Reports Of America’s Manufacturing Renaissance Are Just A Cruel Political Hoax – Forbes

General Electric refrigerator circa 1963: in those days American workers made even the most advanced components.  (Photo credit: 1950sUnlimited)

For years now the American press has waxed lyrical about a supposed revival in American manufacturing. “Reshoring,” they call it. A resurgent United States seemingly is winning back much manufacturing that had previously been considered lost to China and other export-hungry East Asian nations.

Stirring stuff – at least it would be if it were true. Unfortunately it is just smoke and mirrors. Various American corporations, not least General Electric, Walmart, Whirlpool, United Technologies (Otis), and Peerless Manufacturing, have helped propagate the illusion, and no doubt have good public relations reasons for doing so. What is less understandable is the naiveté with which the American media have swallowed the story.

Even more reprehensible has been the role of the Boston Consulting Group (BCG), a firm that, as knowledgeable observers have long been aware, often functions as a troll in helping East Asian governments shape American public opinion. BCG issued a report in August 2011 entitled, “Made in America, Again: Why Manufacturing Will Return to the U.S.” The obvious political effect has been to provide Washington with yet another excuse to procrastinate as East Asian mercantilism undercuts the last vestiges of American economic leadership.

Certainly there is little evidence that the report’s predicted revival of American manufacturing has materialized. In fact America’s imports of manufactured products have continued to increase in the more than two years since the report was published.

BCG’s analysis has been eviscerated by Ralph Gomory, an iconoclastic economic analyst whose authority is not diminished by the fact that in a previous life he headed IBM’s research and development department. As Gomory points out, BCG based its analysis on a crucially false assumption that East Asian economies work on American free-market principles. His conclusion is chastening: “A real manufacturing renaissance in America — at least one based on reshoring from China — is not something we can expect. Forecasts that reach that much-desired conclusion by simply extrapolating cost analyses into the future are not realistic. There is far too much that China and other countries can do to shape the outcome. We would do better to consider what we can realistically do in today’s mercantilist world rather than continue to act as if we were living in a textbook world, a world shaped only by market forces.”

To be sure some reshoring has taken place – but it has such a feeble effort that it has not offset the loss of remaining U.S. manufacturing jobs to foreign nations. The most widely publicized reshoring initiative has probably been General Electric’s revived manufacturing of a few of its largest domestic appliances in Louisville Kentucky. But this decision has nothing to do with some putative general turnaround in America’s fortunes.  Rather it betokens merely the fact that the offshoring of really bulky, expensive-to-ship goods, such as massive French-door refrigerators, was ludicrously misguided in the first place.

The key thing in the GE story is where the components  are made — something that is virtually never mentioned in the glowing accounts of a supposed general U.S. manufacturing revival. The manufacture of advanced components has always been a far more economically significant business than the final assembly of consumer goods. It is a task that requires not only far more capital-intensive manufacturing but in many cases a level of precision that only the most advanced nations can deliver. Such components are crucial moreover in that they are generally lightweight items that are eminently exportable.

As the author Charles Fishman has pointed out, in former times GE’s Louisville, Kentucky appliance division made all the key components in GE appliances.  Now those components are almost without exception being sourced from abroad and virtually the only work being done in Kentucky is the perfunctory slotting together of final products.  Such work accounts for only a small proportion of total value added and it takes place on American soil only for logistical reasons.

GE’s Louisville operation once employed thousands of workers to make almost every part of every appliance and their output was used not only in GE products but in products of other manufacturers around the world. Those jobs are gone forever. Not even GE makes any pretense that its most economically sophisticated components such as compressors for refrigerators, electric motors for dishwashers, and a host of microchips – will ever return to the United States.

What we are left with is that America has traded places. In the old days it exported small valuable things and left the bulky low value work to lesser nations. Now America specializes in items so bulky that they are exorbitant to ship around the world and relies other nations to supply the small high-value stuff. Meanwhile America’s current account deficits just continue to accumulate — and so in lock-step does its foreign indebtedness.