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Manufacturing, FDI and Trade - Bringing Jobs Back Home?

Manufacturing - FDI & Trade

In many developed countries, there is a view that manufacturing jobs have left for lower cost locations, and therefore created structural unemployment. It’s an emotive subject, and is arguably a strong reason why the US electoral process has brought two candidates such unexpected levels of success so far. Trump and Sanders may be very different in the style that they deliver their message, but both suggest that trade, and therefore FDI too, have significantly affected American jobs over a number of years. In the UK too, the Brexit ‘leave’ campaign might argue that separation from the EU would safeguard UK jobs.

The thing with manufacturing is that it creates such emotion because services outputs are less tangible, there is no physical product to point to. There is almost a greater perceived nobility to manufacturing, and services job losses get less sympathy because they are associated with the cause of the recession.

Developed countries still make things!

You will often hear people exclaim “we don’t make anything anymore”, like in the good old days. But in fact, based on latest data from 2013, the US has the largest manufacturing output by value in the world, and the UK is seventh[1]. The key word therefore is value – yes it’s certainly true that millions of jobs have been lost to lower cost locations and the real impact of that on people’s lives should not be underestimated. But is there an argument that they are not jobs that the US, UK or any other developed country should really want to keep to sustain future growth? After all, notwithstanding the population, while China is the second largest manufacturer in the world, per head the UK is three times higher (USD$3,900 compared to USD$1,300). The US is over four times higher at USD$5,600.

But manufacturing evolves, for better and for worse

So, surely it’s unrealistic to cling on to the types of jobs that were a cornerstone of economies 40 years ago, while the world changes around us. After all, it’s unlikely there would be millions of iPhones bought by consumers in developed countries if Apple brought the jobs back home, given the associated increase in retail price. Besides, it’s not just about those jobs going overseas, but also some jobs becoming redundant and replaced by such technology.

Manufacturing is, and will continue to be, an important part of a country’s industrial mix. But the nature of those jobs must inevitably evolve towards fewer, but new, higher value activities. That is where the opportunity is, and it’s for this reason that Economic Development Organizations target “advanced manufacturing”, not just “manufacturing”. Hence the foreign companies that employ 2.3 million Americans in manufacturing - almost one fifth of the manufacturing workforce, and more than one third of all Americans employed by foreign firms – do so for a reason, because of the quality and productivity they know they are getting.

We must still acknowledge the uncomfortable truth that globalization has led to a profound impact in manufacturing employment in some locations, but perhaps it is worth closing this piece with two related points:

  • Manufacturing job creation in developing countries has been instrumental in supporting development. The export-led, basic manufacturing growth of the ‘Asian Tigers’ is a well-worn concept, but at least demonstrates what is possible when the right opportunities are available. There is some moral expectation that wealthier countries should help the poorer, demonstrated by the numerous large scale economic aid programs out there such as USAid and DFID.

  • This moral question can also be extended to the many news reports of alleged worker exploitation in developing countries. The most recent was Lidl’s GBP5.99 jeans, apparently so cheap because the factory in Bangladesh pays workers at an estimated 23 pence per hour. These probably aren’t jobs that anyone would want “to bring back home”, and surely puts some of the political statements we hear on both sides of the Atlantic into context.

[1] See UK House of Commons Briefing Paper - Manufacturing: International Comparisons, June 2015

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