One thing Trump isn't talking about

Earlier this month, Hillary Clinton took to the podium at Knotty Tie Company while campaigning in Denver to take a jab at political adversary Donald Trump on economic policy. She looked out to the crowd holding up two different neckties — one American-made Knotty tie and one Chinese-made Trump tie — and hit Mr. Trump with the following:

I would really like him to explain why he paid Chinese workers to make Trump ties… instead of deciding to make those ties right here in Colorado with a company like Knotty… As I’ve said over this past week in many different settings, in factories across Pennsylvania and Ohio, and I mean this, because if he wants to make America great again, he should start making things in America.

The political talking point was as brilliant as the question presented to Mr. Trump is obtuse. On one hand, the irony being pointed out is perfectly clear: Donald Trump has had plenty to say about bringing jobs — particularly manufacturing jobs — back to America, but where the rubber meets the road, his businesses have been highly supportive of globalization. Not just his ties, but his suits, shirts, furniture, and barware are all produced overseas.

From an economic standpoint, though, the answer to Clinton’s question is quite obvious: Emerging market wages have been historically lower than U.S. wages, with the latter costing as much as 22 times the former. Any intelligent businessperson, particularly from Trump’s era, would take advantage of that cheap labor in order to obtain higher margins. Ultimately, it’s up to the legislature — not someone like Trump — to either encourage or discourage free trade and/or outsourcing.

Economical or not, though, Trump would be smart to avoid this particular issue should it arise in the coming debates. Once you get to the details, it becomes abundantly clear that he isn’t particularly well versed in American job creation — at least no more so than Clinton. Especially damaging to Trump is the realization that those manufacturing jobs he loves to promise Americans… well, they’re never coming back.

The “Ugly” Truth About American Manufacturing Jobs

As recently as 2005, the average manufacturing wage in China was just $0.73, while American workers were demanding $16.50. With the U.S.-to-China wage ratio peaking as high as 22X, the U.S. manufacturing industry lost over 2.5 million jobs since China’s entry into the World Trade Organization in 2001. Economically, this only makes sense.

The ugly truth about these manufacturing jobs, though, is that we didn’t actually lose them; we willingly gave them away. American manufacturing employees simply haven’t been willing to work for less than $10.00 an hour, let alone $0.73. So when Trump, Clinton, or any other politician talks about bringing jobs back to America, this is the reality: we don’t even want them.

This reality is true not just for job seekers but for consumers as well. That iPhone or PC you’re reading this on is affordable for a reason. The clothing we wear, the furniture we buy — it’s all been made possible, and relatively inexpensive, because of globalism. If everything were made in America — at least in recent decades — inflation would be rampant.

Cost of goods aside, the cold, hard truth is that Americans don’t want to be working in a third-world sweatshop for pennies on the dollar. We demand better, which is why America has pivoted from a manufacturing economy to a services economy over the last quarter century.

In 1990, the U.S. manufacturing industry employed more workers than any other sector in 36 states. Today, manufacturing is only dominant in seven states. But while American manufacturing jobs have dwindled from 18 million to 12 million since 1990, service jobs have nearly doubled to 18 million and now dominate in 34 states. It’s not that American jobs are disappearing — it’s just that they’re evolving.

The Death of Offshoring

While the millions of American manufacturing jobs lost over the past quarter century are never coming back, though, this surprisingly doesn’t mean the end of the Made in America tag. In fact, American manufacturing is actually in the midst of a compelling resurgence, despite what you might have heard from the politicians. This resurgence won’t exactly mean more jobs for American workers, but it will at least keep money from leaking out into the global economy as much as it has in the past.

To understand this new American manufacturing resurgence, we need to look at a few specific global trends. The first is wage growth in Asia, particularly China:

While the manufacturing wage gap between China and the U.S. is still quite significant, Chinese wages have risen over 560% in the last decade alone and are only expected to continue going up. The cost-benefit case for outsourcing to Asia is greatly diminishing as emerging market wages rise.

The Return of Made in America

Jointly, there are a few other important trends that, when coupled with Asian wage increases, spell an American manufacturing boom. As CNBC’s Catherine Boyle puts it:

Slowing wage growth in the United States, coupled with rising wages in China and other emerging markets, could soon make the U.S. more competitive. While wage levels in China are still far below the average wage in the U.S, better technology, transportation and services in the U.S. could help make the difference for companies.

According to the BCG Perspectives manufacturing cost index (MCI), for one, China spends more than twice what the U.S. spends on natural gas and electricity during the manufacturing process. Thanks to abundant oil and natural gas production from the recent emergence of hydraulic fracturing, the only countries that spend less than the U.S. for energy in manufacturing are Indonesia, Canada, and Russia.

On top of cheap energy, the issue of technology brought up by Boyle above is key. While the U.S.-to-China manufacturing wage ratio is still at 5X, the U.S. manages to spend only 80% more on total labor than China. In fact, the U.S. spends less on labor than 16 of the world’s 25 leading manufacturing exporting economies, despite have such high wages.

As for how this is all possible, the answer is automation. U.S. workers might be more expensive, but by leveraging technology, they’re vastly more efficient than their international counterparts. Ironically enough, it’s likely to be domestic automation, not Chinese offshoring, that will deal the deathblow to American manufacturing jobs.

Sadly, Trump, who complains about China constantly, has had little if nothing at all to say about the issue of automation despite its inevitable impact on the American economy. Clinton has at least acknowledged the accelerating rate of automation during an interview with Dan Roth in June, saying:

I have thought about it, quite a bit, because I agree with your projection that the pace of automation is accelerating… So I think this is a serious issue and it needs to be addressed by our government, by business, by education and the like.

…So I want us to have a realistic, but optimistic view about what jobs can be. But we’re not prepared for that. We’re not prepared as a nation and millions of Americans are not prepared with the skills that it will take to really enter into the kind of advanced technological economy that awaits us.

Still, simply recognizing that we are unprepared obviously isn’t going to cut it. At this point, we can really only hope that whoever takes office has an effective response to automation, as it’s poised to be the single biggest challenge for American job seekers moving forward. Among other initiatives, job training will be especially important, and education will need to become heavily focused on STEM.

As for how this all pertains to the market, investors would be wise to invest in automation companies while they’re still cheap. Automated retail, driverless vehicles, artificial intelligence, and robotics are all solid investment opportunities for growth-minded investors. After all, if the bots are going to beat you out of a job, you might as well keep a piece of the paycheck.

Until next time,

Jason Stutman

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