The reinvention of the U.S. industrial sector promises far-reaching global consequences
Pushing back against the deluge of punditry about America’s strategic eclipse, my last post argued that the U.S. global position is being bolstered greatly by a revolution in domestic energy production that began to take shape in the past few years. Although it has not received as much attention, a looming rebound in the manufacturing sector will reinforce this outcome. Like the energy renaissance, America’s industrial rebirth promises to have far-reaching global consequences.
The story of America’s Rust Belt – the leaching away over the past few decades of manufacturing capacity to lower-cost locales overseas, especially China – has become a byword for U.S. national decline, so much so that in February 2011, the U.S. intelligence community launched an inter-agency assessment about the security implications of waning manufacturing activity in America.
Yet even in the teeth of the Great Recession, U.S. companies are beginning to relocate production capacity back to the United States, a pattern that is starting to reverse some of the outsourcing of the last two decades. A number of factors account for this development, including rising labor costs in China, a growing appreciation about the dangers of operating extended global supply chains and the advantages of being geographically closer to U.S. consumers, as well as the domestic availability of cheap, abundant energy.
Even with the anemic recovery in the broader economy, the industrial sector has added some 500,000 jobs since January 2010. Indeed the sector has been one of the few bright spots in the nation’s economic landscape (here, here and here), with a surge in manufacturing exports accounting for a good deal of the nation’s growth over the past few years. And a recent report by the Boston Consulting Group concludes that the U.S. is on the cusp of an industrial renaissance, with the potential to create 3 million more jobs by the end of the decade. A new Booz & Company study likewise finds reason for optimism about the manufacturing sector.
Fortifying this development are America’s innate advantages in what is becoming known as the “third industrial revolution” – one that is powered by high-skill labor as well as seminal progress in the areas of artificial intelligence, robotics, nanotechnology, composite materials, and “additive manufacturing” or three-dimensional computerized manufacturing. (Reports by the Economist magazine and the New America Foundation provide more detailed overviews of these advances.)
Besides putting to rest the ideological rancor over outsourcing, the manufacturing resurrection will have other domestic political ramifications. My last post cited Walter Russell Mead’s argument that the Midwest’s growing prosperity brought about by new-found energy abundance will inject greater moderation into the nation’s political discourse. The manufacturing turn-around will augment this effect. A new Brookings Institution report finds that, after decades of decline, industrial employment is beginning to grow once again in the Rust Belt.
I argued earlier that it is questionable whether China will be able to replicate America’s energy renaissance. There is even greater uncertainty about whether the People’s Republic can capitalize on the technological innovations that will power the new era in U.S. manufacturing. As one expert puts it, “it is China’s turn to worry” as “technical advances will soon lead to the same hollowing out of China’s manufacturing industry that they have to U.S. industry over the past two decades.” He adds that:
All of these advances play well into America’s ability to innovate, demolish old industries, and continually reinvent itself. The Chinese are still busy copying technologies we built over the past few decades. They haven’t cracked the nut on how to innovate yet.
To be sure, Beijing is hurriedly trying to address this threat. Premier Wen Jiabao has acknowledged that China possesses “insufficient scientific and technological innovation capabilities” and the country has launched a concerted program to become an “innovation nation” by 2020. But it is doubtful that the authoritarian nature of the Chinese regime, bereft of incentives for commercial inventiveness, will permit this outcome. Daron Acemoglu and James A. Robinson, in their noteworthy new book, “Why Nations Fail,” argue that “the spectacular growth rates in China will slowly evaporate” precisely because of the regime’s exclusionary political institutions. The regime’s character also explains why its approach to innovation is one that relies on “autocratic directives, by ordering people to be inventive, and by throwing money at projects that often end up as white elephants.”
The glaring absence of a vibrant private sector capable of sparking creativity is highlighted in a new World Bank report prepared jointly with the Development Research Center, a high-level think tank in Beijing that is attached to the State Council, China’s top executive body. The report warns that the country’s economic trajectory will be derailed by 2030 if the dominance of clunky state-run enterprises in the national economy is allowed to continue. It recommends adopting a “culture of open innovation,” arguing that:
The role of the private sector is critical because innovation at the technology frontier is quite different in nature from simply catching up technologically. The process becomes essentially one of trial and error, with the chances of success highly uncertain. Innovation is not something that can be achieved through government planning. Indeed, the more enterprises are involved in the trial-and error process of innovation, the greater are the chances for technological breakthroughs, and the more likely that new discoveries will be translated into commercially viable products.
Of course, altering the state-centric model of economic management is all the more difficult to accomplish since state-run companies are a key source of wealth and privilege for rent-seeking Communist Party elites. And even if the herculean political challenges could be successfully navigated, the hierarchical nature of Chinese business culture is also problematic, since it prizes risk aversion while discouraging creativity and initiative.
A final constraint resides in the rigid nature of the educational system, which likewise stifles imaginative and entrepreneurial thinking. Tellingly, less than two percent of recent Chinese college graduates launched businesses. As one commentator notes, the
nation’s high-profile entrepreneurs, such as Pan Shiyi and Zhang Lan, are worshipped by young, middle class Chinese. But these business megastars are largely perceived as distant celebrities, rather than as role models who should – and can – be emulated.
The economic dynamism unleashed by the U.S. manufacturing resurrection – working in tandem with the energy boom – promises to shore up America’s strategic foundations while putting a major dent in the “China rising” narrative we’ve heard so much about in recent years. One specific consequence will be ideational.
America’s reputational clout took a huge hit with the onset of the “Great Recession,” with some advising that the future now belongs to state-managed capitalism. Others opine that a key element of China’s spectacular ascent has to do with a model of state capitalism that presents a superior alternative to the Western free-market principles. Indeed, just seven months ago, a major U.S. labor union figure asserted in the Wall Street Journal that China’s superior economic model calls into question the very premises of America’s free market system. But it now appears that the reverse is far more likely to be proven true.