Government-ordered factory shutdowns

posted: October 16, 2021

tl;dr: The policy mistake that led the U.S. to shut down its manufacturing base...

I’ll start with the premise that the government sets economic policy via laws and regulations. All of us who operate in the economy have to follow those laws and regulations, or risk getting thrown in jail. So when people say “greedy corporations have shuttered American factories and sent all the jobs overseas” I ask the question: why?

I’ve helped an American company outsource its manufacturing, as I described in my four-part series of posts entitled A decision to outsource manufacturing to China. That initiative did not necessarily feel like a financially-driven decision to maximize profits. It felt more like a way to sacrifice part of the company so that the rest could survive. The company I worked for was competing against competitors who were importing well-made products from China that were undercutting ours in price. Our customers were increasingly choosing the cheap imported products.

If you’ve ever worked for a company that manufactured products in the U.S., you probably know that there are many laws and regulations that must be met, across a broad spectrum of activities. To cite a few: minimum wage laws, employee benefits programs, safety standards, emissions and pollution standards, and record-keeping requirements. The latest is the President’s COVID-19 vaccine mandate. Furthermore, all the U.S.-based suppliers a company uses, notably the energy suppliers, also have to meet those standards and others which are specific to their industry. Companies that manufacture outside the U.S. dodge all of these U.S. laws and regulations for the manufacturing process. That’s the main source of their cost advantage.

A portion of the front of a Foxconn factory building in Songjiang, China, with another building under construction in the background

A Foxconn factory building under construction on the Songjiang, China campus in 2007

We in the United States could have preserved our manufacturing base, and the jobs and economic independence that it provided, with a minor policy tweak. Instead of saying “you cannot manufacture your product in the United States unless you meet these standards” we could have said “you cannot sell your product in the United States unless you meet these standards”.

This alternative policy might seem to be one of isolationism, designed to wall off the U.S. from the rest of the world. From another perspective, however, it is global in nature. If it is not fair to pay American factory workers less than $15/hour, then why is it fair to pay workers in a third world country a few dollars a day for their labor? If we want factories in the U.S. to meet safety, emissions, and pollution standards, why is it okay for those factories to effectively hop over the U.S. border and do whatever they can get away with in a poor country? If we want factories to use “green” energy, why is it okay to move them to China, which burns huge amounts of coal? This helps decrease the U.S.’s greenhouse gas emissions, but it may actually increase emissions when looking at the planet as a whole due to the “dirtier” power used in other countries.

There’s no realistic way to get every country to conduct their manufacturing activities to the same standards as in the United States. Any attempt to do so would infringe on the sovereignty of other nations. However, there is a good approximation we can apply: tariffs, which have been around since the founding of the republic, and which used to provide much of the revenue for the federal government. Every year the U.S. could analyze other countries that manufacture products imported into the U.S. and measure how much they pay their workers, how well they treat the workers, how safe and environmentally-friendly their manufacturing processes are, and what sources of energy they use. A tariff rate would then be applied to all the products from that country imported into the U.S.

Products from countries similar to the U.S., such as Germany and the U.K., would be assessed no or very little tariff. Products from countries like China, which don’t pay their workers as much as in the U.S., and which tolerate more pollution and greenhouse gas emission, would be assessed a higher tariff calculated, as best as possible, to offset the cost advantages of not adhering to U.S. standards. There would be much squabbling over the tariff rates, but they would also provide incentive for other countries to migrate closer to U.S. standards. Most importantly, they would level the playing field for U.S.-based companies.

The American worker is the American consumer is the American voter. Outsourcing manufacturing is detrimental to American workers: there are fewer jobs overall, and the American economy is less diverse because it performs fewer activities. On the other hand it is highly beneficial to American consumers: we get to purchase inexpensive consumer goods such as $30 Blu-Ray players, and to do so without having to provide as many goods or services in trade, thanks to our structural trade deficit and the reserve currency status (for now) of the U.S. dollar. The American voter decides who is preeminent. For the past several decades we’ve elected politicians who have put the American consumer first and foremost. As Walt Kelly says, we have met the enemy, and he is us.

Related post: A decision to outsource manufacturing to China, part one