Is the outlook bright for manufacturing?

Almost precisely a year ago I wrote a column about manufacturing. I reviewed the facts about manufacturing in both the country and in North Carolina. While at both geographic levels manufacturing was once one of the dominant industries in terms of both production and employment, in the 21^st century the opposite has been the case. Manufacturing has been in a state of decline.

To review, the nation has lost close to a quarter of the manufacturing jobs it had in 1990.The drop has been larger in North Carolina – almost half of the State’s factory jobs are gone today. In the late 1990s, manufacturing at the national level accounted for 16% of total economic output; today it is 11%. Again, the reduction was bigger in North Carolina, where manufacturing contributed 27% to the economy in the late 1990s, but today contributes 15%.

 Three factors brought about this shrinking of domestic manufacturing. First has been a desire to make countries economically interdependent to lessen the threat of war. Second were improvements in communications and transportation, thereby making trading easier. Third was the desire to lower consumer prices by moving production to lower-cost regions and countries. These shifts hurt North Carolina relatively more because the State had long focused on producing key consumer products, like textiles, apparel, and furniture.

The pandemic changed some of these views about international trade. A big concern was the “supply chain” problems that harmed the economy even after the pandemic subsided.  Both businesses and consumers realized that being dependent on other countries for products came with a potential big downside.

China has grown to be the largest manufacturing country in the world. Some call China the “world’s factory.” But the U.S. and other countries now have serious geo-political differences with China. This has caused many to re-evaluate trade with China.

Last year’s column ended by observing that many in our country – as well as in North Carolina – were beginning to consider serious efforts to move manufacturing back to our country. The question for today’s column is, how have those efforts progressed in the last year?

As with most questions in economics, the answer depends on what statistics are used. Manufacturing production in both the nation and North Carolina rebounded strongly from the pandemic recession that pushed output well below pre-Covid levels. However, since 2022, production has dropped as recession fears have risen. Production levels are now lower than in 2019

Manufacturing employment has increased since the end of the pandemic, and is now at 14-year highs in both the nation and North Carolina. However, there has been some recent retreats in factory jobs, particularly in North Carolina

Of course, a key reason for the decline in domestic manufacturing in the last four decades has been the increase in imports of manufactured products from foreign countries, particularly China. But there appears to have been a reversal in recent years. On trend, imports from China are down. This is a big reason why the US trade deficit in products is 13% lower thus far in 2023 (through July) compared to the same period in 2022.

Why has there been improvement in our foreign trade deficit for manufactured products? The answer is a combination of “foreign sticks” and “domestic carrots.”

 Here’s what I mean. One traditional way of reducing imports and helping domestic producers is to make foreign imports more expensive.  This can easily be accomplished by levying a tax on imports, which is termed a “tariff.” The tariffs are like “foreign sticks.” The Trump Administration imposed significant tariffs on Chinese imports, and the Biden Administration has largely kept them. Hence, over the last several years, Chinese-made products have lost some of their cost advantage.

Another way of competing against imports is to subsidize domestic competitors. For example, if foreign-made computer chips are cheaper than US-made computer chips, then the government can reduce the cost of US-made chips by providing a financial subsidy to the manufacturers.

In 2022, Congress approved, and the President signed, several legislative bills totaling over $2 trillion that will financially assist US computer chip manufacturers, auto manufacturers, and other factories. These can be viewed as “domestic carrots.”

While these carrots and sticks can work, they have many critics. The major argument against tariffs is they prevent US consumers from having access to lower-cost, foreign-made products, hence reducing consumers’ standard of living. Also, in response to the claim tariffs create domestic manufacturing jobs, critics say buying cheaper foreign-made products will free-up money for US consumers to spend on other domestic products, thus also creating jobs.

Detractors of subsidies to domestic manufacturers ask an important question – what happens when the subsidies stop? And if the subsidies never stop, will the higher taxes to support them leave US consumers no better-off?

There is a third way to re-shore manufacturing to our country. This is to make US and North Carolina factory workers out-produce and out-compete their foreign competitors.  In economics lingo, this means improving manufacturing productivity. Unfortunately, US manufacturing productivity has recently been lagging that in foreign countries.

 While the goal of reviving domestic manufacturing persists, the future continues to be uncertain. Still, major changes in the economy can happen within a lifetime. When I was born over 70 years ago, my parents had no TV and had just purchased their first rotary phone!  Will manufacturing make a big comeback? I think it can, but you decide.

   Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.