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Why manufacturing is important for economic superpowers

Why manufacturing is important for economic superpowers


Manufacturing accounts. Although increasingly automated and globalized in recent decades, it still has a special place in the U.S. national psyche and other major exporting countries, such as Germany, China, and Japan.

Part of that has disproportionate benefits for the economy. In the US, for example, although manufacturing accounts for only 11% of gross domestic product and 8% of direct employment, it boosts 20% of the country’s capital investment, 30% of productivity growth, 60% of exports and 70% of corporate R&D, according to McKinsey Global Institute according to. The share of manufacturing in the economy of many other developed countries is much higher.

It’s no surprise that discussing where things are done is emotional and political. This debate has prevailed in recent years, not only because of the US-China technology and trade wars and the shortage of the supply chain in the pandemic, but also because of human rights. Western brands included Nike, H&M, and European luxury producers find it increasingly difficult to use cotton produced in Xinjiang, some of which can be collected and killed with forced labor in Uyghur.

U.S. and European companies are putting tremendous pressure to boycott Xinjiang cotton and use domestic alternatives. However, the Chinese have a dangerous reaction, apparently adding Uighurs to the list of “undisputed” areas such as Tibet, Taiwan and Tiananmen. I suspect that the parties taking over the brands are largely concerned about the importance of China for overall revenue and future growth.

But textiles have been becoming less and less globalized for a long time now. In the US, including textiles and there was furniture among them China had the hardest time joining the World Trade Organization, both of which are labor-intensive and tradable.

However the estimate has changed now that wages and domestic demand have risen in China. Long before Xinjiang’s concerns, garment supply chains were changing. Chinese producers exported 71% of their finished garment products in 2005. By 2018, that was just 29 percent.

This change coincides with other tail winds for regionalization of clothing. More brands go straight to consumers, avoiding expensive brick and mortar stores. This is also increasing investment in software, which will boost efficiency, shorten production cycles and thus shift labor / transportation cost / productivity arbitrage in favor of local production.

These realignments to national economies depend on industry. The fascinating MGI study, which will be published on April 15, examines 30 major manufacturing sectors in the US. Of these, 16 stand out for their economic and strategic value, measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. The outfits are not on the list. They are semiconductors, medical devices, communication equipment, electronics, auto and auto parts and precision instruments.

Of course, some of these industries are being distributed nationally, often for more than political reasons. US-China chip wars. While the U.S. still has an advantage in chip design, domestic production capacity has declined dramatically over the past three decades. That is one of the reasons for the slowdown in the U.S. auto industry in February, when post-pandemic production began to decline. In the same month, President Joe Biden called for a review of weaknesses in the supply chain nationwide.

His administration has already made it clear that he would like to see more domestic semiconductor production, medical supply and other strategically important elements. James Manyika, president of MGI, says that “the size of the demand for domestic production, especially in industries with scale and learning curve effects,” such as semiconductors that are made cheaper in Asia. The U.S. may create more demand for domestically manufactured chips, but only if the government emphasizes investment through guaranteed federal procurement, as semiconductors did in the 1950s and 1960s.

Given the impetus given “Buy American” Under Biden’s command, as well as the support of the federal balance sheet union work in government contracts and health infrastructure, this is unthinkable. In fact, within the defense community (which needs high-end chips for military equipment) and the progressive left (the U.S. wants to be a leader in cutting-edge clean technologies, which could also lead to semiconductor demand) the U.S. and China want to dismantle chip supply chains .

Where would this leave Europe? Sitting very uncomfortably between the two economic superpowers. At the national level of competitiveness, it doesn’t matter much whether fast fashion suppliers and luxury retailers talk about Xinjiang, although the moral questions involved can have consequences for brand value.

But it doesn’t matter what governments do to support domestic demand or to control supply chains. I suspect that these decisions will start less around simple cost and efficiency calculations and will start with a broad discussion of national competitiveness.

rana.faroohar@ft.com



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