|U.S. Trade, balance of payments (BOP) basis, 1960-2001|
|Figure 1. In the early 1970s, service exports and goods imports diverged, leading to the trade deficit the U.S. faces today.|
This month we look back on the last few decades of trade and commerce in the U.S. and try to put recent changes in the molding industry into perspective. We also discuss current trends with members of the industry and get their thoughts on which road the U.S. molding industry will take now that itâs standing at the crossroads.
GDP, Goods, Services
The U.S. manufacturing heritage is justifiably proud. Starting with the Industrial Revolution, this nationâs ability to design, engineer, and create a myriad of products quickly and efficiently has been demonstrated time and again.
The fact is, however, that since World War II, the American economy, and society as a whole, has shifted from one dominated by manufacturing to one dominated by the service sector (Figure 1). This is not to say that the manufacturing community is producing less. In the 14 years from 1987 to 2000, the GDP of the manufacturing sector has averaged annual increases of 3.9 percent. (The 2001-2002 manufacturing recession helped knock down the 2001 GDP 6.4 percent.)
|U.S. gross domestic product, $, billions|
So, how is it that manufacturing GDP is trending up in absolute dollars, but down as a percentage of total GDP? The answer lies in the services GDP, which is growing at a faster rate than manufacturing GDP, and each year it comprises a greater percentage of the total GDP (Figures 2a, b, below). From 1987 to 2001, finance, insurance, and real estate GDP grew an average 6.8 percent annually; services GDP (which includes hotels, entertainment, and health, legal, and social services) grew an average 7.7 percent annually over the same 15-year period.
|U.S. gross domestic product by industry (in curent dollars)||U.S. gross domestic product by industry as a percentage of total GDP|
Figures 2a, b. From 1987 to 2000, manufacturing GDP grew consistently (left), but its percentage of total GDP has declined (above), thanks mostly to the dramatic increase in services GDP.
The overall trend toward service is reflected in import/export data as well. Figure 1 shows the U.S. goods and services trade balance going back to 1960. Until 1970 the U.S. generally ran a negative service balance, a positive goods balance, and an overall positive trade balance. But in 1971 that all changed. Almost overnight the U.S. trade balance for goods flipped negative, services became positive, and we began what is now a 30-plus-year run of an overall negative trade balance. The explosion in the quantity of imports to the U.S. is also reflected in country-by-country trade deficit data (Figure 3, below).
It may not be fair, however, to so starkly and appositionally segregate the manufacturing and service sectors of the economy. Bo Carlsson, DeWindt professor of industrial economics and director of Ph.D. programs and research at Case Western Reserve Universityâs Weatherhead School of Management (Cleveland, OH), points out that large parts of the economyâs services sector are complementary to and dependent on the manufacturing sector. He calls such services âproducer services,â and in 1999 published a paper in Economics of Innovation & New Technology that contends that the manufacturing sector is not in as great a decline as perceived.
Carlsson says that thanks to reclassification, several services that used to be associated with manufacturing are now, for statistical purposes, labeled as purely âservices.â âIâm thinking of services like architectural engineering, communications, accounting, and management consulting,â says Carlsson. âA lot of these have been reclassified. Where did they end up? Itâs the same people doing the same thing in a new entity that happens to be called services.â
Taken together, according to Carlssonâs research, manufacturing and producer services comprised 54.6 percent of GDP in 1977, and 51.6 percent in 1990, showing a decline of 5.6 percentâmuch less than the 22.4 percent decline in manufacturing alone reported during the same period.
Despite such economic analysis, in the end thereâs no getting around the fact that manufacturingâs contribution to GDP is waning, and it leaves molders and moldmakers in the midst of a global shift in the world manufacturing economy.
Brave New World
|âI realize that the low wages in other countries are not going to change. We are willing go toe to toe with other moldmakers from other countries, but I want a level playing field.ââRick Finnie, owner, M.R. Mold & Engineering Corp., Brea, CA|
As has been widely reported, many of the U.S. molding industryâs favorite customers have taken their manufacturing elsewhere, including Hewlett-Packard, Motorola, Dell, Apple, Black & Decker, and Ericsson. Just last fall, Ford announced that it would procure from China almost $1 billion in supplies by mid-2003, and more than $10 billion by 2005âall in an effort to whittle down the $90 billion it spends each year in purchasing costs. Case Western Reserveâs Carlsson contends that the manufacturing community being developed north of Hong Kong in Guangdong will âlikely become the major manufacturing center in the world in the next decade or so.â
In fact, the Chinese economy is improving so well that Moodyâs recently raised its outlook on Chinaâs long-term foreign currency bonds from positive to stable, thanks primarily to a surge in exports (fueled by foreign direct investment) that helped boost the countryâs currency reserves.
This largesse can be attributed in part to the fact that in November 2001 China won accession to the World Trade Organization (WTO), ushering it into the rarefied air of more open and accessible trade. Membership in the WTO also binds China to a host of guidelines and restrictions on trade and investment. The ultimate goal is to bring Chinese trade policy in line with that of other WTO members.
Among the items added to the China to-do list after joining the WTO were to implement a tariff reduction strategy; eliminate import and export barriers and quotas; improve protection of intellectual rights; eliminate import licensing as a trade barrier; eliminate importation approval processes designed to favor domestic producers; bring taxes and charges levied on imports into compliance with WTO guidelines; and eliminate subsidies on industrial goods per WTO statutes.
Unfortunately, China to date has been slow to comply with WTO statutes. A 2002 report on China issued by the U.S. Office of the Trade Representative says, âUnderstanding of WTO rules remains limited, . . . particularly outside of Beijing and Shanghai. Membership in the WTO will bring substantial changesâboth economically and sociallyâbut it will not remove all commercial problems and the implementation process will take time.â
Ironically, the WTO guidelines and bylaws to which China must now adhere will likely prevent the U.S. government from taking any protectionist action of its own. As the Bush administration learned when it moved to protect the steel industry last year, the international community doesnât take kindly to a country increasing tariffs as part of industry preservation. When any WTO member acts to use tariffs as a barrier to trade, a wide array of punitive actions can be invoked to correct the offending country. If the U.S. wants to move to preserve the manufacturing economy, it will likely use other methods.
|U.S. trade balance, 1985-2001|
|Figure 3. Among Americaâs five biggest trading partners, the U.S. deficit with China has steadily become the largest.|
When considering the monumental changes the molding industry is going through, itâs hard not to become concerned that we are watching the beginning of the end of injection molding and toolmaking in the U.S. However, finding agreement on what the decline of manufacturing means, and where itâs taking the nation, is a daunting challenge.
Carlsson contends that the market forces taking molding jobs to Asia cannot be reversed. He saysâpointing to the agriculture and steel industries as examples of what not to doâthat it is unreasonable to expect the U.S. government will take substantive action to protect molders and moldmakers. The United Statesâ prime interest, he contends, is to maintain the nationâs robust and safe investment climateâeven as the trade deficit balloons.
Carlsson thinks the industry itself should take advantage of the change. He estimates that itâs probably not unreasonable to expect that manufacturingâs total share of GDP may drop to as low as 10 percent in the next decade. âI donât think thereâs much stopping this shift,â he says. But, he adds, that shouldnât stop the industry from devising ways to survive, by playing to its strengths.
âLetâs do what we do best and let [developing countries] do there what they do best,â he says. âBut letâs not lose track of the front end of thisâthe high technology, the new developments, developing new markets, new customers, and new products. We can help ourselves through this transition, but we have to recognize that this change is very real.â
This change is resulting in an odd paradox for manufacturers: The only way to survive and grow is to remove labor and add automation; so, as productivity increases, employment decreases. A molder must, basically, choose between his employees and his business. Once this is done, itâs then time to start looking at the advantages U.S.-based molders and moldmakers bring to customers.
This sentiment was echoed at IMMâs first Crossroads Roundtable held in Cleveland in November. Spencer Siegel, VP market development at Classic Industries Inc. (Latrobe, PA), said âgetting into and fully understandingâ a customerâs business has become a competitive advantage. âOur engineering team becomes an extension of [the customerâs] engineering team,â says Siegel. âWe become the manufacturing arm of its organization and work closely with our customers to improve efficiency. Because when you talk about cost, efficiency is cost.â
âThis very approach is right on target,â said John Aue, president of Venture Plastics (Newton Falls, OH). âI think that is about the only way you can do it. Weâre going to have to look at the areas that we can contribute to here on the domestic side that perhaps they canât do in Asia.â
Taking this concept one step further are larger molders and contract manufacturers like Nypro and United Plastics Group, which have located facilities worldwide in an effort to take advantage of low-cost labor. Next monthâs Crossroads report will look more closely at this trend, but certainly OEMs are not the only ones who stand to gain by moving some operations to developing countries.
|âTaking raw materials and making something of value out of the labor applied has historically generated sustainable wealth creation. If we allow ourselves to be just consumers we will end up washing each otherâs clothes. More importantly, we bestow as a result enormous power to those who supply us, and become vulnerable to their dictates.ââPaul Tontsch, principal, Precision Injection Molding, Surrey, BC|
Level Playing Field
At the recent Crossroads Roundtable IMM asked what government could do to help stop the flood of manufacturing jobs going overseas. The most common answer is one heard many times in the last few years: âGive us a level playing field,â said Tim Riley, VP of manufacturing at Perfection/H&H Plastics (Madison, OH).
Molders and moldmakers simply canât compete head-to-head with a country that pays its employees $15/week. Compounding the problem are tariff discrepancies between the U.S. and China. All of these factors combined most recently to inciteâat the behest of Pennsylvania Congressman Phil Englishâthe International Trade Commission (ITC) to launch a Section 332 investigation into the state of the mold- and diemaking industry.
The ITC issued its findings of fact in October, which may be used to initiate a government actionâthat remains to be seen. In the meantime, the report stands as possibly the most thorough review ever of the stateÂ of moldmaking, covering the U.S., China, Hong Kong, Japan, Taiwan, Canada, Mexico, the European Union, Germany, and Portugal. (For the full report, go to www.usitc.gov.)
Jerry Lirette, president of mold component supplier D-M-E Co. (Madison Heights, MI), has been very involved with the ITCâs Section 332 investigation. His concern about the decline of manufacturing extends beyond the toolmaking industry and the dollars and cents involved; heâs concerned that the erosion of Americaâs manufacturing base will compromise its political power as well.
This concern, shared by several manufacturing organizations, has led to the formation of the Manufacturers for Fair Trade Coalition. Itâs composed of industry trade associations and firms, including, among others, the SPI, the AMBA, the Tooling & Manufacturing Assn., the National Tooling & Machining Assn., and D-M-E. The mission of the coalition is to âidentify and promote trade policies that advance U.S. manufacturing.â Advancing, in this case, also means preserving.
|Web resources for trade statistics, data, and policy|
|International Trade Commission||www.usitc.gov|
|International Trade Data System||www.itds.treas.gov|
|Office of the U.S. Trade Representative||www.ustr.gov|
|Rep. Phil English||www.house.gov/english|
|Rep. Marcy Kaptur||www.house.gov/kaptur|
|Rep. Don Manzullo||www.house.gov/manzullo|
|U.S. Dept. of Commerce, Bureau of Economic Analysis||www.bea.gov|
|U.S. Dept. of Commerce, Census Bureau||www.census.gov|
|U.S. Dept. of Commerce, Commercial Service||www.usatrade.gov|
|U.S. Dept. of the Treasury||www.ustreas.gov|
|World Trade Organization||www.wto.org|
The no-tariff concept is relatively new; in fact, in late November the Office of the U.S. Trade Representative proposed a tariff-free world on industrial and consumer goods by 2015. International response was lukewarm, particularly from developing countries, which count on tariffs for revenueânot to mention the fact that 2015 is 12 years away, a long time in a globalized world.
Of course, protectionist measures arenât the only options at hand. The laundry list of potentially helpful government actions include the following:
- Trade balance initiatives for critical industries among U.S. trading partners.Â Â Â Â Â Â Â Â
- Domestic content legislation on finished products in critical industries.Â Â Â Â Â Â Â Â
- Investment tax credits for firms that make capital equipment upgrades.Â Â Â Â Â Â Â Â
- Accelerating depreciation for equipment and software.Â Â Â Â Â Â Â Â
- Tax credits for energy-efficient equipment and plant modifications.Â Â Â Â Â Â Â Â
- Subsidized training and apprenticeship programs.
The first two items are, Lirette acknowledges, relatively radicalâespecially for an open-market-loving country like the U.S. âWe can be a free-enterprise system, but with limits,â he says. âWe should be looking at whatâs good for the U.S., not just whatâs good for the shareholders of our publicly traded companies. If we become primarily a consumer of other countriesâ goods, then the strength of our nation starts to erode.â
In an effort to prompt the administration to pay closer attention to the manufacturing sector, Rep. Marcy Kaptur (D-OH) and Rep. Don Manzullo (R-IL) sent a letter in late 2002 to President Bush, requesting that he appoint a task force on manufacturing. If granted, this could lead to the creation of a manufacturing commission. (Currently there is no federal department or organization responsible for assessing the health of the manufacturing industry and how the country might be impacted by its decline.) As IMM went to press in mid-December, President Bush had reportedly not acknowledged or replied to the letter.
The Icebergâs Tip
Discovering agreement on the issue of globalization and its impact on and meaning to the U.S. manufacturing industry is difficult one. One thing is certain: Change is afoot within the injection molding and toolmaking industries that likely will be looked back on as the turning point. We are at a crossroads, and in the coming months we hope to help you and the industry decide which way to go.