8 Reasons for the Decline of American Manufacturing
A brief look into what causes one of America's touchiest issues
Few economic issues rile the electorate like the decades-long decline of American manufacturing. Every couple years in the United States, we hear political candidates boast about their new and improved solutions to return the U.S. to its dominant manufacturing role in the global economy. This has been a touchy political issue, especially for the millions of voters who yearn for the good ol’ days of “Made in America”.
So what happened to American manufacturing? Why have so many jobs disappeared? There are many potential causes, some of which are interrelated. Politicians and pundits tend to focus on one in particular which I will address first, but it is important to recognize all the potential causes so that we can know how to solve this issue, assuming that it is even a major issue at all.
1. China
Who doesn’t like blaming China?
After Deng Xiaoping came to power at the end of the 1970’s, his government implemented several market reforms that significantly improved China’s economy. China’s burgeoning industry created a cheap alternative to U.S. manufacturing. As a result, several companies in the U.S. moved their production to China.
On top of that, the Chinese government has been subsidizing many of their domestic industries. This has made manufacturing even cheaper, which has further toughened the competition with China. I’ll address later why they do this, but the question still arises whether this is good or bad for America.
On the one hand, some manufacturers lose out against a subsidized, less expensive foreign competitor. But the less expensive manufacturing leads to less expensive products for the American consumer. Even though some people may lose jobs, millions of people benefit from the lower prices.
The subsidies also come at the cost of the Chinese citizens. Is it really that bad of a deal for Americans if the Chinese are paying for us to have cheaper goods?
A downside for Americans is that the Chinese then put their competitors out of business and could subsequently raise praises. This is the old monopolist’s trick that many robber barons were accused of in the late 19th century. I have my doubts about the sustainability of this tactic and whether it poses much of an actual concern for most industries. However, I do know people who were put out of business by subsidized Chinese competitors, and they seemed to believe that the Chinese would at least profit in the short term.
2. Globalization
The world was set to undergo a dramatic change when in 1956 Malcom McLean founded a shipping company that used shipping containers to transport goods. The new technology allowed overseas trade to prosper. Over the next several decades, producers were able to ship their products all over the world at a reasonable price.
The increased trade led to a more interconnected economy and increased competition between international producers. As a result, cheaper Asian factories were able to compete with American factories. Large companies began contracting their production overseas, and American manufacturing took a hit.
Though increased competition is certainly going to create new winners and losers, it doesn’t explain why the American manufacturers failed to succeed against their Asian counterparts. Domestic manufacturing has several advantages when it comes to communication and trust. And why would it be more expensive to produce in America anyway? To answer that, we need to look at the cause of rising costs.
3. Over-regulation
While global competition increased, American regulations remained stricter relative to the loose regulatory environments in other countries. Minimum wage laws and mandatory employee benefits increased the cost of labor. Audits from regulatory agencies like OSHA and the EPA increased the costs of compliance. Because regulatory agents are protected by qualified immunity, they can be relentless in trying to ruin businesses without fear of retribution.
Business regulation is not necessarily a bad thing. Regulation, quality assurance, and employee rights are important for a prosperous economy. But when the government plays a large role in regulating the economy, it increases costs for those businesses already operating on thin margins and stifles new innovation.
4. Steel Industry Protection
American politicians and pundits talk about the steel industry like helicopter parents talk about their children.
“We must nurture our steelmakers and protect them from that big bully China.”
“It’s a scary world out there. They can’t make it on their own!”
In reality, the American steel industry is the 30 year old still living in his mother’s basement and selling all her stuff on eBay. In the U.S., no other industry has been more coddled into impotence, and no other industry does as much complaining.
Over the past century and a half, the American steel industry has enjoyed numerous import tariffs, export subsidies, and quotas. This has raised steel prices higher than what they otherwise would be, thus leading to increased costs for those industries which rely on steel. Paula Stern, the former chairwoman of the International Trade Commission, had this to say about the affects of steel prices on manufacturing:
Inflated U.S. steel prices were an important factor in the erosion of U.S. manufacturing preeminence and employment from the 1960s to the mid-1980s.
James Bovard writes about the unintended costs of steel quotas during the 1980’s that were designed to protect American industries:
Reagan’s steel quotas destroyed far more jobs than they saved. Professor Hans Mueller estimated that the quotas resulted in thirteen jobs lost in steel using industries for each steelworker’s job saved. The Institute for International Economics estimated that quotas were costing the equivalent to $750,000 a year for each steel job “saved.” A 1984 Federal Trade Commission study estimated that steel quotas cost the U.S. economy $25 for each additional dollar of profit of American steel producers.
Even though it may seem like protecting the steel industry would help boost domestic manufacturing, in reality it leads to rising costs which are felt down the line by those factories which use steel in their products. This in turn creates an incentive for companies to move production overseas where they do not face such steep costs.
5. Tech Specialization
This reason may not contribute to the decline in manufacturing so much as it has had an impact on manufacturing jobs.
As technology became more advanced, manufacturers upgraded their facilities and employees needed more specialized training with the new equipment. Factories have also been steadily automating their processes.
Gone are the days when a healthy man with little education could start work in the factory right out of high school. Today, many companies look for skilled workers who are trained with different kinds of technology. If the company cannot find good employees, they have to move locations, go out of business, or find new ways to do without workers.
So why have manufacturers in countries like Germany been able to adjust as new technologies enter the scene? One possible answer can be found in their education system.
6. Education
Americans have heard for years that the pathway to success requires a college degree. Inculcated with this belief, many young American go to college after completing their secondary education. In 2020, around 70% of young adults were enrolled in college. This has created a large supply of people with college degrees that are in low demand, and a low supply of technically trained specialists.
In many European countries like Germany, teenagers who do not want to follow the academic route have the option of entering an apprenticeship. At 15 years old, they can already receive training in a trade such as carpentry or electronics.
Young adults who take the trade school route are ready and trained to enter the work force by the time they graduate from secondary school. This gives manufacturers a steady stream of employees who are up to date with the latest technology. Minimum wage laws typically don’t apply to apprentices, so companies can afford to hire them, and teenagers get paid for completing an education requirement.
The education system is not the only reason that Germany’s manufacturing sector has not suffered to the same extent as America’s. That brings us to reason #7.
7. The End of Bretton Woods
After World War II, leaders from around the globe convened at Breton Woods, NH, to agree on an international monetary system. The intention was to boost the post-war economy. In the end, the attendees of the conference agreed to use the U.S. dollar as the world’s reserve currency, which was set at $35/oz of gold. All other currencies would be pegged to the dollar, which could be redeemed by other governments for gold. This seemed reasonable at the time since the U.S. had by far the largest gold reserves in the world. As long as countries used the dollar as the reserve currency, the U.S. could act like a bank. The government could expand the supply of dollars by loaning to other countries and earn interest on the loan.
As would be expected, other countries built up their gold reserves by redeeming their dollars. This bled gold from the United States and put the U.S. in a bind. In 1971, the Nixon administration decided to devalue the dollar relative to gold. By 1973, Nixon suspended the dollar’s convertibility to gold, signaling the end of the Bretton Woods system. The U.S. had fully transitioned to a fiat standard. The dollar would no longer be backed by gold, but by the United States government.
So what does this have to do with manufacturing? The Bretton Woods system and it’s subsequent downfall may not have been so catastrophic for American manufacturing, but there were some effects. With a fiat standard, governments can increase the supply of money at will. This in turn affects how investments are made in higher order capital goods, such as those needed for manufacturing.
Currency exchange also went from a fixed exchange rate to a floating exchange rate. That meant that the dollar could become stronger or weaker compared to other currencies, which leads to the final and likely the most significant reason for the decline of American manufacturing.
8. Rise of the Petro-Dollar
After the United States pulled out of the Bretton Woods system, OPEC and the U.S. came to an agreement that oil could only be bought with U.S. dollars. Since every country needed oil, the demand for dollars increased. This led to the dollar increasing in value compared to other currencies.
Because the dollar was stronger than it otherwise would be, U.S. goods became more expensive compared to those produced in other countries. American manufacturers struggled to export goods and compete with the lower costs that other countries enjoyed.
That did not mean the U.S. has had nothing to export. Since dollars have been in high demand, America’s most valuable export has been fiat dollars. The U.S. has since come down with a slight case of Dutch disease. This syndrome occurs when a country’s economy is dominated by a single commodity due to a comparative advantage. When this happens, it becomes most profitable to deal in this commodity and export it to other countries. Labor and resources turn to the production and sale of this single product. The economy booms but becomes less diversified as it is more economical to import other goods rather than produce them.
An economy plagued by Dutch disease can enjoy periods of success but is not very robust. Prosperity is dependent on the foreign demand for the commodity. If the price of the commodity tanks, the national income decreases and a crisis can emerge as people become exposed to prices of foreign imports.
Since dollars are the most valuable export of the United States, much of the nation’s labor and resources have turned to the production of dollars in the financial sector. Instead of investing in manufacturing businesses that would have to compete against markets with weaker currencies, the financial industry turned its attention to purely financial activities.
In some ways, this has been good for the American consumers who are able to enjoy a wide array of inexpensive imported goods. But the artificially boosted strength of the dollar has gutted what were once diversified industries. Resources have instead been allocated towards the financial industry and credit expansion. When the house of cards eventually falls and America is exposed to the prices of imports, many people will not be able to rely on a healthy industrial core to meet their consumer needs.
For a deeper dive into global monetary policy and how it affects American manufacturing, I highly recommend these two articles by Lyn Alden:
The Fraying of the US Global Currency Reserve System
Bringing it all together
Our understanding of the bigger picture becomes clearer when we understand how all the different factors interconnect. Globalization has increased competition between manufacturers all over the world. The demand for dollars to buy oil strengthens the dollar against other currencies, which in turn weakens the demand for American-made products. Countries like China need those fuel-buying dollars, and subsidize industries to ensure that they can export cheap products to the United States.
To bolster the struggling industrial sector, the U.S. government has implemented protective measures like import tariffs on steel. But these measures often have unintended consequences that harm American manufacturing more than it helps. The government’s role in over-regulation and public education also has played a role.
But is this even that big of an issue? Politicians have for years been enacting all sorts of measures to supposedly boost American manufacturing, yet middle America still continues to struggle making any headway, and American’s in general continue to enjoy less expensive imported goods to meet their needs. Shouldn’t American’s just focus on the comparative advantage they have in tech development, farming, and financial services, and let other countries manufacture our goods?
While this may always be the case regardless of what we do, American industries still ought to be able to have a fighting chance on the global market. Deregulation will allow producers to compete, create more jobs, and innovate. Education reforms that allow teenagers to do an apprenticeship instead of high school will supply more able workers who are ready to contribute. Lifting protections on steel will reduce costs for other industries and give them an incentive to keep production in the U.S.
Monetary policy is a much more difficult political issue to address. Most domestic policies can be changed through the democratic process, but monetary policy is unlikely to change in that way. Dollar hegemony gives the United States an incredible amount of power and influence. It is the key linchpin in the machine that drives the expansive American empire. Take away the United States’ global control over money, and you take away the power to wage endless wars, topple governments, sanction enemies, and keep alliances in check. Sound monetary policy would help strengthen domestic industries in the long run, but it would weaken America’s dominance in the geopolitical realm. It is highly unlikely that politicians and bureaucrats would be willing to relinquish that power.
Modern society is incredibly complex and most societal issues stem from multiple causes. Solutions typically must address these various potential causes in order to be effective. If Americans want to stem the decline of American manufacturing, they should refrain from pinning the blame on a single cause and instead craft solutions that address the issue from multiple angles.