WS>>How America Lost Its Industrial Edge

carl william spitzer iv cwsiv_2nd at JUNO.COM
Sun Jul 13 18:13:33 MDT 2003

          Posted 5, 2003
          By Paula R. Kaufman

          Economic  commentator Eamonn Fingleton  speaks  bluntly
     about  what  he sees as the frittering away  of  the  United
     States'  manufacturing  base  and what he re  gards  as  the
     consequent  stagnation of the American standard  of  living.
     For those who believe in the superiority of the current U.S.
     postindustrial  strategy,  a reading of  the  OECD  Economic
     Yearbook makes for a distinctly chastening study.

          As  Fingleton  puts it: "The United  States  trails  no
     fewer than eight other nations, all of which devote a larger
     share of their labor force to manufacturing."

          Fingleton, who distinguishes between high-end and  low-
     end  jobs, insists that the former, advanced  manufacturing,
     must be reconstituted if the United States wants to remain a
     superpower.  And what are these eroded industries?  Semicon-
     ductor  materials,  ceramic  packaging  for  semiconductors,
     charge-coupled  devices (CCD), industrial robotics,  numeri-
     cally  controlled  machine tools, laser  diodes  and  carbon
     fibers, to name only a few.

          Where did the manufacturing of these items go? In  most
     cases, Japan now dominates the more advanced areas of  these
     industries, says Fingleton, who lives in Tokyo. Moreover, he
     argues,  by  dint  of superior know-how  and  large  capital
     investments  Japan now enjoys a global lock on key  manufac-
     turing processes.

          Fingleton  recalls an America where men and women  went
     to work and made the nation great, the old-fashioned way, by
     producing  products people wanted and needed. And he  juxta-
     poses  the  loss of advanced manufacturing jobs  in  this  c
     ountry with what he regards as the overvalued dollar, Ameri-
     ca's  compulsion  to borrow huge sums of money to  fund  its
     deficits and an illusionary U.S. prosperity based on  unsus-
     tainable  debt. For now Japan and China, both  running  huge
     tra  de  surpluses, pay the United States' bills,  he  says.
     Where  does  this  leave the American worker?  He  puts  the
     answer simply: Out of work!

          It is not true that Japan is in dire economic  straits,
     Fingleton  maintains.  In  a recent article  in  the  London
     journal  Prospect entitled "Japan's Fake Funk,"  he  writes:
     "The Western consensus is that Japan is a basket case: It is
     not. That is a misreading by the West."

          Meanwhile,  he says, ill-conceived U.S.  policies  have
     failed to protect home-based American industries, leading to
     the transference of the most advanced technologies known  to
     mankind. Fingleton says flatly that Japan has built u p  its
     industrial  base  at the expense of the United  States,  and
     that China now is chomping at the bit to do the same.

          Insight:  You speak of the transference of hard  indus-
     tries. What do you mean by that?

          Eamonn  Fingleton:  I mean those  engaged  in  advanced
     manufacturing. Specifically, industries that are both highly
     capital intensive and highly know-how intensive. They  typi-
     cally  are many orders of magnitude  more  capital-intensive
     and know-how intensive than the most advanced of "New Econo-
     my"  services,  such as computer software developed  in  the
     last three decades.

          Personal Bio

          Eamonn Fingleton: An economist who warns against
          unsustainable debt and globalism.

          Currently:  Self-employed  economic   commentator,
          author of In Praise of Hard Industries: Why  Manu-
          facturing, Not the Information Economy, Is the Key
          to Future Prosperity.
          Born: Aug. 19, 1948; Irish Republic.

          Family: Wife, Yasuka.

          Education:  Trinity  College,  Dublin;  degree  in
          economics and mathematics.

          Career:  Section  editor,  Financial  Times;  Now!
          Magazine, London; Forbes, New=

          York; Euromoney, New York and Tokyo.

          Books:  Doubletake: Japan's  Secret  Understanding
          With China and the Coming=

          Eclipse  of American Power (soon to be  published)
          and Blindside: Why Japan I=
          s on
          Track  to  Overtake  the U.S. by  the  Year  2000.
          Articles published in Harvard=

          Business Review, The Atlantic, Challenge, American
          Prospect, Prospect (Lond=
          The  Spectator (London), Fortune, Foreign  Affairs
          and elsewhere.


           Although  Japan  is  known in the  West  for  its
          leadership  in certain consumer products  such  as
          cars  and  television sets, its area  of  greatest
          leadership  is  in much more  advanced  industries
          that  largely are invisible to the consumer.  Spe-
          cifically,  Japan  leads almost right  across  the
          board in the sort of advanced materials, high-tech

          components  and  production  machinery  that   are
          driving  the electronic revolution. Some  products
          may  be assembled in the United States, but  their
          key manufacture - the manufacture of the  advanced
          components and materials - is done in Japan.

     Q:   Do U.S. manufacturers hide from the American people how
          dependent they are on foreign suppliers?

     A:   The impression given is that outsourcing is done within
          the  U.S. and that available components come from  many
          sources. But it is clear that most advanced  components
          and materials now are outsourced from Japan.  Corporate
          America is very guarded about its dependence on foreign
          suppliers, and this applies in spades to outsourcing by
          American defense contractors.

     Q:   So  the  United States has lost its  edge  in  advanced

     A:   It is absolutely gone. The U.S. started losing its edge
          about 30 to 40 years ago. By the early eighties, Ameri-
          ca was already in serious trouble.

          The  sad truth is that advanced manufacturing  accounts
          for  only a very small part of the total  U.S.  economy
          and much of it merely is customizing equipment for  the
          needs  of the American market. Final assembly of  manu-
          factured  products often is carried out in  the  United
          States and, to the extent that it is the sort of  manu-
          facturing  that requires close proximity to  customers,
          it likely will stay in the United States.

          Meanwhile,  high-tech  manufacturing here  largely  has
          disappeared,  particularly mass-production  manufactur-
          ing.  American  companies can make almost  anything  if
          price is no object, and thus they can produce in  small
          batches,  for instance, for defense purposes. But  they
          no  longer master the mass-production  techniques  that
          are  necessary  to be cost-efficient in  serving  world

     Q:   How  vulnerable  are Americans to job  dislocation  and
          unemployment  because  of what's happened  to  advanced
          manufacturing in this country?

     A:   I believe most of the job loss already has taken place.
          The blue-collar worker we all knew some 30 to 40  years
          ago was the backbone of the American economy. He or she
          was  the  best-paid worker in the world. But  more  and
          more  Americans of average ability now are employed  in
          "Mac-jobs"  within  the service  industries.  Typically
          they are not as well paid as in manufacturing.

          The manufacturing jobs are gone, and the U.S.  standard
          of living has been impacted badly by this. When I first
          came  to the United States in the 1970s, I was  stunned
          at  how  wealthy  Americans then  seemed.  Since  then,
          Western Europ e largely has closed the wealth gap  with
          the  United States, so that living standards even in  a
          country like Ireland that seemed poor a few decades ago
          are not far behind American levels.

     Q:   You describe significant job loss to Japan at the  high
          end  of  the industrial food chain.  Are  low-end  jobs
          endangered, too?

     A:   At the higher end of the food chain, Japan already  has
          taken  its  bite:   The jobs are gone. There now  is  a
          serious threat emanating from China, which is vying for
          the  lower  end of American manufacturing.  Beijing  is
          moving  very fast and threatening what remains  of  the
          job base in the United States.

     Q:   What lies ahead for the American worker given this grim

     A:   Blue-collar workers have been hit hard and the  erosion
          of  their jobs will continue. But America is of  course
          now  overwhelmingly a service-based econo my, and  jobs
          in  services largely are insulated  from  international

          America  as  a whole is  therefore  feeling  relatively
          little pain, even in currency markets.

          East Asian economies are supporting the U.S. dollar  as
          well as funding the U.S. trade deficit. As a result the
          dollar  has not shown the effects of the hollowing  out
          of American manufacturing, but we are about to see  the
          free market play itself out in the currency markets.

     Q:   Why are East Asian nations supporting the dollar?

     A:   It is obvious to many in the U.S. financial sector that
          Japan,  China and, to a lesser extent, Taiwan are  sup-
          porting  the dollar in an organized effort  to  benefit
          their  own industrial policies. These nations  want  to
          promote their manufactured exports, and the lower their
          exchange  rates  are vis-=E0-vis the  dollar  the  more
          profitable it is for their manufacturers to export.

          The  dollar  now is vastly overvalued  vis-=E0-vis  the
          East Asian currencies. The best way to look at this  is
          to ask yourself a question:   How low would the  dollar
          have to fall to enable the United States now to balance
          its trade de ficit? To answer that, you have to look at
          both  the state of American export industries  and  the
          extent  to which the United States now is dependent  on
          imports for goods that it no longer can make - at least
          cannot make in mass-production volumes.

          The  numbers are shocking. In the late 1980s  the  U.S.
          dollar  traded  above  Y140 [yen].  Today,  the  dollar
          trades at Y117. So we have seen some depreciation  even
          since  the Japanese bubble collapsed in 1990. But,  for
          the United State s to begin to win back export markets,
          we probably would have to see the dollar fall to Y60 or
          lower.  A  50 percent devaluation against  the  Chinese
          currency also is necessary.

     Q:   Why did this "hollowing out" of the U.S.  manufacturing
          base take place?

     A:   It  began in the 1960s and became really  serious  from
          the mid-1970s onward. One key factor early on had  been
          a U.S. government policy of transferring technology  to
          Japan. There was an American tendency to  underestimate
          the Ja panese competitors. This was particularly appar-
          ent in the electronics industry, where American  compa-
          nies  that  won contracts to supply  semiconductors  to
          IBM, for instance, would be required by IBM to  license

          a  "second source" - a company that could  continue  to
          supply if the primary contractor were hit by an act  of

          American  companies like Motorola and Intel  invariably
          chose  to license Japanese companies to do such  second
          sourcing,  on the theory that the Japanese were  incap-
          able of eating America's lunch.

          Also,  there existed a very powerful Japanese  plan  to
          extract  technology  from this country.  By  the  early
          1970s,  Japan  was the second-largest economy in  t  he
          world,  a market that could not be ignored. Firms  such
          as IBM and others were eager to sell their products  in
          Japan. But the Japanese insisted on a quid pro quo.  If
          an  American company wanted to sell in Japan, it  would
          have to manufacture there. Then, when the company moved
          to  the next stage of the technology, it  often  closed
          down  its American factory and served the entire  world
          market from its Japanese operation. Sometimes technolo-
          gy  transferred to the Japane se subsidiary  leaked  to
          the company's major Japanese competitors.

          It  all  adds up, and now America imports much  of  its
          manufactured goods, with the current account deficit at
          4.7 percent of GDP [gross domestic product] and  almost
          all of it related to manufacturing. By comparison,  the
          worst  trade deficit in the early 1970s when  [Richard]
          Nixon took the U.S. off the gold standard was just  0.5
          percent of GDP.

     Q:   And as a result Americans lost jobs?

     A:   Many jobs indeed. But there was also the myth known  as
          the "New Economy," which for 20 years had been  growing
          in fashion.

          I was working then at Forbes magazine in New York and I
          recall how struck I was by the large number of  sophis-
          ticated people I met who exclaimed that "the future  is
          in services! Manufacturing is a commodity business!  We
          need to get out of it!"

          Indeed,  America did get out of it. Having allowed  its
          manufacturing  base  to disappear, the U.S. now  is  in
          possession of almost an entirely service-base d economy
          - beating all standards of economic history. The  manu-
          facturing  sect or exports, on average, 11 times  more,
          based  on  per unit of output, than do  service  indus-
          tries. Herein lies the problem:   The United States  no
          longer produces t he goods to pay for its imports.  You
          have to fund the gap.

          For  30  years the United States has  run  these  trade
          deficits. In the early days, they were relatively small
          and explained away as a temporary phenomenon. They long
          since  have ceased to be considered temporary  even  by
          the most trenchant advocates of laissez-faire.

          They  have major negative consequences for  the  United
          States,  particularly in undermining America's  ability
          to project economic power abroad.

          Don't  get  me  wrong:   I am not  saying  imports  are
          necessarily  a  bad thing. But when the  United  States
          must go to foreign central banks with its hand extended

          to fund huge trade deficits for decades on end, someth-
          ing is desperately wrong.

     Q:   How dependent is the United States on foreign capital?

     A:   Highly dependent. Two countries now are serious capital
          exporters:   Japan and China. There is one huge capital
          importer:   the United States.

          The  U.S.  Treasury is more and more  beholden  to  the
          Japanese  Ministry of Finance, which is a  power-driven
          organization.  One doesn't want to be an alarmist,  but
          there is the matter of sovereignty here. It is inappro-
          priate  that  the world's superpower  is  dependent  on
          government agencies in other nations to get it  through
          the day.

     Q:   You  argue that the information economy is not the  key
          to future prosperity. Why isn't it?

     A:   You are referring to the subtitle of my book In  Praise
          of Hard Industries:   Why Manufacturing, Not the Infor-
          mation  Economy, Is the Key to Future  Prosperity.  The
          point I was making is that the prospects for the infor-
          mation economy, meaning the all-digital service economy
          that  the American press was then talking  about,  were
          vastly  overblown. Many of the services  being  created
          were  basically  worthless, a point that has  been  re-
          soundingly vindicated by subsequent events.

          I should make clear, however, that my argument  carried
     no Luddite content. I pointed out that the Internet and many
     other manifestations of the information economy that were so
     hyped  at the time were indeed great advances for the  world
     in  general. But the idea that America could somehow  estab-
     lish a hammerlock on such services and thus graduate to some
     ineffably  higher level of prosperity by providing  them  to
     the world was the purest nonsense.

          In  reality, many of those services are  highly  labor-
     intensive and, to the extent that international trade can be
     conducted in them, they should be located in places such  as
     India, Russia, Latvia and so on, where labor is much cheaper
     than it is in the United States.

          Meanwhile,  the United States would be well-advised  to
     follow  the lead of the Japanese, the Germans and the  Swiss
     by  maintaining  and  enhancing its  position  in  advanced-
     manufacturing industries.

          Paula  R.  Kaufman is a free-lance writer  for  Insight

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