Manufacturing is becoming less and less lucrative for countries looking to develop their economies. According to one of the most comprehensive studies in the field, the market forces of a globalized economy have made it more difficult for rich countries to compete in the global market and for poor countries to become rich by industrializing.
One of the biggest takeaways of the study was that once manufacturing shifts abroad, say steel milling from the United States to India, the per-capita income (or job market share) will peak at a lower level than in the previous country. This implies that any politically-centered policy to bring back manufacturing jobs in rich countries, such as Trump’s recently proposed trade tariffs, are doomed to fail in the long-run.
The research led by Aashish Mehta, a University of California Santa Barbara associate professor in the Department of Global Studies, analyzed a dataset of manufacturing employment in 63 countries from 1970 to 2010, representing 82 percent of the world’s population in 2010.
The path countries have taken towards industrialization looks more or less like this: At first, there’s a low share of manufacturing jobs, but as the economy gains of industrialization accrue, more manufacturing jobs become available. However, once income rises, so do wages. At one point, it becomes more lucrative to move away from high-paying jobs, either replacing them with machinery, moving operations abroad where wages are lower, or both. These global forces allow developing countries to become industrialized and catch up — the traditional way of becoming rich themselves. However, the share of manufacturing jobs in the new country peaks at a lower level than in the previous country, the researchers wrote in the Cambridge Journal of Economics.
“While the original OECD countries peaked with over 30 percent of their jobs in factories, today’s industrializers seem to be peaking at around 12 to 14 percent,” Mehta told Jim Logan for The Current. “We also showed that the per-capita income level at which this decline sets in has fallen over time. These findings suggested to us that the path to riches through industrialization had narrowed considerably.
“This was worrying,” he continued. “We had to know why it happens and, particularly in an era of climate change, we had to know whether there are alternative pathways to national prosperity.”
Mehta and colleagues found that although individual countries are deindustrializing early and at lower shares, the number of manufacturing jobs is generally the same. Manufacturing jobs tend to flow from richer countries to poor countries, where the workforce is less skilled and automatization not that widespread. So, it takes more people in a developing country to replace one manufacturing job lost by the industrialized country.
“If you took half the manufacturing jobs out of Europe, let’s say manufacturing employment comes crashing down from 30 percent to 15 percent. And you took all those jobs and you put them in China or India. The fraction of Chinese or Indian workers working in factories would go up very little, because there are so many of them. But globally, no factory jobs would be lost,” Mehta explained.
In today’s context, the research suggests that it will prove extremely difficult for the U.S. to compete for manufacturing jobs. Besides having a cheaper labor force and opening up trade (China is a great example), developing countries have also invested heavily in infrastructure but also education. Mehta notes that this has not been the case in the U.S. in recent decades. For instance, very few people in the United States are trained how to operate a machine relative to the country’s population. Today, developing countries are more adapted and able to support manufacturing in ways that the U.S. cannot.