U.S. Factories Facing Decline Due to Import Surge
What led to this situation? A significant drop in manufacturing productivity.
The expectation with globalization was pretty straightforward. Yes, U.S. factories could end up with fewer workers, but it was assumed that the remaining employees would be more productive because of better technology, software, supply chains, and management. So, although jobs were lost, the idea was that efficiency would ideally rise.
But here’s the kicker: that didn’t happen.
Labor productivity in manufacturing did increase by about 3.3% annually from 1987 until 2010. However, since then, things have changed dramatically.
According to new research from Northwestern University by Robert Gordon and Kenneth Liu, there’s a deeper issue at play. Why have increased imports negatively impacted America’s manufacturing strength and output?
The researchers cleverly turn the focus away from the period following the 2008 financial crisis, which many see as when manufacturing started its decline. They point out that the real turning point came earlier, around 2000.
Typically, productivity discussions revolve around technology, management skills, or training effectiveness, and some people claim it’s hard to measure accurately. But, Gordon and Liu argue differently. When production slows, factories close down. As factories shut their doors, the workforce ages out. This leads to a diminished supply network. Once suppliers shift their operations overseas, domestic companies struggle to access essential components, knowledge, and manufacturing expertise.
Disintegration of the Industrial Ecosystem
We didn’t simply swap American-made products for foreign imports. It effectively weakened the entire system that boosts U.S. productivity. Imports have ballooned compared to domestic manufacturing. For instance, the percentage of imports in the domestic manufacturing landscape jumped from 28% in 2000 to 45% in 2023. In essence, foreign production didn’t just supplement U.S. manufacturing; it increasingly took its place.
This shift is crucial because productivity advances don’t solely come from highly educated consultants or theoretical papers. Instead, they stem from within the industrial framework. When domestic production decreases due to import competition, factories shutter, jobs disappear, and essential knowledge transfers overseas. Gordon and Liu emphasize that a factory isn’t merely a place for assembling goods; it’s also a learning environment for engineers, a space to identify defects, and a hub for problem-solving among suppliers and manufacturers. When manufacturing jobs are plentiful, workers carry this valuable knowledge with them. Ultimately, production hollowing out can compromise future improvements.
The hardest-hit industries have taken severe blows. After the year 2000, sectors like apparel, textiles, furniture, and electrical equipment grappled with tremendous drops in production. Gordon and Liu found a strong correlation across the manufacturing domain.
Consider the American computer industry—once a cornerstone of productivity. By 2018, the import penetration in computers and electronic equipment soared to 84%, nearing the levels seen in the low-cost textile sector. Industries that once exemplified American technological dominance have also faced challenges.
This research carries implications for current policies. Critics often argue that imposing tariffs results in a dip in productivity. However, Gordon and Liu suggest this view may be misguided. Rather than productivity exceeding real economic conditions, it thrives on the very act of production. Should reshoring efforts reinvigorate the industrial ecosystem that globalization disrupted, it could plausibly enhance productivity.
