Photographer: Michael S. Williamson/washington post/getty images
Economics

Trump's Plan to Bring Back Manufacturing Isn't Crazy

Reshoring production would be good for the economy. Just don't expect a boom in blue-collar jobs.

The head of President Donald Trump's National Trade Council, Peter Navarro, has been making waves recently, with an op-ed in the Wall Street Journal and a speech to the National Association of Business Economists.

The bad news is that Navarro still uses some dodgy economics when arguing for lower trade deficits. As I explained last December, lowering trade deficits doesn't necessarily give gross domestic product a boost. Navarro should stop using this talking point.

That said, Navarro's vow to "reclaim all of the supply chain and manufacturing capability" that the U.S. has lost in recent decades isn't necessarily a bad thing. There are good reasons to want to revitalize U.S. manufacturing and lower the trade deficit -- as long as it's done in the right way, and as long as expectations are appropriately modest.

What a manufacturing revival definitely wouldn't do is bring back good old-line manufacturing jobs. The U.S. is a rich country, meaning that its comparative advantage in manufacturing lies in capital-intensive, high-value-added goods -- semiconductors, industrial machinery, aircraft and pharmaceuticals. Those are the kinds of things that are mostly made by machine tools and robots, not by human beings working on an assembly line.

To see what a U.S. manufacturing export boom would look like, we need only consider Germany. Germany is a rich, productive country with a very large trade surplus. It's succeeding at doing exactly the kind of thing Navarro wants. But the percentage of German workers employed in the manufacturing sector has gone down and down, just as it has in the U.S.:

Where Have All the People Gone?

Percentage of German work force in manufacturing.

Source: Federal Reserve Bank of St. Louis

So even if the U.S. manages to bring manufacturing back, it wouldn't recreate the widespread industrial employment of the 1950s and 1960s.

But there are plenty of other reasons to want to bring supply chains back to the U.S. High-value-added manufacturing -- robot factories pumping out goods -- creates jobs for Americans in other ways. As economist Enrico Moretti explains in his book "The New Geography of Jobs," high-tech manufacturing creates higher-paying service-sector jobs in a local area. The dollars that come into a town with a robot factory get spent on doctors and waiters and personal trainers, and the money circulates throughout the community, leaving everyone better off.

Manufacturing might also have some special properties. Productivity growth is usually higher in manufacturing than in other industries. Part of that is because it's easier to automate the production of goods than the provision of services. And as engineers like Intel Corp. co-founder Andrew Grove were fond of reminding us, manufacturing also creates knowledge spillovers via the supply chain -- the place where electronics are made is also probably going to have an edge in advanced battery technology.

Navarro's idea of reducing the trade deficit is also a good one. Trade deficits leave a burden for future generations, since they have to be paid back by future trade surpluses. Closing that deficit would let Americans of the future -- who are already going to be burdened with an aging population and crumbling infrastructure -- breathe just a little easier. And as economist Dani Rodrik explains, exporting can help companies to figure out what they're good at.

So there are many reasons for the U.S. to do what Navarro wants -- to bring back the supply chain, to revitalize the manufacturing sector and to lower the trade deficit. The real question is how to do this.

Tariffs on foreign goods are probably a bad way. They carry the danger of retaliation, and trade wars are painful for everyone involved. Also, tariffs make it harder to import the materials that are needed in the manufacturing process.

A better idea would be to help companies with reshoring. Lots of companies shipped production to China and other countries, lured by the promise of low wages, cheap energy and government subsidies. But wages have been rising steadily in China:

Goodbye China Cost Advantage

Annual pay in yuan for Chinese manufacturing workers.

Source: Trading Economics

Other costs have risen there as well, so that it's now about as cheap to manufacture things in the U.S. as in China.

But many of the companies that outsourced manufacturing years ago are now stuck in China, since moving back to the U.S. entails large costs. The U.S. government could provide financial and logistical assistance to companies that want to move production back to the U.S., thus freeing these companies from the overseas trap. This would represent a bailout of sorts, since it would be using government money to help companies out of the predicament that their own short-sightedness landed them in. But the benefits, in terms of a U.S. manufacturing renaissance, might be worth both the unfairness and the financial costs.

So don't discount Navarro's dream of bringing back the supply chain. If done right, it could be good for the U.S. economy's long-term health.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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