Low-cost imports are problematic, but not the sole reason or most important reason for the recent slump.



It's been widely reported that we've lost 3 million manufacturing jobs in recent years. Entire industries have been devastated. Some stories have portrayed Chinese workers as virtual slave laborers in factories that spew and pollute to their heart's content as a new industrial empire gets created.

Kernels of truth can be found in this scenario, but overall it amounts to a caricature. Last December, I participated in the Copper Development Association's annual Market Trends Forum in New York. Among the speakers was David Heuther, chief economist for the National Association of Manufacturers (NAM). While he did not pull punches about the challenges facing our manufacturing sector, the most fascinating parts of his presentation were those that cleared up common misconceptions. Here are some points worth pondering.

• Yes, imports from China and other low-cost producers are a problem, but not as much a factor as the decline in exports of American manufactured goods. Of the 3 million manufacturing jobs lost in the United States in the 2000-2003 period (2004 recorded a slight gain), the largest single factor was a decline in manufacturing exports, responsible for about 675,000 lost jobs, according to Heuther.

  Of course, part of the reason our plants lost export business was overseas customers turning instead to low-cost producers. A bigger factor, though, was a decline in global economic growth from 4% in 2000 to merely 0.5% in 2001, with some bounce back to the 2.5-3.0% range the next two years. Last year's global growth was estimated at 3.5%, and manufacturing's fortunes improved correspondingly. This year's global growth is forecast at 3.6%, which should further boost U.S. exports.

• The next biggest factor in manufacturing job loss has been productivity acceleration, said Heuther, responsible for an estimated 600,000 jobs lost.

  Lost jobs get the news media and politicians huffing and puffing, but everyone loses sight of the fact that even in a booming economy, manufacturing's percentage share of employment continues to decline inexorably due to automation. America long ago lost the ability to compete with unskilled Third World labor.

• The third largest factor in job losses has been the decline in capital expenditures, according to Heuther. Ranking fourth was the much ballyhooed import penetration, which he figures is responsible for only about 500,000 of the 3 million jobs lost. Manufacturing jobs have been on the rebound since bottoming out in the first quarter of last year.

Fierce import competition remains a fundamental long-term challenge to American manufacturers, Heuther conceded. Just as troubling to NAM, however, are rising costs associated with corporate taxes, employee benefits, pollution abatement and tort cases. NAM calculates that regulatory expenses add up to about $8,000 per manufacturing employee, or about a 22% penalty to the cost of manufacturing in the United States.

All of this seems daunting, but the situation is far from hopeless for U.S. manufacturing. Heuther's figures show manufacturing production has been on an upward trend since early 2003, and in the fourth quarter of last year surpassed the level reached during the last upswing in June 2000.

Certain goods, especially low-cost commodity products, will continue to leak away from our nation's factories. But U.S. shores still frame a good number of advantages for manufacturers. These include some of the best production technology in the world, an abundant skilled work force, and proximity to the world's largest consumer market.

Don't overlook the importance of the latter. Consider that in our industry alone foreign-owned companies such as Wirsbo, Grundfos, TOTO, Viessmann, Chicago Faucet, Gerber and others have seen fit to operate North American plants despite disadvantageous labor and regulatory costs. Being close to one's end markets is a compelling force, and for that reason alone the United States will remain an attractive site for many manufacturers.

Also keep in mind that citizens of China, India and other low-cost manufacturing nations will not want to work for proverbial peanuts forever. As time passes, we will see their wages go up and more regulations arise to protect their environments and social well-being. Then they will join us in wringing their hands over slave labor competition from, perhaps, places like North Korea and Congo.

If we could only figure out a way to export a few hundred thousand of our lawyers, we'd really turn the corner in becoming competitive again! <<