U-turn on outsourcing

Lost know-how and an unprepared workforce mean the US will have to learn to make again to be competitive

The recent US-China trade spat has once again called attention to the long-term future of general manufacturing in the United States.

The debate today is very different from that of 20 years ago. At that time, many analysts looked at general manufacturing as a sunset industry with little future. Many Wall Street gurus cheered the outsourcing of production and hailed it as better allocation of resources. They maintained the country could be a manufacturing power by just keeping the higher value-added design phase and the final marketing phase at home, the middle part of the production chain - the manufacturing process itself - was best outsourced to overseas factories by paying a small fee. This was largely the accepted international business practice just as China opened its doors to foreign investment and joint manufacturing.

The pundits also dismissed its likely impact on local employment, confident that the booming service sector would readily absorb the redundant manufacturing workers. The rationale being that by keeping the high value-added activities in high-tech manufacturing, and the design and marketing of general manufacturing at home, it would be enough to maintain the nation's manufacturing and economic supremacy.

The discourse today is a U-turn on that. US President Donald Trump's stand on trade reflects many Americans' belief that outsourcing has eroded the underlying economic strength of the US economy, the manufacturing sector's deficit is not sustainable, and shifting employment to the services sector has hollowed out its middle-class. Most of the newly created service jobs in the aftermath of outsourcing are low paying ones. The country must balance its trade and bring back general manufacturing.

This belated realization of the importance of general manufacturing to the US economy is not incorrect, but it misses several important points. Foremost of which is the hidden defects of the then sacrosanct smiling curve economic theory. The presumption that controlling the design phase and marketing phase allows one to control the entire value creation chain misses the fact that there are distinct production technologies embedded in the manufacturing phase. Knowing how to design a product and how to fine-tune the product to what the market wants helps in the making of the product, but it does not always mean knowing how to make it efficiently and cheaply. And this is where the Chinese manufacturers excelled. The MIT task force on manufacturing has repeatedly warned the US against the loss of production know-how, but those warnings have fallen on deaf ears.

Another critical issue is the quality of general manufacturing workers. While the US boasts the world's best universities and research talents, the state of its general education is less than ideal.

The gold standard for general education evaluation seems to be the Program for International Student Assessment of the Organization for Economic Cooperation and Development, which has tested 15-year-old students every three years starting 2000. The last PISA in 2015 involved 540,000 students in 72 nations and regions. It ranked US students 24th in reading, 25th in science, and 40th in mathematics. When the scores in these three areas were combined, US students ranked 31st behind the students of China, Slovenia, Poland, Russia, and Vietnam. The PISA test confirmed the ascendancy of East Asian countries in general education, all four Asian tigers in addition to China and Japan were in the top rankings.

When looking at a comparable sample of countries that participated in the PISA exam in both 2012 and 2015, the US ranking fell to 40th from the 36th in the most important subject - math. In fact, it didn't even make the OECD average score in math.

Scores were relatively unchanged in reading and science compared to 2012 - down one point in each. The US performed slightly better than the OECD average in both subjects but still behind East Asian countries.

There was a PISA test in 2018 participated in by 80 countries, and the result are not out yet. However, there is little sign that the performance of the US students has improved. The consensus is that the relative position of the country might continue to drop as other countries have been paying more attention and committing more resources to general education in recent years.

The educational attainments among many other Americans are also dismal. An estimated 30 million US adults cannot read, write, or do basic math above a third-grade level.

There are arguments for linking the PISA test to general manufacturing job skills. However, many analysts have noted that increasing automation in general manufacturing calls for a workforce that is adaptable to the changing technology environment, and a sound education at senior high school entry level proves more decisive than a university education. In other words, the future of general manufacturing in the US looks bleak based on the performance of its high school students. In fact, it was pointed out by many industrial researchers that most manufacturing facilities in the US today are increasingly being staffed by Indians, Chinese, and eastern European workers. Many US workers are not able to take high paying factory jobs because they lack the requisite skills, or they simply shunt factory jobs out of occupational bias. This situation has further compounded the skills shortage for general manufacturing jobs.

The twin factors mentioned cast doubt on whether the long-term goal of Trump to bring home general manufacturing by policy actions will work. The issue of losing manufacturing know-how and an unprepared labor force as compared to other countries will make the US industries uncompetitive. They are structural issues that were long brewing below the surface and will take collective efforts and time to remedy. Worse, this is a major issue which has yet to generate an intensity of debate commensurate to its long-term repercussions. It compels one to question the wisdom of Trump's call to bring home American-financed overseas manufacturing facilities back home.

The author is a visiting senior research fellow at Cambodia Institute for Cooperation and Peace. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

(China Daily 01/29/2019 page13)