The Denial of American Decline and the Fetish of Manufacturing

China’s share of world income (measured in purchasing power parity prices) was a mere 2.2 per cent of world income in 1980, rising to 14.4 per cent in 2011, and projected by the IMF to overtake the US by 2016, with 18 per cent.  In 1980, the US share of world income  was 24.6 per cent. In 2011, it was 19.1 per cent. So while the absolute decline of the US share has been mild, its relative decline has been irrefutable. Irrefutable? Step forward Robert Kagan and Barrack Obama!

Share in World GDP_PPP

Robert Kagan’s essay, “The Myth of America’s Decline”, has been seized like a straw by Barrack Obama, according to FT author Edward Luce’ “The Reality of American Decline”.  At the State of the Union on January 26, President Barack Obama argued, "Anyone who tells you that America is in decline or that our influence has waned, doesn't know what they're talking about."  

As for net investment abroad, the switch in world leadership from US to China has been much more impressive. So have its consequences; recommended reading: “The End of Influence: What Happens When Other Countries Have the Money”. But the big risk is that the new US inferiority complex turns the Americans into industry Colbertists, harming the global convergence process underway by interfering with free trade.

 A new paper by Benjamin Mandel of the New York Federal Reserve Bank “Why Is the US Share of World Merchandise Exports Shrinking?” shows that the US share of world merchandise trade dropped from 12 to 8% over the past decade; the respective share for services even dropped from 25 to 6% during the same period.

Both compositional effects and faltering competitiveness explain the delining US share in world exports. The commodities sector was one of the primary drivers of the decline, yet its contribution to export share losses largely derived from the declining weight of commodities in the world export basket as well as the price fl uctuations of these goods. Corn and soybeans were the wrong products to gain market share with in the 1990s, as prices tumbled and income elasticity of food items were low. The growing appetite China’s for protein-rich food may well turn US food exports from laggard to  driver. That said, the United States did experience large declines in share in machinery, transportation products, miscellaneous manufactures, and chemicals.

With such numbers in mind,  President Obama asserted at his recent State of Union address : “We will not go back to an economy weakened by outsourcing.” But: Not outsourcing jobs to locations with lower labour unit cost not only harms the world’s poor but risks losing the jobs withheld in rich countries, too. (Germany’s celebrated competitiveness is quite related to outsourcing of the standardised components of her manufactures). Obama also celebrated manufacturers: “Tonight, I want to speak about an economy that’s built to last - an economy built on manufacturing.” In his “Shame on You, Mr. Obama, for Pandering on Trade”, Professor Jagdish Bhagwati points to the fallacies in Obama’sproposition, and to the risk to the world trading system emanating from the United States:

·         The general disillusionment with the financial sector has been seized on by the manufacturing lobby to argue that therefore manufacturing should be supported. Bhagwati rightly asks: “Why not opt for DHL, transport and communications, for example, instead of cement mixers?”

·         Over time, manufacturing yields to services. This gigantic change that is taking place has nothing to do with outsourcing.

·         The notion that manufacturing is more productive than services is not supported by research. The range of modern services that can be digitised and traded globally is constantly expanding. (India has been a pioneer, but many other poor countries are finding it easier to generate productivity growth in services than in industry.) Services expansion provides an alternative growth escalator.

Watch out when empires start drowning… They might desire to leave the earth scorched.