The True Cost of Free Markets

There are many who will say that the ongoing problems and challenges in U.S manufacturing are the fault of foreign markets, or a result of China’s rise to power as a cheaper alternative to domestic options. Placing blame on these factors solely would be painting a limited and ignorant picture of the true facts.

Are the ongoing problems and challenges in the U.S manufacturing a result of China’s rise to power?

The fall of manufacturing in the United States, and the rise of China as a superpower in this industry began in the 1980s. Growing up, I was always told that anything made in China was far inferior to anything manufactured in the United States. Where did this sentiment come from? More importantly, now that I am older and wiser, it’s time to challenge these biases that were ingrained into me, and seek out the truth.

How did we get here?

The White House Trade Council head, Peter Navarro, as part of “Made in America Week” in July 2017, claimed in an interview with NPR that China’s entry into the World Trade Organization and global markets was the primary cause of subpar growth since the turn of the millennium (2000).

People like Navarro analyze trade with every country and identify problems like cheap labor in Mexico, currency imbalances in Germany, labeling them as “unfair trade practices.” He focuses on changing everyone else, but fails to look inward at the problems that have been festering for decades within our own country.

In reality, America is responsible for our problems. It comes back to decisions that focused on shareholders and tax cuts, on ensuring the corporations thrived instead of the common worker. We did this to ourselves. The fact that other countries discovered how to do things better does not make them our enemies, and yet, here we are.

Laissez-faire Economics: A Review

While China’s entry into the global market certainly had an impact, the true root of the issue began during the Reagan administration during the 1980s, with the introduction of laissez faire economics.

Directly translated to “let do” or “leave us alone,” this theory restricted government control over the economy, allowing the markets to control themselves independently. This, of course, put power in the hands of corporations, who focused solely on shareholders and profits, leaving countless workers in the dust.

This was a major shift away from the Keynesian economics approach that had been in place since the end of the Great Depression in the 1930s. In the Keynesian model, the theory was that government intervention could in fact stabilize the economy. British economist John Maynard Keynes argued that free markets have no self-balancing mechanisms that lead to full-employment.

The seeds for this shift away from government intervention began in the 1960s and 70s. Milton Friedman’s 1970s article for the New York Times, titled “A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits,” is thought of as a major moment in this shift.

Prior to 2020, U.S. manufacturing was already in decline. In January 2020, reports from the Institute for Supply Management revealed that U.S. manufacturing activity had fallen to its lowest level in over a decade over the course of November and December 2019, with numbers not seen since June 2009.

New orders, productions, and employment aspects of the index were all negative. At the time, Tim Fiore, chair of ISM’s manufacturing business survey committee believed that things would get better. “We’ve probably seen the worst of it behind us,” he said. If only that were true.

During the Trump administration, the ongoing trade war with China began on the assumption that it would lead to a change in this downward trend for domestic manufacturing in the United States. Tariffs on $370 billion in Chinese goods annually were designed to end unfair business practices and build up manufacturing in the U.S.

In January of 2020, China did agree to a deal that would have them purchase more goods from the United States and enforce things like intellectual property protections. Despite this, U.S. manufacturing jobs and production have been on the decline, with 12,000 more job losses in December of 2019 alone.

While the goal is clear, the methods are clearly not working. Most of all, the aggressive trade tactics with China are not effective.

Taking all of this into account, it’s fair to say that the biases infused into me as I was growing up were false, at least in the time period of my youth. Prior to my lifetime, it would have been fair to say that products manufactured in countries like China or Taiwan were in fact cheap or of low quality, but it’s clear that this was no longer the case in the final years of the twentieth century and into the twenty-first century.

Better economic decisions, better technology, cheaper manufacturing, these were the factors that put other markets ahead of the U.S. in manufacturing. As I said before, however, China did play their part in the decline of domestic manufacturing. Let’s look at things from that perspective.

The Other Side of The Story: Is China Really The Problem?

While the United States’ leadership certainly had a hand in the downfall of domestic manufacturing, we must also consider the role of global manufacturing powers.

While Japan was once associated with the highest quality in manufacturing, modern competition has driven Japanese manufacturers to cut costs and strive for production quotas that are difficult to reach. Several decades of slow economic growth and a shrinking population have also made it difficult to keep up with neighbor countries like China.

While current circumstances are far from China’s fault, it would also be ignorant to deny that the country’s rise to power didn’t have a hand in placing a few extra nails into the proverbial coffin. Some will say that China took over manufacturing because they have access to cheap labor, and therefore an edge over others.

That’s a very limited point of view, Inexpensive labor was indeed a factor. In the early 2000’s, China’s wages matched other developing countries, and current wages are as much as five times higher than countries like Mexico or Vietnam.

There are numerous factors that position a country like China to become a manufacturing power. While some of them, like weak environmental laws, can delve into the unseemly side of manufacturing, others offer an interesting look into what spells success for a country like this one:

• Access to high-quality, reliable, and skilled labor
• High-tech factories and consistent innovation
• A focus on production at scale and industrial automation (China has been the largest purchaser of industrial robots since 2016.)
• Flexibility and agility (China’s response to COVID-19 is perfect example, showing a rapid shift towards mask production, testing, and the construction of entire hospitals in a matter of days)
• Infrastructure designed to support numerous factories, efficient transport, etc.
• A government that looks decades into the future when planning for investments, subsidies, tax breaks, and beneficial trade agreements.

The truth at the end of it all is that other countries like China are not responsible for America’s manufacturing problems, nor should they be punished for being more competitive than domestic options. They did not bring us here, and trying to war with them while our own systems are broken benefits no one. The Trump administration has hammered on an approach that bullies other countries and fights for perceived “fair deals.”

How Do We Fix Domestic Manufacturing?

There’s no one-size-fits-all solution here, but coming out of 2020, there are ways to shift our course. Any solutions we do pinpoint, however, will take decades to fully come into their own. Why? The answer comes down to countless factors, but many of them are of our own doing.

As a country, our government has long put the interest of corporations before the people. Things like the trade war are presented as solutions to bring jobs back, but as we’ve seen, fail to accomplish even that.

As a society we’ve also had a hand in this downfall. We chose the cheaper option, always have. We made Amazon what it is today, we’ve bought products manufactured in countries like China and Taiwan despite complaining about their supposed “inferior” quality. We did it because it was cheaper, because it was easier, and I’m no exception to that.

We’re not going to suddenly change our ways. We could alter our supply chains across pharmaceuticals, defense, and consumer electronics to rely less on outside sources, but we would do with the caveat that our domestic offerings would be more expensive. We simply cannot manufacture these things as cheaply here as we can elsewhere.

In the end, it’s a complex issue, with people’s livelihood on the line. One recent study suggested that resorting the pharmaceutical value chain to its full potential could create more than 800,000 high-paying jobs.

Perhaps the change in leadership will begin the process of taking real, foundational change to balance the cost we expect with the jobs we need, but only time will tell. First and foremost, we need to stop blaming others. We created this problem, and we’re the only ones who can solve it.