25 April 2017

Automation And Trade

Offshoring Happened - Manufacturing Malaise Isn't Only The Fault Of Robots

One of the biggest developments of the last fifty years of the U.S. economy has been the offshoring of manufacturing. Entire manufacturing industries such as televisions, clothing and steel moved almost entirely abroad. Other manufacturing industries such as automobile manufacturing, have remained partially in the U.S., but a significant share of the goods in the market are produced offshore by both domestic and foreign companies, both of whom manufacture cars partially in the U.S. and partially abroad. The oil and gas industry because there are natural limits on the extent to which it can be offshored, and a handful of idiosyncratic holdouts like aircraft manufacturing, have remained mostly domestic. But, the overall trends have been clear.

While it is true that the U.S. manufacturing industry hasn't lost much productivity and has even increased a bit, and that automation has played as great a role in lost manufacturing jobs as offshoring, it is also true that a much larger share of goods consumed in the U.S. are manufactured abroad than was the case half a century ago, and that market share of manufacturing had declined steadily over a long time period (although it may now be leveling off).

This has resulted in immense economic dislocation in the U.S. and huge social costs. Offshoring and automation have both contributed significantly to the appearance of the Rust Belt. It has absolutely devastated cities like Milwaukee, Flint, Detroit, Toledo, Lima, Cleveland, Youngstown, Buffalo, Pittsburg, Allentown, Burlington, and Saint Louis. It created the despondent working class that is now abusing opium on record scales, and was a pivotal factor in creating the black underclass. As a group, less educated men have born the brunt of offshoring while receiving only lower bills for purchases of imported goods at Wal-Mart in exchange for the economic prosperity that they lost when manufacturing jobs left.

So, but for offshoring, the U.S. manufacturing industry would be much larger than it is now and would employ far more people, notwithstanding automation. The failure of the U.S. manufacturing industry to expand because offshoring has eaten much of its growth is one reason that the U.S. education system hasn't seen strong private sector pressure to improve vocational education for middle skilled manufacturing jobs, many of which are relevant in a world of highly automated manufacturing. Why push to train people for jobs that the economy isn't creating because it is cheaper to create them abroad?

On the other hand, the high standard of living in the U.S. today is due in significant part to the extremely low costs of goods relative to services that offshoring has made possible. But for this offshoring, goods would be more expensive in the U.S. and Americans could afford less of them. 

Also, offshoring, which has almost certainly been concentrated in the areas where U.S. environmental laws have the biggest impact on the bottom line of manufacturing companies, has played an important and unrecognized role in improving the quality of the environment in the United States, which its citizens have enjoyed with better health and greater happiness.

The U.S. would manufacture a larger share of the goods consumed in the U.S. and would manufacture more far goods overall than it does now, in the absence of so much offshoring, but the total amount of manufactured goods we consumed would be smaller, and the economies of the developing world would be far, far less well off, particularly in Northern Mexico and China.

The economic evidence is overwhelming that free trade which facilitates offshoring has increased U.S. GDP per capita. But, given the extent to which GDP gains in recent years have been concentrated in a small economic elite rather than being widely shared, and given that the social costs arising from lost manufacturing jobs aren't deducted from those GDP gains, the economic benefits of offshoring for the the free trade which has facilitated offshoring for everyone outside the upper middle class in America are significantly overstated.

Why Is Manufacturing Offshored?

The conventional wisdom is that manufacturing jobs left the U.S. because the cost of labor in the developing world was lower and environmental laws were weaker.

Suppose the conventional wisdom is true.

Labor Costs, Environmental Laws And The Situ Of Manufacturers

As manufacturing becomes more automated, the share of labor as a factor of production in manufacturing shrinks and the labor that is requires is more skilled.

Comparative advantage between the U.S. and developing countries is greater for developing countries at the low end of the labor market than in the highly skilled labor market.

Highly automated manufacturing operations also tend to be less polluting because pollution and waste have always been inefficient. It is just that historically, the costs of pollution were outweighed by the cost savings involved in using these sloppy methods.

Also, many of the historical offshore manufacturing centers have seen their wages rise as they have developed economically and have been forced to pay more attention to environmental regulation as unregulated pollution has made life unlivable and higher standards of living have allowed people to place of greater priority on the environment.

As less skilled labor costs and environmental laws become a smaller consideration in locating manufacturing, other aspects of developing economies and offshore manufacturing operations also loom larger.

Quality control is harder to maintain from afar. Developing economies tend to have more corrupt and inefficient government bureaucracies and less reliable legal systems. Their infrastructure is less reliable. A general environment of corruption can seep into business operations leading to reduced quality and higher costs.

Automation, in some cases, via tools like programmable manufacturing equipment and 3D printing, can also make economies of scale in manufacturing less important. This makes it possible to have more manufacturing locations closer to the places where the produces will be sold, to change up and "retool" product lines more rapidly, and to make more customized products.

In summary, automation, on balance, disfavors the offshoring of manufacturing relative to the status quo.

Transportation Costs And The Situ Of Manufacturers

All other things held equal, manufacturing goods closer to where they are used is more economically efficient than manufacturing things far away. But, the cheaper and faster freight technology is the less distance matters. 

Increased automation will tend to reduce the costs of shipping freight. But, cargo ships and trains are already so highly automated that there is little room to reduce costs with automation that reduces labor costs in that part of the freight market.

The only place where automation could still dramatically reduce freight costs is in trucking, if self-driving trucks, which already exist in proto-type form. But, this reduction in freight cost is pretty indifferent between the benefit it provides to manufacturers somewhere in the U.S. and manufacturers abroad once they deposit their freight at a port or their goods are removed from a rail yard.

So, automation is unlikely make offshore manufacturing significantly more competitive vis-a-vis domestic manufacturing.

Also, one of the likely growth areas for manufacturing is likely to be in the construction industry, where there is a huge untapped potential that has been utilized with great success on a limited basis, to build buildings in bigger chunks that are built in more efficient, less waste generating factories off site. These factories build building components on a more automated basis with more skilled labor than on site stick building techniques. But, the components are very big, some transportation costs are a material consideration.

Transportation issues disfavor offshoring for building module manufacturing more than they do for other kinds of manufacturing.

Bottom Line

Gradual shifts towards more highly automated manufacturing will shift incentives away from offshoring manufacturing and towards manufacturing domestically. Comparative advantage principles mean that offshoring won't go away any time soon. But, in general, automation means that the future of the domestic manufacturing industry in the United States is fairly bright going forward. 

This is especially true in new industries where sunk costs don't multiply the impact of decisions made when economic incentives more strongly favored offshoring.

Of course, since domestic manufacturing is most attractive in the most automated operations, a major resurgence of domestic manufacturing may not produce all that many more U.S. jobs and the jobs that it does create will largely be for higher skilled workers, not for the blue collar workers who lost their jobs in the deindustrialization process that started to take hold in the U.S. in the 1970s.

The exception to that general rule, however, may be manufacturing in support of building construction, where transportation issues can favor domestic manufacturing even when the work is relatively unskilled. But, even in this case, the growth in construction manufacturing jobs will come at the cost of even more lost jobs in on site construction. And, this shift will hurt the least skilled workers the most.

Automation is bad news for the employment of less skilled workers both in the U.S. and abroad. And, the impact of automation on these workers is largely irreversible, unlike offshoring.

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