Jamieson Greer on the Rise of Manufacturing Competition

At the Reindustrialize Summit held in Detroit last week, U.S. Trade Representative Jamieson Greer said the following about the decline of American industrial power:

At the heyday of American industrialization, our country enjoyed a robust middle class, an unassailable national defense, and an innovation economy unprecedented in human history. I am not appealing to nostalgia, but to real achievements that powered our nation.

Cities like Detroit made that possible

Ford’s Rouge Plant alone employed over 75,000 workers in the late 1940s. These workers not only earned a good living, but had the opportunity to build a good life too. They could afford the cars they crafted out of cold metal, and the enormous and widespread demand for work provided long-awaited opportunities for Americans of every color and creed. Their promissory note for the American Dream was not signed on paper, but forged in steel. It was stamped “Made in the USA.”

What these workers did not realize, initially, is that change was afoot beyond our borders and allowed—and even encouraged—by Washington D.C. Foreign countries wanted in on the benefits provided by industrialization and innovation in the United States. To achieve that, foreign governments often adopted policies to give their businesses an unfair advantage. From subsidies to wage suppression to lax regulations and environmental rules, these foreign economic policies started a decades long experiment in market distortion the likes of which is unrivaled in history.

As an example, I will cite South Korea—which is a great ally and partner of the United States. They make a tremendous amount of steel there. Is that because South Korea has iron ore, or energy, or coal, or anything like that? No. It is because they have leveraged years and years of subsidies and industrial policy to achieve this. And frankly, that is what I would have done too if I was Korea. But it created enormous challenges for our own industry and workers. I raise this only as an example, many other countries pursued such a strategy as well.

I'm going to say a couple things in response here.

First, in my view, one of the ideas that has misled U.S. policymakers is thinking that the post-WWII period of U.S. industrial dominance was the natural order of things, and any shift away from that economic hierarchy must reflect something unfair. The reality is very different and I think needs to be better understood. Prior to WWII, the Europeans and Japanese were industrial competitors, and it was inevitable that they would reestablish themselves after the devastation of the war. And it was also inevitable that other countries would be able to learn from those who had already industrialized, and climb the economic ladder. Thus, the late 1940s period Greer is referring to was an anomaly, and there's no going back to that. Competition will only intensify in the future, as additional countries become more competitive in various sectors. The U.S. can, of course, close off its own market to import competition, but that is unlikely to make it more competitive in global markets (assuming that's a goal here).

Second, let's talk about South Korea. Greer blames subsidies and industrial policy for Korea's steelmaking rise, and it's true that South Korea used these policies. But lots of governments supported their domestic steel industry, and not all of them became so competitive in global markets. For South Korea, there were a number of other factors in the mix that contributed to a competitive steel industry, including the following:

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. As Americans of my generation all learned during childhood through the TV show M*A*S*H, the U.S. government was actively involved with supporting South Korea in the early 1950s. And as I learned later, it wasn't just soldiers and doctors being sent over there, but actual economic resources as well. That was enormously helpful for South Korea's economic development, and I think most people would say it has also been very good for the U.S. to have South Korea as a powerful economic and political ally.

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. If the Koreans had, say, oil buried under the ground, they would have invested heavily in extracting it. But they don't have oil or similar natural resources, so a focus on developing the manufacturing sector made sense.

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. South Korea in the 1950s is sometimes presented as a totally underdeveloped country with limited prospects for industrialization, but it was making great strides in education during this period, and that can help a lot with the manufacturing sector.

I'm not a fan of subsidies as a general matter, but I think that when considering the reasons for Korea's rise as a steelmaking (or carmaking or shipbuilding) power, it's important to recognize that there are a lot of factors beyond subsidies that are responsible. It's hard to say what Korean steel or other manufacturing would have looked like without government support, but it's likely they would have been globally competitive in at least some sectors. (To be clear, it's hard to say what most countries' manufacturing sectors, including those in the U.S., would look like without the various forms of government support they received over the years).

Summing up, the post-WWII period was a unique one, with Europe and Japan destroyed after WWII and much of the world still trying to emerge from colonialism. But it was always clear that Europe and Japan would recover, and that some other countries would industrialize. This special period of U.S. dominance across many manufacturing industries was, as noted above, an anomaly. The U.S. can't have a comparative advantage in everything, and other countries are going to be able to outcompete the U.S. in some sectors. While it is possible the U.S. can use subsidies or tariffs to shift the economy more towards manufacturing, as many people seem to want these days, doing so will sacrifice American competitiveness in other industries. Economic policy always involves tradeoffs, and that's the tradeoff here. The U.S. may be able to take some of South Korea's steelmaking, but it will be giving up something to do it.