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Bite the Bullet on Free Trade? by Jeff Moad - Managing Automation Interview with Eamonn Fingleton, author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity In 1999, at the height of the dot-com bubble, author Eamonn Fingleton published "In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity," in which he predicted the collapse of the so-called Internet economy and warned that the United States was in the process of squandering its legacy of manufacturing leadership. More recently, the Tokyo resident has written in detail about how first Japan and now China have taken advantage of free trade policies to grow their manufacturing industries at the expense of the U.S. Recently, Managing Automation Executive Editor Jeff Moad spoke with Fingleton about the state of manufacturing in the U.S. Q: Why has American manufacturing been allowed to atrophy? Who's responsible? A: There are many factors and many actors. Probably the main responsibility lies with the economics community -- economists. American manufacturing when I was young - I'm 57 - was clearly dominant worldwide. The leadership that America enjoyed in the 1950s and 1960s has now utterly gone, in large measure because America has taken an inappropriate approach to trade over those years. In doing so, it has been advised by economists who have very little understanding of the real world. They proceed from models that assume away much of the reality of the world. Their basic point has been that free trade is the perfect system and that it will work for the United States even if other nations do not reciprocate. That's at the heart of the problem. Other nations - starting with Japan - discovered that operating one-way free trade - meaning taking advantage of American markets and closing their own - is a very powerful formula for growth. They've been able to use that regimen to extract key production technologies from the United States. If you wanted to sell in Japan, over the years the way to do so was to set up an operation on Japanese soil and transfer your technology there. Korea copied Japan. Taiwan copied Japan to an extent. China is copying Japan now in this approach to trade. This was devastating to the United States in several ways, of which the technology transfer phenomenon is the most obvious. Q: Are there technologies we should be protecting from transfer to foreign competitors today? A: I think the cupboard is almost bare in the United States now. Certainly there are few technologies in the United States that are not available to someone else as well, whereas 30 or 40 years ago the United States had a monopoly on crucial technologies. It is important to emphasize that there are two different types of technology. One is fundamental scientific breakthroughs such as the invention of the transistor by Bell Labs. ... But then there is the technology of production. Once you've discovered the principle of the transistor, how do you mass produce it in the way that it's being mass produced today where it's costing perhaps, per unit of computing power, a small fraction of a millionth of what the original transistors cost to make in the 1950s? The production technology is something that the Americans tend to overlook, but it is actually in many ways more important than the ability to invent fundamental breakthroughs. Q: Are there manufacturers in the United States who still retain proprietary advantage in terms of production processes? A: Obviously there are still some big names in American manufacturing. Boeing is one. Intel is another. ... But Boeing is being rapidly hollowed out. Boeing has gone completely global. It is sourcing from all over the world. The next Boeing plane, the 787 - to be launched in a couple of years, will be more Japanese than American in its production. Intel's an interesting case because its success is based not so much on manufacturing expertise as on control of a standard. It is, no doubt, a capable manufacturer. But its manufacturing expertise is not the critical element of its success. Contrast that with Toyota, which is successful and highly profitable not because of any one or collection of patents. It's successful because it does the manufacturing process better at virtually every level. Q: Isn't the low cost of labor in places such as China really the cause of competitive imbalance in manufacturing? If so, is the hollowing out of American manufacturing inevitable? A: If you are sufficiently capital intensive, it is not a problem that other countries have low wages. If, however, your capital intensity has been depleted over the years simply because managers have not been investing, then progressively you are in trouble from low-wage countries. And that is what is going on at the moment. It's worth remembering that back in the 1950s and 1960s, wages in the United States were far higher than in the more advanced parts of Western Europe and as much as four or five times higher than in Japan. These days, Germany, Japan and Switzerland are ahead of the United States in wage rates translated at current market exchange rates. So the United States [in the 1950s and 1960s] could compete perfectly well with low-wage countries, but it could do so because it was more capital intensive than those low-wage countries. If American workers were working with better machines, the fact that they were paid more was not a major problem with competitiveness. Q: Is China's recent devaluation of the yuan an indication that it is opening to free trade policies? A: My interpretation of China's recent move on the yuan is that it is doing something for political purposes. What it has done so far at least has not made much difference to the trade relationship between China and the United States. But it tends to placate those people in the United States who had been urging a revaluation of the yuan, and it holds out the hope that there will be further revaluations. Q: Is it too late for U.S. manufacturing to regain its advantage by investing in superior capital equipment? A: The policy in question is how to deal with the trade problem. If the present trade regimen continues where more and more countries can pursue the East Asian model of exporting but not importing to the same extent, then you will see a continuation of the process of decline in the United States. ... The policy that is required is tariffs. Tariffs are regarded quite erroneously as somehow a know-nothing strategy. [But] it's worth remembering that, up until Dwight Eisenhower, every Republican president had been a protectionist. Tariff levels, as they existed in 1970, would probably be high enough to not only stop the rot in the United States, but turn things around. In 1970, the United States was not dysfunctional. It was much more effective than it is now. So it's a question of biting the bullet in terms of the trade policy. Q: Do you see any indication that that will happen? A: Politics works by counting heads, and, these days, because manufacturing is a small proportion of the total employment picture in the United States, far fewer workers now have an interest in protecting manufacturing than was the case in the early 1950s. Far more people work in services now, and, therefore, they feel they will be net losers from tariffs because their cost of living will go up, and their jobs are not at risk. So the political calculus is more difficult now than it used to be. Q: The book you are currently working on looks at an unspoken alliance between Japan and China. What impact will this relationship have on manufacturers in the United States? A: I think that China and Japan are economically much closer than most people in the United States understand. Japan imports more from China than the United States does. Japan has invested very heavily in China, has transferred significant amounts of technology to China. So there's a lot there that is not readily apparent to policy makers in the United States. Q: American manufacturers continue to improve productivity through automation technologies. How important will this be going forward? A: Automation is very important, and investment in high-productivity manufacturing techniques is crucial. But I sometimes wonder how much of that is really going on in the United States now. It's hard to get a reliable assessment. But, given that so much of American manufacturing has gone offshore, maybe much of the investment is now in countries outside the United States. ... Automation is great, but if it's just automation in factories in Japan or Korea or Taiwan, it's not helping the American economy. SOURCE: Managing Automation Articles: Reflections On General Electric's Global Strategy |
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