according to a report by High Road Strategies. A 2013 study by the Pentagon’s Defense Science Board warned that the integrity of all U.S. defense systems would become increasingly difficult due to “offshore manufacturing of components, combined with the global sourcing of commercial technologies.”
A case in point is the development and production of machine tools – machines that make machines – which are the heart of an industrial economy. This industry, once dominated by America, is integral to the production of high-quality precision parts, faster manufacturing cycle times, and lower costs. Even though the U.S. is the second largest machine tool consumer behind China, the industry has virtually disappeared in the U.S., now dominated by overseas suppliers such as Germany, China, and Japan.
Causes of Job Losses
The loss of American jobs is the result of a confluence of disparate factors including the following:
1. Outsourcing to Offshoring
Outsourcing – transferring non-core business functions to external suppliers – became hugely popular during the 1980s and 1990s. The practice of shifting work to a specialized, more efficient contractor enabled companies to reduce and control costs, focus on critical functions, and supplement their capacities. When such transfers occurred within the country, the impact on total employment was minimal.
According to a report by the United States Government Accountability Office, offshoring began with the shift of semiconductor and software production to China and India in the 1960s, justified as necessary to compete in foreign markets. Facing increased competition from cheap overseas products and high labor costs and regulations in the U.S., companies were quick to take advantage of foreign workers earning less than 10% of an American worker’s average wage.
The free transfer of technology accompanies the transfer of jobs overseas. While countries have historically protected the intellectual property considered to be critical to their economy, offshoring firms have given the expertise away, actually transferring the advantages of the American workers to their overseas counterparts.
2. The Fallacy of Globalization
Proponents of offshoring or “global sourcing” promised that the consequences of moving work to countries with lower wages and fewer workplace regulations would benefit Americans through lower consumer prices and increased profits for company shareholders, spurring economic growth. As a consequence, governments around the world removed trade barriers and opened markets. Unfortunately, the benefits have been hard to quantify or are missing entirely.
American economists on both sides of the political spectrum have long advocated globalization and free trade based on the premise that those low-wage countries who sell lower priced products will use their profits to buy luxury, higher-tech products from the countries buying their products. In their scenario, displaced workers quickly find new jobs, creating an endless cycle where everyone wins. This expectation is false, as many are now discovering.
Corporate directors and managers, lured by the promise of extra profits and lax regulations, do not consider that workers displaced by offshoring remain unemployed or work for lower wages – and as a result, purchasing power declines and domestic markets shrink. As Harvard economist Branko Milanovic recognizes in his book “Global Inequality,” the “big losers from the current wave of globalization have been working- and middle-class people.”
Politicians expecting to enhance economic growth and higher government revenues must instead deal with enormous increases in trade balances, national debt, and income inequality among its citizens:
- According to the U.S. Census Bureau, the United States trade imbalance ballooned from an average of $5.5 billion each month in 1991 to more than $60 billion per month in 2016.
- The U.S. Treasury Department reported a national debt of $5.6 trillion in 1999 and $18.1 trillion in 2015.
- In the mid-1970s, the top 1% of American families captured about 11% of the nation’s total income while the bottom 90% received 67.5%. By 2012, the 1%’s share had doubled to 22.5% while the bottom 90% fell to less than 50%, according to research compiled by Emmanuel Saez.
3. Corporate Interests and Wall Street Influence
In 1953, the president of General Motors, Charles Wilson, responded to a question during his confirmation hearing to become Secretary of Defense that “for years, I thought what was good for the country was good for General Motors and vice versa.” The belief that corporations still represent their country of origin is considered anachronistic today. America is perhaps the only industrialized nation in the world that accepts the concept that a company’s economic interests trump its patriotic responsibilities. As Professor Gary Pisan says in a Harvard Business School interview, “The interest of companies and the country [as a whole] have diverged.”
This attitude – the lack of concern for any consequences except profitability – has been promoted since the early 1970s by Nobel Prize-winning economist Milton Friedman. Dr. Friedman famously declared that there is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, that engages in open and free competition without deception or fraud.
Multinational corporations, the majority based in the United States, have shifted manufacturing overseas to lower-wage third-world nations to maximize short-term profits and stock prices. Labor costs in Mexico are 16.3% ($6.20) of the U.S. average manufacturing wage and benefit costs of $38. Labor costs in countries like China ($3.30 per hour) and India ($1.70) are even lower, according to Deloitte 2016 Global Manufacturing Competitiveness Index.
Steve Pearlstein, a columnist with The Washington Post, attributes the offshoring stampede to exploit the differences to the rise of private-equity companies like KKR, the Carlyle Group, and Bain Capital. To reap the highest return on their investment, the new capitalists “load up company executives with so much stock and stock options that they don’t hesitate to make difficult decisions such as shedding divisions, closing plants, or outsourcing work overseas.”
Just as “bad money drives out good money” – Gresham’s law – labor-intensive industries will almost always follow the path of low wages, such as, being subject to overseas outsourcing, according to McKinsey & Company.
Measures to Increase Jobs
Job losses and the economy have become potent political issues. Politicians, economists, and business leaders have proposed a variety of different solutions to reverse the trend and ensure America’s position as a super-power in the future.
Suggestions to restore American manufacturing jobs include the following:
1. Repudiation or Revision of Trade Agreements
Some claim that North American Free Trade Agreement (NAFTA) between Canada, the United States, and Mexico has been disastrous for American workers. Since the treaty lacks adequate enforcement provisions to ensure a level playing field, U.S. workers compete directly in a “race to the bottom,” according to Leo Girard, international president of the United Steelworkers. He contends that the Trans-Pacific Partnership (TPP) will force American and Mexican workers alike to compete with “forced and child labor in places like Brunei, Malaysia, and Vietnam.”
Proponents of free trade claim that changes in NAFTA or failure to pass the TPP will force poor Americans to pay more for necessary consumption items. Donald J. Boudreaux, professor of economics at George Mason University, claims that “trade deficits are generally good for America.” He substitutes “capital account surplus” for “trade deficit” and asserts that the trade deficit is “a signal that global investors are confident in America’s economic future.” Boudreaux contends than China’s currency manipulation does not harm the economy, but “benefits Americans at the expense of the Chinese.”
Given the divergence of views on free trade, the likelihood of significant revisions in NAFTA or rejection of TPP is, at best, uncertain.
2. Education and Retraining of American Workers
According to a study by Duke University’s Fuqua School of Business, executives often justify their offshoring activities with a claim that American workers lack the necessary skills to compete in the modern manufacturing world. Such claims are dubious at best since many Americans are required to train their low-wage, poorly trained foreign counterparts before the move. Nevertheless, there is evidence that additional training would benefit most displaced workers.
The safety net for displaced American workers is miserly compared to most industrialized countries. Unemployment benefits are of shorter duration and displaced workers lose health and retirement benefits in addition to income. In 1962, President John Kennedy established the Trade Adjustment Assistance Program to help workers whose jobs were lost due to trade liberalization; Congress expanded the benefits in 2002. However, the program has been a failure in the eyes of many, especially conservative think tanks.
A 2014 report by The Heritage Foundation claims that workers who participated in retraining programs were less likely to find jobs and more likely to have lower incomes than workers who did not participate in the program. The authors of the report assert that “Congress should not spend $1 billion a year [Note: the actual budget for TAA was about $604 billion in 2015] on a program that does not help, and may well hurt, unemployed workers.” Cato Institute’s Dan Ikenson asks, “Why should we treat people who lose jobs or can tie their job loss in some way to trade any differently than we treat other people who lose their jobs?” This attitude fails to consider the deleterious impact on the manufacturing base.
It is likely that retraining programs will continue and perhaps be expanded and improved in the future. However, it is clear that additional efforts to retain jobs initially are needed.
Optimists believe that the jobs lost overseas are returning due to the natural consequences of the free market. They suggest that an increasing number of manufacturers will return exported jobs to America – reshoring – as wage differentials between countries disappear and the benefits of manufacturing proximity to markets become apparent. They point to the number of jobs that are returning or coming to the U.S. for the first time – more than 249,000 manufacturing jobs between 2010 and 2015 – according to the Reshoring Initiative 2015 Data Report. The Association for Manufacturing Excellence claims that many companies that had considered going offshore for their production “are changing their minds and bringing jobs back to America.”
Unfortunately, the rate of restoring is a myth. Despite four years of increases in the number of jobs returned to the United States, the number of positions offshored has consistently and significantly exceeded the reshored jobs, according to the 2015 A.T. Kearney U.S. Restoring Index. One of the major factors in the decision to offshore production is access to a market, especially China. While the wage differential may have narrowed, the desire for access remains. As a requirement to sell to Chinese consumers, the Chinese government often requires a partnership with a native company, free technology transfers, and a variety of laws regarding cultural, agricultural, and economic security as well as social stability.
Furthermore, the number of jobs associated with a reshored factory is often considerably less than the number jobs initially offshored. Rather than paying higher labor costs in the U.S. to an equivalent number of workers at the foreign site, companies are investing in automation as the cost of robotics have fallen 40% to 50% since 1990. Since 2010, manufacturing output has increased 20% while the number of manufacturing jobs has risen slightly more than 5%. As a consequence, many economists believe it is unlikely that the number of manufacturing jobs lost overseas will never be fully recovered.
4. Financial Incentives and Penalties to Manufacturers
For years, individual states have engaged in giveaway programs to encourage corporate relocations across state borders. While such incentives – tax credits and abatements, grants, and investments – might benefit one community, another community loses. From a national perspective, there is no gain in the number of jobs involved. Furthermore, there is some question whether incentives work. In the case of Carrier moving 1,400 jobs from Indianapolis to Mexico, the company had received a $5.1 million federal tax credit in 2013 to revamp up local production, according to CBS Indianapolis.
The U.S. Senate introduced the Bring Jobs Home Act in 2012 and 2014, and the House followed in 2015. The Act failed to pass each time. Under its provisions, companies would lose the standard business deduction for moving expenses when offshoring jobs and a 20% tax credit for reshoring jobs.
Critics claim the law is more symbolic than effective. According to James Hines, professor of law and economics at the University of Michigan, “It adds up to a trivial amount of money. Given how many multinational firms we have, it’s impossible that it has any effect on their behavior.”
Disincentives to offshoring manufacturing work include restrictions on the awarding of federal or state contracts, loss of potential federal loans, and a requirement under the Worker Adjustment and Retraining Act (WARN) for companies with 100 or more employees to notify employees at least 60 days before the plant closing. Such disincentives have been ineffective in stemming the number of jobs moving overseas.
Historically, tariffs have been the most useful tool to protect a country’s industrial base from foreign competition, the antithesis of free trade agreements. For decades, scholars blamed the passage of the Smoot-Hawley Tariff Act as the primary cause of the Great Depression in the 1930s. In recent years, opinions regarding the impact of the tariffs have softened with other factors such as financial speculation, agricultural overproduction in the 1920s, and Federal Reserve actions considered to be more at fault.
As political pressure builds to reject TPP and amend NAFTA, it is possible that Congress will enact specific tariffs aimed at the products produced by companies who have offshore production.
Needing a New Relationship Between Federal Government and Business
Many industrialized countries have initiated trade policies to protect and expand businesses located within their borders – but the U.S. is unique in its virtual “hands off” stance. While government involvement (or interference, as some claim) in business is controversial, failing to retain manufacturing capabilities exposes the nation to economic and military risks.
Paul Roberts, economist and author of “How the Economy was Lost: The War of the Worlds,” claims “A country that offshores its own production is unable to balance its trade. Americans are able to consume more than they produce only because the dollar is the world reserve currency. However, the dollar’s reserve currency status is eroded by the debts associated with continued trade and budget deficits. The U.S. is on a path to economic Armageddon.”
Despite China’s growth, America remains the largest consumer market in the world, and overseas firms seeking access should be willing to move manufacturing within its borders as a condition of access – a requirement long in place for foreign companies hoping to sell in the Chinese market. At a minimum, Congress should identify technology and essential industries that are critical to the nation’s security, and prohibit any attempts to transfer affiliated work or knowledge beyond our borders. Products that compete with these industries should be restricted or taxed to ensure a level playing field.
Other federal efforts needed to retain and protect domestic manufacturing include:
- Improving Infrastructure, Especially Communication and Data Networks. A 2014 report by the Economic Policy Institute (EPI) analyzed infrastructure investments ranging from $18 billion to $250 billion annually for 10 years. On the low end, EPI projected a first-year increase in GDP of $29 billion and 216,000 net new jobs; at the high investment of $250 billion, GDP would increase $400 billion in the first year with 3 million new jobs.
- Encouraging Innovation. Innovation is critical to economic development, with a “clear statistical link between innovation and gains in the standard of living,” according to a Goldman Sachs report. The 2015 Bloomberg Innovation Index ranks the U.S. sixth in the world behind South Korea, Japan, Germany, Finland, and Israel.
- Expanding Robotics and Automation. While promoting automation appears counter-intuitive to job growth, the reverse is true. While automation reduces the number of low-skilled workers in a particular site, a study by The Boston Consulting Group projects the demand for higher-skilled workers to add 700,000 to 1.3 million factory jobs in the U.S. by 2020. South Korea, Germany, and Japan use two to three times the number of robots per 10,000 workers as the U.S., according to the International Federation of Robotics.
- Attracting and Retaining Highly Skilled Immigrants in STEM Fields. While immigration continues to be a controversial subject, the advantage to a country’s economy from the impact of trained workers in the science, technology, engineering, and mathematics field is not. Nevertheless, foreign students earn more than half of the advanced degrees in STEM subjects awarded by U.S. colleges and universities, according to Pew Research Center. Under current law, foreign graduates with STEM degrees must leave the United States within three years of graduation.
- Eliminating Corporate Inversions and Corporate Tax Loopholes. The practice of relocating a corporation’s legal domicile to a lower-tax country while keeping its operations in its higher tax country of origin is one of the more egregious methods multinational companies use to escape taxation. Use of such schemes as the “Double Irish, Dutch Sandwich” or Apple’s use of international tax laws (reported on by the International Business Times) should be restricted or eliminated.
- Encouraging Repatriation of Corporate Profits Held Offshore. By adjusting U.S. corporate tax rates to the median corporate tax rate of the world and providing additional incentives to multinational companies to invest in factories and jobs within the United States, a substantial portion of the estimated $2 trillion held offshore would be recovered for the benefit of the U.S. economy.
- Launching a National Public Relations Campaign to Buy American. The goal of the campaign should be to reestablish the link between companies based in the United States and our national interests. By encouraging a preference for products made in the United States, consumers can put social pressure on companies to keep jobs domestically.
If America is to remain a superpower in generations to come, we must take immediate steps to stem the flow of jobs overseas and rebuild our manufacturing base. We would be wise to heed the warning of Professor Gary Pisano, who states, “Manufacturing capability takes a while to erode. But the damage is almost irreversible – that’s the concern.”
Many Americans employed in white collar or service jobs do not understand the risks of offshoring, believing that their jobs are not transferable. This is not true. In a Foreign Affairs article, former Federal Reserve Vice Chairman Alan Binder estimates that 28 to 42 million U.S. service jobs are susceptible to offshoring. Failing to save our manufacturing jobs will be inevitably followed by the loss of our service jobs.
Are you worried about the loss of jobs overseas? Should we renegotiate the terms of NAFTA or reject the TPP?