With so many fears ping-ponging around about manufacturers leaving Australia and cheap Chinese production stealing our jobs, it’s worth taking a thought excursion into two possible future worlds. One in which the ‘made in Australia’ label no longer exists and one in which China stops manufacturing for the outside world.
What if no-one manufactures in Australia?
First of all, this would become an irrelevant relic of history:
Once the old tags were sufficiently rare, people would probably start trying to sell them on ebay.
But what else would change?
Some claim we would simply shift our focus to service based industries and that’d be that. We’d move on and leave manufacturing in our wake. This thesis relies on statistics that demonstrate the downturn in manufacturing occurred in negative correlation with an upswing in service sector consumption and job creation.
This may be true. However, it fails to take into account any economic factors extraneous to this simple correlation. And correlation does not always mean what we think it does.
How important is manufacturing to Australia’s economy?
If the manufacturing industry completely closed up shop in Australia, we would, undoubtedly adapt. But how long would this take and how strong would our post-manufacturing economy be?
One of the most eminent economists of the 20th century, Nichloas Kaldor, noticed an oft repeated correlation across the course of his research-laden career. A healthy manufacturing industry was consistently matched with economic growth and high standards of living. When countries experienced a manufacturing boom, economic growth and living standards would blossom with along it. And the same was true in reverse. Downturns in manufacturing led to stalling economies and issues with poverty, unemployment and rising crime rates.
While growth in any sector is positive, Kaldor found manufacturing was unique in that its growth stimulated prosperity in other industries. This, he asserted, is why its health has more of an impact on the economy as a whole than any other sector.
Kaldor is not alone in his theory about the manufacturing industry.
“Manufacturing is the engine that drives the rest of the economy. If you’re well paid, you have discretionary income. When he was CEO of Starbucks, Howard Schultz always said the most important indicator to him for his business is the health of the manufacturing sector.”Dan Swinney, Manufacturing Renaissance
From industry experts to other economists, Kaldor’s sentiments are echoed across the globe. Reporting on her research in one of the 2009 editions of Applied Economics, Marquette University economist, Miao Wang found foreign direct investment (FDI) into the manufacturing industry had a significantly greater influence on a country’s overall economy than FDI in any other sector. She looked at the economies of 12 different Asian nations over a ten year period. And in fact, her findings weren’t just indicative of manufacturing having more of an influence than other sectors. It was actually the only sector in which the impact of FDI was felt outside of the industry itself.
University of Aberdeen researchers, David McCausland and Ioannis Theodossiou, spent 20 years putting Kaldor’s theory to the test. Their findings were published in the Journal of Post Keynesian Economics (2012). Their 11-country, double-decade analysis brought them to the conclusion that Kaldor’s theory was solid. Manufacturing is the single most important growth factor for a country’s economy.
If these economists are right, a non-manufacturing future for Australia would surely be pretty dim. Switching our focus to the service sector, mining and agriculture might not be enough to sustain our economic growth and, by extension the living standards we’re used to.
And it’s not just living standards that would dip
Other economists argue that innovation is inextricably interwoven with the manufacturing process. In an interview with the Harvard Business School (at which he is both an alumni and professor), Gary Pisano explained:
“People in the United States and other advanced industrialized countries say that the future is in innovation, not manufacturing, as if manufacturing is not part of the innovation process.”
Pisano sees the cost-saving strategy of moving manufacturing facilities offshore as an example of nearsighted, short-term thinking.
“The company can buy manufacturing services at a much lower rate if it goes to China or elsewhere, depending on the industry. But if everybody is doing that, you get a general erosion of the economy, which could lead to a decline in the standard of living. An individual company, though, can move assets anywhere. So companies can reward their shareholders regardless of what happens to the national economy. As a result, the interest of companies and the country have diverged.”
So it seems that setting up shop in China may be a good move for some but, if everyone did it, Australia’s economy would slip into a nosedive we would struggle to pull ourselves out of.
What if the tables were turned and China stopped manufacturing?
Given the importance of manufacturing to our economy, many people become critical of cheap, overseas operations; particularly those whose products bear the ubiquitous ‘made in China’ stickers.
This (often ironic) stamp can be found in every aspect of our lives, from the clothes we wear and tech we use to the tools we work with and cars we drive. And, providing further proof of Kaldor’s argument, China has seen massive growth in its middle class and improvement in living standards along with the growth of its manufacturing industry.
If they stopped exporting all the goods they manufacture, China would face a two part problem: hostility from the nations they exports to and a massive dip in the living conditions of the billions of people who work in the industry. This internal and external unrest would create a cascade of additional problems.
How would it affect us if China stopped manufacturing?
Just as China has eagerly stepped up to fill the hole left by the US in the advancement of green tech, so too would countries like India, Vietnam and Indonesia step in to fill the vacant “cheap manufacturer” space China would leave behind. However, they don’t have access to the same land and resources China does.
Literally all of the world’s resources can be found within China’s borders and it ranks third in the world for calculated mineral reserves. According to the United States Geological Survey, in 2010 China was the world’s leading producer of:
- iron and steel;
- phosphate rock;
- rare earth minerals;
- and zinc.
That’s some list. So new factories in other developing nations would be all well and good but they’d still need China’s support for all their component parts.
Then there’s the imports that would stop if China no longer had to manufacture anything. China is the world’s largest importer of crude oil, hitting a peak of 7.6 million barrels a day in 2016. If they cut their imports, oil prices would crash, having an impact across the board on the nations China imports from.
As China, and the rest of the world scrambled to adjust to these drastic upheavals, manufacturing automation would become more appealing, particularly in nations, like the US and Australia, where the cost of labour is high. So losing the cheap Chinese products wouldn’t necessarily lead to more jobs at home but it would lead to higher prices for all the day to day things we use.
What does it all mean?
When faced with complex problems, it’s tempting to demonise other nations and make sweeping generalisations that bringing manufacturing jobs back home will, in the words of Donald Trump, “make our country great again”. While a strong manufacturing sector is certainly a vital part of the health of our nation, it is equally important for the countries we trade with to have booming industries.
So, rather than buying into fearful narratives about global competition, Australians should be focussing on how we can support and build our manufacturing industry. If we can revamp our approach and find a niche to call our own, we’ll have a stable base for the future of our economy as a whole and every other sector it contains.