Western Economies Don't Need a Manufacturing Industry

"Think about it. Since China has become the manufacturing hub of the world every good conceivable has come down in price. This increases our purchasing power and living standards. It helps China move out of poverty. We move into work that pays better and exchange this other service based products for such goods."

OK I've thought about it and this is my reply. I've got no economic training apart from what I read on this and similar sites (only a recently minted Physics PhD, and a programming job), so you'll have to forgive my economic naivety but this is how I see things.

IF you have a job then cheap goods are great. However if the cheap goods come at the expense of you losing your job then net standard of living won't actually rise for you the job loser (for me the job holder it is great though, while I still have my job).

Yes in the short term cheap goods are great, but in the long run if we all go broke because we can't sell anything any one wants, because we can't compete with the sellers of the cheap goods, then standards of living won't rise. (Sorry for repeating myself but I think it's an important point).

Its mainly that last sentence I have a bone to pick with though, the one that goes "We move into work that pays better and exchange this other service based products for such goods". I'll skip over questioning whether "service" based work actually does pay better, I have certainly heard otherwise, and get to the point.

If the US is only ever sending money to China, for said cheap goods, and never getting any back again in return for goods and or services given to China, then there will be a net flow of money from the US to China. This one way flow of money can only go on for so long, before an imbalance occurs with the US as a massive debtor and China as the creditor. This state of affairs can be extended of course by China extending the US credit. But you can only rack up debt with someone for so long (even borrowing from them to pay the interest you owe them) before it all comes crashing down. This story sound familiar to anyone?

Just to reiterate the point. While an American can exchange money for a service to a fellow American to give to China for a good, and that American can in turn get his dollars for exchanging services with a fellow American and so on, eventually someone somewhere along the chain is still going to have to get their money by exchanging a good or service with China, if a net flow of dollars from the US to China is not to occur. (The Chinese simply lending the money they receive for goods back to the US solves this problem in the short term but only makes the debt even worse in the long run, so doesn't really count as a solution. The printing press, money out of thin air option isn't a credible solution either).

So then what exactly is it that the US will be sending to China in order to get all those dollars back and avoid a US economy wrecking trade imbalance? Services you say? Well my points is that "services" for the most part don't actually travel well. It is hard for an American to cook a hamburger for someone residing in China, or be their bell boy, or door greeter or security guard if they are both on different continents. These jobs tend to be given to local people (as in people not on the other side of the planet away from where the job needs to be performed) for obvious reasons.

What about those few services that thanks to the wonders of modern communication technology do travel, like call centres perhaps ? Are the Chinese going to start farming out call centres to the US, the way the US has to India? Will dollar a day Chinese workers one day start experiencing the joys that I've had of talking to someone on a different continent (in their case the US apparently) when they want to know why their internet connection is down or why their electricity bill is so high? Better start brushing up on the Mandarin I guess?

As for the author's mention of software export potential, well I think you'll find the Indians have that market cornered too. If you're an avid flight simmer like me you'll also be familiar with the brilliance of Russians programmers (outlasting Microsoft in that area by the way). Both the Indians and the Russians come a lot cheaper than the US. Programming is the sort of thing that you can do if you're clever but find yourself lacking much capital, which is why it's so popular with smart, educated people in poor countries. That's precisely why so much US IT has already been outsourced overseas just like US manufacturing, there are plenty of well educated and clever programmers in 2nd/3rd world countries that will work a lot cheaper. Sorry but I don't really see the US comparative advantage in programming. As for the hardware, there is very little silicon left in silicon valley these days or so I was recently reading.

OK what about financial services, perhaps the US can sell the Chinese financial services? Well if its advice you want to sell, there's the language barrier, plus I'm not sure how keen the Chinese would be for American financial know how given the current state of affairs. Or perhaps the US can become money lenders to the Chinese....Oh wait.

Mr. Tomlinson has just so many fallacies and fantasies imbedded in his article that I scarcely know where to begin....or end for that matter.

"The service sector is not a drag on the economy, its a path to further prosperity and represents an increase to a nations living standards".

An increase to whom? The one that pounds the cash register at Wal Mart? Wow! I guess that we'll all have to write the exploitative multi-nationals and their whores in Congress a thank you note!

"The purpose of conducting trade on a global scale is take advantage of one another's skills."

Confucius says that a translation is needed here: "The purpose of conducting trade on a global scale is to exploit the $1/day indentured slaves toiling in Chinese sweat shops at the expense of the American workers so as to further fatten the bottom line of the exploiteers (multi-nationals)".

"The point is a country does not require manufacturing in order to prosper."

Yes, we can all see the fruits of that collected wisdom as evidenced by the steadily increasing poverty, the massive (double digit) unemployment lines and the 40 million plus on food stamps in America.

"The so called humanitarians are currently protesting against such wage rates, but wait another generation to see how it transforms the ancestors of the people who walked before them. It will be a different picture."

Well of course these exploited indentured slaves in China are protesting against the $1/day wages in the sweat shops. Who wouldn't be if all that they could afford to offer their families is a half bowl of rice on the table for dinner? My! Won't the future generations be the lucky ones here?

"As more of the world becomes educated, more service jobs will be created. More wealth will be created at an ever increasing rate."

Well, I guess that leaves America out. Today's American chlldren still can't read nor write even after completing high school.

Rick, actually Mr. Tomlinson is correct that west doesn't need manufacturing per se, it needs to adjust to a net exports balance productive stance in its core strengths, but the reason the western economies are not quickly and positively adjusting to good globalization is because the elite who want bad globalization are destroying the real-time feedback loop in markets that would cause people to make the correct decisions about their present and future:

http://esr.ibiblio.org/?p=2534#comment-278220 (Jocelyn is me)

http://esr.ibiblio.org/?p=2539#comment-278213

http://www.marketoracle.co.uk/Article20327.html#comment94598 (Good Globalization)

Rather, Rick from your past comments on this site, you propose to introduce more delay and false promises, thus aiding the elite (and playing right into their strategy as they expect you to) in causing a worse catastrophe that will hand them control in a global grab, aka "rescue" or world war:

http://www.google.com/search?q=site:marketoracle.co.uk+Rick+Shelby

Thanks for all the comments.

Rodney - So what are the alternatives to not sending manufacturing jobs somewhere else? We could have autarky where we keep all the work here and don't export or import goods with others. We wouldn't be able to afford as much, even staples such as food would rise (in fact we wouldn't be able to get some a lot of the foods we enjoy). Alternatively we could compete. As such nations usually have Western tooling we would need to drop our wages substantially, again a complete collapse of purchasing power. You fancy living on a couple of dollars a day?

There is no easy solution - both proposed solutions that you identify mean we end up in poverty. Alternatively we can do work that others can't, and increase our living standards by adhering to the free market.

Why do Countries such as Hong Kong have less manufacturing than the US as a percentage but generally run trade surpluses? You shouldn't equate a trade defect with a loss in manufacturing capacity, Peter Schiff is wrong to mislead people like this (I'm sure its not intentional). Services can alleviate a trade defect much more effectively than manufacturing.

For example Google is an American company. Its revenue come from advertising, companies all over the world pay google to post adverts. All the money comes from Europe or where ever - creating huge trade surplus with the world. Google is in the service sector. Soon the developing world will pay more and ad revenue will all come flowing back to the US (thats not to say they won't come up with their domestic competition), but its easy money. Its the intellectual, creative economy that can generate so much money.

Regarding software in India or where ever, its good, they are moving into services which will make them richer. We just have to do other things that add value, and a lot of Indian developers don't add value (trust me, I've worked with them).

Rick - Its Government who create poverty though welfare, price controls on wages or the inflation they create that enriches the wealthy at the expense of the poor.

Chinese people are not "Slaves", they move under their own will from the penniless countryside. They are doing what our ancestors did building a better life for their children. It the same process, we can't assist in this.

America is not going to be in poverty, it will be like Britain during its decline, its all relative compared to the China man who starved under Mao 40 years ago, but in the future we will have all sorts of wealth.

Shelby - My sentiments exactly. The trade deficits are caused because many in the world tolerate them (in Chinas case encourage them as an economic weapon against the west to make us weak) and our government promises us things they can never hope to deliver.

Services are the next natural progression. Think about the example above. Google generates in excess of $20B revenues per year yet it only does that with 20,000 employees.

Now do the sums for those people doing low cost manufacturing in the developing world. To generate the same revenue you are talking about millions of people working. Thats the creative economy and the power it brings and thats where we need to head if we are to continue prospering. The knock on effect to create other service jobs compound.

Furthermore, manufacturing is being automated and eventually it will add no value and pay no wages. In the next 10 - 20 years, designs fed into a computer will be built and replicated by a nanotechnology bot. The valued added is the services, the design, the engineering, the integration of components, marketing, analysis, etc..

Americans would have a long time ago been more motivated to invest in the future, had their motivation not been turned upside down by the manipulation of interest rates:

http://www.marketoracle.co.uk/Article20263.html

But the Americans demanded this manipulation and of course supply will always rise to meet demand:

http://www.marketoracle.co.uk/Article21650.html