By DANIEL J.B. MITCHELL
I’m going to tell you about the coming boom in manufacturing, not only nationally but right here in Los Angeles. I know. Everyone has told you that manufacturing is dead. It’s all relocated to China and might be migrating to India. Anyway, here in Los Angeles, we make movies and such, and live in a “service economy.” And, of course, there is the spectacle of our once-proud American auto industry subsisting on federal handouts.
But consider these facts. The U.S. deficit in net exports of goods and services is about 5 percent of GDP. We have been financing that deficit, year after year, by borrowing mind-boggling amounts from countries such as China and Japan. In the 17th and 18th centuries, there was a widespread belief among national rulers that the purpose of trade was to accumulate gold hoards, gold being the international currency of the era. To accumulate gold, so-called “mercantilist” countries endeavored to run trade surpluses, pushing up their exports and limiting imports. China, Japan and other countries have become modern mercantilists, hoarding more and more U.S. dollars, which replaced gold as the international means of exchange.
However, that approach is increasingly unsustainable. For the elites of the modern mercantilist countries, the process of selling on credit to the United States and piling up U.S. Treasury securities as a result, seemed beneficial. Or at least it did for the last two or three decades. But just as the unsustainable housing bubbles and dot-com bubbles came to an end, so, too, are we nearing the end of modern mercantilism.
What does that shift imply? It means that either U.S. exports will rise substantially and/or U.S. imports will decline. But one way or another, our net exports have to increase in order to stop dumping dollars on the world and to start repaying past debt. Whether we are talking about the export side or the import side of the ledger, roughly eight out of 10 dollars of American trade are manufactured products. Yes, we also have exports and imports of services. But the bulk of the trade adjustment is going to come in the manufacturing sector. (Sorry, Hollywood, but movie royalties from abroad are just not big enough. Blockbuster films are not going to repay our debts to the world.)
Creating jobs
Simply to bring about a zero balance in net exports from the current deficit, we would need to expand manufacturing output by something like 4 percent of GDP (assuming expanded service net exports make up the other 1 percent of our deficit). Manufacturing accounts for only about one-tenth of total employment and a slightly higher fraction of GDP. So raising activity in manufacturing by 4 percent of all activity whether through more exports or through import substitution is equivalent to raising the manufacturing job total by 40 percent! And note that eventually repaying our past international debt requires a surplus in net exports, not just a zero balance.
At the local level, Los Angeles-Long Beach had about 472,000 manufacturing workers going into the current recession. Even a conservative calculation of the impact of the end of modern mercantilism suggests adding 150,000 workers to that total just to get to a zero balance in net exports. But for our local economy, how modern mercantilism comes to an end will matter, due to the important presence of our major seaports and airports, and the significant logistics sector that handles international cargo here. If mercantilism ends via trade protection and isolation, i.e., policies to block imports, our ports and logistics sector will suffer. But if the United States can achieve substantial export expansion through international cooperation and needed exchange rate adjustments, the resulting manufacturing boom will be mirrored by more trade and jobs at the ports and in logistics.
I know that thinking about any sector booming in the midst of a deep recession and financial crisis seems farfetched. Many businesses currently are teetering on bankruptcy. But we will one day come out of our current economic morass. When we do, it seems most unlikely that our economy will once again be based upon a “charge-it-to-China” mentality. The end of modern mercantilism thus has to mean a manufacturing boom. If Los Angeles which still has a major manufacturing presence wants to be part of that boom, it needs to begin to plan for it now. Other parts of the country will be eager for their shares and for ours.
Daniel J.B. Mitchell is professor emeritus at the UCLA Anderson School of Management and the UCLA School of Public Affairs.
