Will America Become Great Again?
Donald Trump’s promise to make America great again was soundly embraced by US voters, but not as much by policymakers. A glaring sign is that he received only 6.7% of the vote in Washington DC compared to Harris’ 92.5%. As a result, since election day, experts have been debating his promises.
For many, Trump took advantage of Democrats’ inability to address the manufacturing employment crisis in the US, which many suggest as the most structural reason behind his win. Since 2000, more than five million jobs were lost in the sector, and the Rust Belt, home to some of the strongest industrial unions in the country, leaned this time for Trump.
As in Europe, this situation has fuelled a compelling story about the rise of the far right. According to the argument, the ones to blame are the social democratic parties that embraced globalisation, losing touch with their base. Yet, a recent discussion has raised the question: what has driven the decline in manufacturing —productivity or globalisation?
Productivity
In a book published last year, Harvard’s Robert Lawrence argued that the declining share of manufacturing jobs in the US would have occurred even in a country with no foreign trade. The key would lie in the sector’s high productivity coupled with the economy’s overall unresponsive demand.
The argument is as follow. After a certain point, when people see their income increase, they are more likely to consume services than goods – a pattern observed in every country Lawrence studied. Furthermore, productivity, our capacity to produce the same with less labour, grows faster in manufacturing than in services. As a professor once explained to me: It is easier to innovate the production of a glass than to revolutionise how to serve food in a restaurant.
By drawing upon these two facts, Lawrence narrates the West’s manufacturing crisis as the rise of services to the detriment of manufacturing employment. In Europe and the US, high investments made manufacturing productivity grow strongly, making the economy grow rapidly while making industrial goods cheaper and salaries higher. Accordingly, people chose to consume more services, pushing the share of service employment upwards. As a result, countries transitioned from economies centred on manufacturing to ones dominated by services, and since services’ productivity grows more slowly, overall economic growth declined.
Source: NBER-CES Manufacturing Industry Database
Globalisation
Michael Pettis, from the Carnegie Endowment for International Peace, disagrees with Lawrence. In a piece written a few months ago, he argues that the unique position of the US in the world economy has had a detrimental effect on its manufacturing sector.
The US consumes roughly half of global excess surpluses. This means that countries running exports economies have found in the US the final consumer for half of the excess goods their economies cannot absorb. This situation, however, is the result of some countries devaluation policies, most notably China’s, in Pettis’ view.
The argument is as follow. When a country pursues the undervaluation of its currency enacts a subsidy from consumers of foreign goods, that now face higher prices, to exporters of local goods, that now can sell at lower prices. As in a global economy, the supply and demand for goods must balance, the rest of the world must adjust by producing fewer goods or buying more. Thus, when those countries undervalue their currencies, they basically overvalue the dollar, which yields the opposite effect in the US – exporters suffer, and importers flourish.
The argument is specifically critical of China, since 1978 runs an economy annually investing nearly 40% of its production – maximising productive capacity without promoting consumer demand, trading instead its goods abroad. For Pettis, had this not been this way, the manufacturing sector in the US would be at a much stronger position.
Conclusion
Assessing Lawrence’s argument, it is clear that, in the long run, an economy cannot sustain an industrial base: Even China, the world’s largest manufacturer, is facing a declining industrial output. Thus, it is highly unlikely that the US will see manufacturing peak again, even after imposing tariffs. However, this alone does not fully explain the current state of the U.S. manufacturing sector. If the U.S. had adopted different policies toward China and other export-led economies, the manufacturing sector might be in a much better state today.
Notes
1. You can find Lawrence’s book here: https://www.hks.harvard.edu/publications/behind-curve-can-manufacturing-still-provide-inclusive-growth
2. You can find Thomas Wolf account of this issue here: https://www.ft.com/content/aee57e7f-62f1-4a57-a780-341475cd8f89
3. Michael Pettis’ account is here: https://carnegieendowment.org/china-financial-markets/2024/07/which-country-should-design-us-industrial-policy?lang=en
