Good Fiction

Ian Fletcher (not to be confused with the scribe behind the James Bond novels) yesterday wrote about the problems with American manufacturing.

Whereas I agree with his larger points — manufacturing output does not necessarily measure manufacturing health — there’s a couple of problems with some of his supporting evidence.

For one, there’s his contention that because Japan supplies “over 70 percent of the world’s nickel-metal hydride batteries and 60-70 percent of the world’s lithium-ion batteries,” it give the country “a key advantage in electric cars.”

Well, maybe. Being a supplier of a critical commodity or technology does not, history shows time and again, necessarily translate to ownership over the end-market. Labor and other ancillary costs have a tremendous affect on the procurement decision tree. China, of course, had no real technological advantage over Japan, Taiwan or the US in printed circuit boards. It just had loads of cheap manpower, and a government so eager to build its tech base that it moved land and sea (sometimes literally) to make it possible.

Which brings us to nit No. 2. Says Fletcher: “The Obama administration shows no awareness of any of this, despite scratching a hole in its head over why job creation has stalled. (Hint: it hasn’t stalled in the nations, from China to Germany, running trade surpluses with us in manufactured goods.)” No, unemployment hasn’t stalled in either country, but for reasons other than what Fletcher asserts. China, of course, has an abundance of cheap labor that no country save India can match. In Germany, on the other hand, the unemployment rate is 6.8%, which is better than in the US, but hardly great relative to classical standards. As recently as 2004, it was 9.7%, after which Germany enacted a series of financial reforms. The nation now stands as the financial bedrock upon which lies much of the rest of the beleaguered European Union. I would argue that Germany ability to position itself financially, rather than any politically driven manufacturing strategy, is at the core of its current export success and employment stability.

Finally, Fletcher ignores a far more significant data point: Japan. Japan’s economy is some 60% larger than Germany’s, and its internal manufacturing supply chains are legendary. Its unemployment rate was 4.9% in December, which appears stellar, until one realizes that figure is 188% higher than the nation’s average from 1953 through 2010. Its GDP is on a roller coaster, having contracted in the December quarter. Yet it runs a $45 billion trade surplus with the US. Here, Fletcher’s contention that trade surpluses and manufacturing supply chains go hand in hand with job creation falls on its face.

Fletcher is on the right track, but some of his supporting details are closer to the James Bond series: good fiction.