We all know it, if not see it in the news every election cycle: manufacturing in North America is oft-romanticized but little defended with actual policy proposals. We are often nostalgic for the manufacturing prowess (and middle class lifestyle) that existed in the 1950s and 60s, but for all the nostalgia it does get, little of it finds real life today.

Much of this change is attributed to offshoring, and while the politics of it may be divisive, it could be considered a practical choice amidst the growth of a global, affordable labor supply and our general desire for a variety of cheap goods. At the same time, the 1960s saw a burgeoning environmental movement in part responding to the damage caused by that decade’s manufacturing standards. At the same time, while automation led to Luddite riots in the 19th century, an embrace of purpose-built automation, science and technology led to a wider array of basic living goods and contributed to a reduction in absolute poverty.

So, while there was plenty of justification to start down this path so many decades ago, today many make the case to bring manufacturing back. We would be wont to disagree, however the case here must be correct for the era. In making a case for policy today, we must focus on three key policy points to bring back manufacturing in a durable way: maintaining efficient supply chains as international labor costs rise, using environmental policy as fuel for manufacturing growth and incorporating automation that augments labor power while reducing overall unit labor cost. In that environment, the real case for manufacturing doesn’t become a matter of emotional resonance, but practical benefit for all.

What Started the Offshoring Policy?

While the desire to maximize shareholder value, the need to increase production to meet the consumption needs of baby boomers and the diversification of international trade flows in the 1960s and 70s all drove initial offshoring efforts, the tendency towards offshoring ultimately comes from the reduced unit labor costs and relative increases in productivity it provides.

Why is this the case? Fundamentally, a factory can and should exist wherever the most profitable cost of inputs, labor and transport to market can exist. In this scenario, profits are not only maximized, but the final sale price of goods can also be kept low given that a market is sufficiently competitive. And of course, if competition is so lacking that profits remain inordinately high, someone will almost certainly edge into the market (barring the few notable software services that we are all certainly aware of today). 

In this classical economic model, total labor costs don’t know nationality, color, class, caste or status – only education, skills and willingness to do the job. Of course, given the relatively low standard of living found outside the “Western” World in the beginning of the 70s, it’s no surprise that waves of offshoring got off to a roaring start.

While a variety of skills have been devalued in favor of white collar or “knowledge” work, offshoring also involves an offshoring of the environmental consequences and energy consumption that occurs in the domestic market. Fast-forward to today, we find that the case to bring back manufacturing has the modern supply chain standing in its way. 

Why is this the case? Well, in any supply chain, there are inputs, non-final goods, and final sale goods. Each step of this process involves variation between low-value added and high-value added processes that require varying levels of skill or experience. Higher quality processes will tend towards the highest-skilled markets. 

The supply chain consequences of offshoring has had a positive impact on the wages and labor productivity across sectors. Why those benefits are not distributed equally are, as you’ll see, due to insufficient automation. Source: Princeton.

Ultimately, however, the ability to optimize between labor markets allows for each to see it’s efficiency maximized. In one example: a Barbie Doll’s hair might be manufactured from nylon in Japan, the clothes from cotton in China, the body from ethylene refined in Taiwan, assembled in Malaysia and Indonesia and tested for distribution in California.

In all these scenarios, flexibility is created by introducing new laborers with skill levels scaled to the goods they produce, allowing them all to produce more goods than otherwise would be possible. Why can this be seen as a disruptive process? Is it past concentration of supply chains leading to a “hollowing out” of domestic manufacturing? Is there reduced labor power due to reduction in the number of jobs available? This is where finding a practical way to bring manufacturing back is key – mitigating that disruption in a profitable way is ultimately the best way forward. 

Is Environmental Regulation Bad for Manufacturing?

During the 1960s and 70s, it was expected that US cities would be invisible under a veil of pollution before the end of the 20th century. The first Earth Day, celebrated in 1970, was one of the largest social actions in United States history – all to trigger new environmental protections. It was so effective that eventually Richard Nixon founded the EPA before the end of that year – an unusual instance of a conservative president initiating what is generally considered liberal policy.

In that time, of course, the US trade deficit in manufactured goods has exploded, as much due to offshoring itself as the motives for offshoring. It has been estimated that environmental regulation has caused a 4.8% reduction in relative in total factor productivity of US manufacturing. This equates to 8.8% decline in US-based manufacturing profits. On its own, this policy makes a non-decisive difference. However, in combination with the productivity improvements that come from expanding supply chains overseas, could this have contributed to a compounding effect that drove manufacturing overseas and triggered such a negative political narrative about this sector?

The OECD has done extensive research on this topic, and while regulatory “asymmetry” between countries can complicate production decisions, in 1995 economist Michael Porter developed the aptly named “Porter Hypothesis” in which environmental regulation encourages cleaner technology investments which drive net energy and consumable savings up beyond the cost of investment.

In simpler terms: the investment in clean technology ultimately saves much more money and resources than it costs, and the effect accelerates as regulation increases. Ultimately the more automation is induced and the more advanced resource-saving technologies are deployed – while also subtracting the energy costs of moving goods between global markets – new technologies ultimately make it more profitable to manufacture goods closer to the market where they are consumed, while also placing less stress on that particular nations commodity and energy markets. 

Our industrial policies can produce greater goods and still function in relative harmony with nature wherever a sufficient “forcing function” exists. The only exception to this is where private companies are forced to comply to these regulations without sufficient support to bear the disruptive initial costs. Despite these possibilities, the politics around the issue makes it seem like there is a zero-sum choice between the environment and attracting the jobs we want to reshore – how is it that we can instead connect these loose ends?

Can Manufacturing Automation and Labor Power Coexist?

The root of the problem in this conversation is the zero-sum assumption that automation kills jobs. Under limited scrutiny, this is false. Companies are continually investing in new means of automation and ways to increase productivity, and yet we only see total job openings fall significantly during recessions or in the run up to greater economic downturns, while job openings consistently rise as an economy grows – even when automation investments have already been implemented.

What explains these job losses, and what perhaps induces greater job losses during economic downturns? Is it automation, or is it that we don’t automate enough to keep profitability high, the costs of goods low, and jobs and incomes sufficient to have broad sustained prosperity?

In the face of this, a new study from Statistics Canada may indicate a real transition in the way we can think about automation. They’ve found that firms who use robots tend to employ 15% more workers than those who don’t. Ultimately, the productivity benefits of automation can actually increase employment, defeating the core objections to fundamentally encouraging a manufacturing-based economy.

With all factors held equal, robotic automation actually increases employment. Ultimately, sufficient automation will actually restore the job market of the past, while also maintaining high corporate profitability. Source: StatsCan

It’s quite possible that the relative reduction in manufacturing facilities – which of course reduces actual automation in those facilities to zero (because they no longer exist) – is responsible for the perceived malaise in the labor market compared to the 1950s and 60s. A quick look at germany would indicate that politicization has perhaps been part of the problem: Germany, land of labor politics, continued middle class success and  extensive environmental regulation, sees labor leaders continually embrace robotics as a new means to magnify the productivity of the workforce and maintain the standard of living they all enjoy. 

The evidence has been sitting in front of us all along, so why wait to change the politics around a sector that is so critical to having a modern, prosperous society?

Bringing Manufacturing Back to Center Stage

Ultimately, technological transformation is what brings manufacturing forward and makes it stronger. The first phases of the industrial revolution were so powerful that, as a consequence, they made many workers feel like they were “simply cogs in the machine”. The introduction of standardized time, workplace resources, new skills and education, along with limited understanding and negotiating power all made industrialism a new master, and not simply a new tool.

And yet today, groups like the National Association of Manufacturers claim that skills are what is fundamentally lacking to bring about a new manufacturing heyday. Much as this would help, it may not be possible – the skills gap is only expected to increase, and with school boards and public institutions already hold purse strings tight, the decades needed to transform the workforce won’t happen overnight. Automation wouldn’t just fill the skills gap, it would actually increase entry-level positions and help less-skilled workers start to view manufacturing as a good career.

We know today that the way in which we use resources, generate wealth and foster community must adapt to new challenges. Nothing good lasts forever, but we can make it last longer if we’re willing to change. More efficient manufacturing technology – combined with new branding and perceptions that permit adoption to accelerate – are what is necessary to continue building a greater standard of living over the long term.

So what kind of manufacturing technology must be promoted? Technology that minimizes environmental impacts, brings jobs to a wider array of communities and actually creates more jobs and economic stability as time goes on. Of course, all this can only be accomplished by actually developing the technology, but better processes, design methods and quality controls are all essential to overcoming manufacturing’s biggest costs and enabling it’s biggest opportunities.

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