Don’t listen to the overheated rhetoric coming out of United States presidential hopeful Donald Trump, writes Brian Lee Crowley in the Globe and Mail. Superior ideas, not the heavy lifting that comes with manufacturing "things you can drop on your foot", are what give the North American economy an edge over competitors.
By Brian Lee Crowley, August 7, 2015
Republican presidential aspirant Donald Trump is only the latest economic crank to attract a significant political following by peddling emotion and anecdote as evidence and stoking the legitimate fears of the economically vulnerable.
Trump’s latest claim is America has been weakened and China strengthened by the move of manufacturing jobs overseas, pinpointing the culprit as poorly designed free trade agreements. “I always beat China” he boasts while wearing a ball cap emblazoned with “Make America Great Again.”
Leave aside the fact that China’s growth has occurred despite having no free trade agreement with America. The more fundamental question is whether America has been weakened, and its workers’ job prospects blighted, by the loss of manufacturing jobs over the past few decades.
To believe this you must accept Trump’s basic premise, that making goods (which The Economist unforgettably defined as “things you can drop on your foot”) is the only real and worthy kind of economic activity. Services, by contrast, are illusory and ephemeral, sometimes denigrated as “taking in each other’s washing.”
If this premise is correct, then indeed America has been weakened and China and other rising manufacturing powers have been strengthened.
This manufacturing fetishism, however, is a mirage. It draws a completely false distinction between goods and services.
All economic value is created by human knowledge. Natural resources are just rocks until people learn how to extract their precious essence, as Canadians famously did with the oilsands. Farmland has no intrinsic value until it is put in the hands of people who have the knowledge of weather, seasons, seeds, crops, husbandry, harvesting, transport and marketing to make it productive.
Manufactured goods also derive their value from the knowledge embodied in them. What makes a table, car, pill or iPhone valuable is not the tangible materials that went into its manufacture, but the intangible ideas that went into its creation.
Services are no different. The knowledge and ingenuity that goes into drawing up an architectural plan, preparing a tax return, making a film or carrying out an environmental assessment are what create their value and they are indistinguishable from what creates the value of something you can drop on your foot. As one economist so aptly puts it, "The value of a dollar's worth of cloth is exactly the same as a dollar's worth of web design. One dollar."
So has America been weakened by the fall in the number of manufacturing jobs and the rise of services? Quite the opposite. At 5.3 percent, America is basically at full employment despite the loss of millions of manufacturing jobs over the last quarter century. Moreover contrary to the McJobs rhetoric, the move into services has created millions of high value-added and well-paying jobs.
In fact it is the manufacturing jobs that have gone offshore that are the less desirable, lower value-added jobs now compared to services. This was famously illustrated a few years ago by an analysis of where the real value lay in the production chain for the iPhone. The greatest value-add was in things like design, R&D, distribution and sales, the least was in the actual assembly. That’s why Apple is a hugely profitable company: it actually does the most valuable stuff itself (largely in America), but farms out the assembly (mostly to China).
In a modern knowledge-intensive high-wage economy like Canada or the US, then, the old assembly line where low-skilled workers could earn middle class wages is dead. The reason is encapsulated in an old joke about an industry Trump knows all about: construction. A developer and a trade union official were watching a giant earth mover at work on a construction site. The unionist laments the fact that the earth mover could have been replaced by 100 workers with shovels, to which the developer asks the logical question: why not 1,000 workers with teaspoons?
The answer is that you can pay the operator of the sophisticated, expensive, computer-controlled earth mover a hundred times what you can pay the shoveller and a thousand times what you can pay the teaspoon-wielder. The last two rely exclusively on their physical strength, the first must skillfully orchestrate the knowledge of a thousand specialised minds embodied in the machinery she controls.
The shift from manufacturing to services has made America stronger, not weaker, because it is the most hospitable place on earth for the knowledge creation and innovation that is at the root of all economic progress. Even if a President Trump wrested manufacturing away from China, it would create little employment in America because Americans increasingly work with their minds. And those free trade agreements he criticises are what prevent others from throwing up barriers to America’s creative prowess. Nice ball cap though.
Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.
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