Don’t Cry for American Industry

Recession is on the lips of all the doomsday-preachers, so calls have risen for some sort of protective tariff on competitive imports from China, according to professors Kenneth F. Scheve of Yale and Matthew J. Slaughter of Dartmouth in a recent article in Foreign Affairs.

The tremendous rise in our exports to China refutes these dire predictions of the demise of American manufacturing. According to the Department of Commerce, free trade policies have increased the income of Americans by $500 billion to $1 trillion annually in the last few decades.

Take the metal fabricating industries: Data indicate that while there has been an increase in overall imports from China (from 2002 to 2006), our fabricated metals exports to China have quadrupled. For example, our exports to China of finished metal shapes expanded from $29 million to $457 million. Iron and steel-mill products quadrupled, from $39 million to $135 million. Exports of non-ferrous metal products soared from $75 million to $1.1 billion.

During the same period, our metalworking machine tool exports to China surged from $394 million to $807 million. Exports of industrial engines swelled from $258 million to $798 million. Civilian aircraft metal part exports climbed from $290 million to $826 million. Exports of industrial machines rose from $1.1 billion to $1.9 billion and power generator exports increased from $149 million to $428 million.

There is every indication that American manufacturers are gaining – not losing – momentum, as this accelerated rise of American metal-product exports to China shows above.

How are American manufacturers accomplishing all of this in the face of cheap Chinese prices?

One answer: Improvement in our manufacturing methods through lean techniques and total quality management, according to the Manufacturing Performance Institute (MPI), a Cleveland-based research organization which carried out a census of manufacturers. These two improvement methods are best achieved by using incentive and bonus programs, like Gainsharing and its varieties, that help lean manufacturing and TQM boost productivity and eliminate errors.

For example, if 100 employees produce 1,000 widgets in 10,000 hours in one month, and the same 100 employees produce 1,000 widgets in 9,000 hours the next month, that productivity improvement of 1,000 hours of labor is a savings worth $10,000 if labor is $10/hr.

This illustrates the point that productivity improvement is not a matter of increasing production, but increasing output per man/hour worked ? thereby saving labor costs while increasing the profit margin on sales. This sort of improvement has been taking place in most of our metalworking industries. In fact, U.S. manufacturing productivity has increased by more than 50 percent in the past decade.

The widespread use of incentive systems to encourage American employees to boost productivity is a major factor in meeting Chinese competition, according to the National Association of Manufacturers in its annual survey covering 2006.

The rise of Chinese exports throughout the world has been attributed not to Chinese manufacturing ingenuity, but to their lower cost of labor. However, all reports indicate that this is changing. After years of gradual decline, prices for goods from China have risen 1.2 percent since February 2007 because of higher labor costs, according to our Labor Department.

Chinese wages are on the rise. No reliable figures exist for average Chinese wages, and their government’s economic data are notably unreliable. But sporadic labor shortages began to appear in 2003, and now Chinese businesses reportedly have a hard time finding skilled workers and must pay more money to the workers they can find.

A separate report by the Chinese Academy of Social Sciences warns of coming labor shortages, even in rural areas. The trend in China is rising labor rates, which will undoubtedly continue to influence Chinese prices.

A recent government survey of 2,749 villages in 17 provinces and autonomous regions found that in 74 percent of villages there were no workers fit to travel to distant cities, according to the official Xinhua news agency.

The unpleasant discovery that the quality of Chinese output is not up to par is another aspect of evaluating competition with China. For example, lead content in Chinese-painted toys and complaints about the quality of Chinese-produced cosmetics, toothpaste, pet food, pharmaceuticals, plastics, chemicals, aircraft metal components and other metal fabrications have all created a backlash against Chinese imports.

A generation ago, we had great fear that Japanese output would overwhelm our markets. But American manufacturers rose to the challenge and met the Japanese competition. By the same token, pessimists now fear that Chinese output will swamp the American markets and outdo American manufacturers in world markets. This has not happened. With the growth of American exports, it will not happen.

While pessimists sob that the glory days of U.S. manufacturing are past, nothing could be further from the truth. U.S. manufacturing is the most innovative and resilient economy in the world ? and certainly faces no recession today.

Dr. A.A. Imberman is the chairman and CEO of business consulting firm Imberman and DeForest, Inc., 990 Grove Street, Evanston, IL 60201, 847-733-0071, Fax: 847-733-0074, www.imbdef.com.