Productivity Has Killed Manufacturing

Oh…you thought since the Second World War we’d done away with labour camps?

David Kilgour — Canadian pollie and Nobel Peace Prize winner — tells us of a Dr Lee. As soon as the American Lee stepped foot in China, he was arrested and taken to a camp.

There, he worked long hours for three years making slippers.

It was only when the Americans finally pressured China that Lee was released. He was finally able to return home to New Jersey.

Harry Wu, now a human rights activist, was another one of these labour prisoners. For 19 years he toiled away making cheap goods for American businesses.

Everyday, 12, 14, 16-hour day. You have a quota. If you cannot completely finish the quota, you will get punishment. You will go to solitary confinement.

The police always say good labour, good food. Less labour, less food. You don’t labour, no food.

Wu goes on to say:

This is American corporation, dam it! Shame…[they]…cooperate with Chinese government. They have to say, we have to follow Chinese law…Otherwise we cannot do it. Yeah! You have to follow Soviet law. You have to follow Hitler law. Are you going to do it?

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Undoing the wrongs of the past

Surely this is motivating enough to take manufacturing jobs away from China. Maybe it was a motivating factor for the Trump administration to finally put tariffs on China.

Clinton wouldn’t do it. Bush didn’t. Neither did Obama.

Maybe Trump is exactly the kind of guy the people of China need…a guy willing to stand up to China’s government…a guy willing to say things as they are.

God knows the Clinton mess had to be cleaned up.

Yesterday, I was reading the latest from The Rum Rebellion. It’s an Australian libertarian e-letter run by our very own Greg Canavan.

If you don’t already subscribe to the letter, you should! I believe it’s some of the best writing on politics, money and stocks.

So if you haven’t already, you can subscribe here.

What I thought was important to understand in this whole trade spat, which Greg highlighted, was the WTO mess Bill Clinton forced upon the American people. And it’s what lead to a boom in Chinese labour camps.

Here’s how Greg put it…

The last [Trump] tweet is key. ‘We have to be allowed to make up some of the tremendous ground we have lost to China on trade since the one-sided formation of the WTO.’

The WTO is the ‘World Trade Organisation’. If you followed my recommendation from last week and watched Death by China a documentary made by one of Trump’s trade advisers, you’ll understand exactly what he means by that.

In short, the US allowed China into the WTO based on certain expectations of China opening their economy. The expectations were never met. China reneged on their promises and instead benefitted from the US shifting its manufacturing base to the Middle Kingdom.

With very low wages, no labour or environmental laws, it was a no brainer for US companies to move to China. Cheap consumer goods were an immediate benefit. Then the post-2008 tech revolution created an IT supply chain with China at its source.

The result? Lower prices for everything.

Tariffs don’t seem all that bad now, huh?

Consider the wealth transferring from the US to China, which funds an authoritarian communist party. Consider the prisoners meeting quotas for food. Consider the forced transfer of technology, which likely costs American businesses (not management but shareholders) billions over time.

Trump will never win a Nobel Peace Prize. He might not even care about the prisoners in China or unemployed factory workers in America. But surely his tariffs count for something. If nothing else it starves China of US dollars, an asset they’ve juiced their economy on for years.

Higher tariffs limits the weapons in China’s arsenal to grow. Of course, I have no idea when this trade spat ends, or to what heights it could climb.

My guess is that neither Trump nor Xi will budge until something drastic happens.

But there is one thing I’m quite sure of, the US will not get a resurgence in manufacturing jobs.

The jobs aren’t coming back

Yesterday, I pointed out why the US buys so much from China. It’s nothing you probably don’t know already. But it’s important to note nonetheless. Here’s what I wrote…

Yes, America buys more from China than they buy from the US. But that’s how it is for a lot of US trade relationships.

America is wealthy. US households consume far more than most. Manufacturing is largely offshore. Where are Americans going to buy their goods? Obviously offshore.

The US is also a service dominated country.

Money Morning

Source: The Washington Post
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Services tend to be local in nature. You’re not heading to China for a haircut or Germany to see your GP.

What this means is America imports a whole lot, and has few goods to export.

If there was no China, do you really think Americans would shuffle back to the factories…? Of course they wouldn’t!

In fact, heading back into the factories could mean a pay decrease for most Americans.

No, I think they’re happy working their service-orientated jobs, making bonuses and bringing home more money each year.

From an economic sense, businesses wouldn’t want it either.

Without China, American businesses still have other options, other countries with low labour wages to trade with. Take Vietnam for instance.

They’re also a part of the WTO. The average factory worker in Vietnam makes less than a third of their American counter parts.

The assembly worker in Vietnam might take home US$280 per month. The assembly supervisor might get US$468 per month.

Compare that to the US’ average factory wage of US$1,950 per month and it’s a no brainer. With no China to trade with, US businesses just divert their supply chain through Vietnam.

But there’s another reason why Americans won’t shuffle back onto the assembly line. And it’s for the same reason you see few if any American farmers today.

Productivity will be the death of manufacturing…

The death of manufacturing

Do you remember when the agricultural sector was on top, when most of us were farmers growing grain and raising cattle? Maybe some of you do, but who today thinks agriculture is a path to riches?

Anyone?

Almost no nation across the world is looking to get rich from farming. And that’s because it’s a mug’s game. There are a lot of competitors trying to sell wheat, corn and rice. They already sell produce at rock-bottom prices.

Where are the juicy profits to be had?

Well, the same is going to happen to manufacturing. And it will be for the same reasons. Efficiency, productivity and limited demand.

That’s what killed agriculture and it’s going to kill manufacturing too.

Take a look at how efficient American farming became when robotics and automation were introduced…

Money Morning

Source: The 20th Century Transformation of U.S. Agriculture and Farm Policy
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The global farming industry has learnt how to produce more on the same patch of land, which is why single farms are becoming that much larger (US example) to maximise output…

Money Morning

Source: The 20th Century Transformation of U.S. Agriculture and Farm Policy
[Click to open new window]

The American story of farming is much like the world story of farming. Everyone got more efficient, more productive. Prices for grains and other foods came down. Farming profit margins get cut to the bone.

Today, there are little to no American farmers. The majority kept in business are constantly looking to the government for a helping hand.

Money Morning

Source: The 20th Century Transformation of U.S. Agriculture and Farm Policy
[Click to open new window]

Again, which nation today stakes their future on producing rice or grains? Almost none! Yet when it comes to producing ‘things’ everyone wants in.

Even Trump.

But the same thing will happen. Manufacturing will become more efficient. Productivity might be 4% whereas global demand for goods is only 2%.

There will be no more workers on the factory floor. All manufacturers will look like Japan, who has more workers on the loading docks than they do working the machines.

So maybe tariffs do move manufacturers around. Maybe instead of in China, factories will move to Vietnam. Maybe the bold ones will even come back to the US.

But long term, I think those jobs are dead…

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: In this just released report, Matt Hibbard shows you his top five dividend picks for 2019. Click here to claim your copy today.


Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and Gold & Commodities Stock Trader, and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


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