Will the Collapse of the Western Manufacturing Base Create a Worldwide Depression?

by John Brian Shannon

The Eastern economies have traditionally been the manufacturers and purchasers of downmarket goods in their own region, while Western economies have traditionally been the manufacturers and purchasers of upmarket goods in their particular region.

Over the past 40 years Asia has taken much of the West’s upmarket manufacturing base, so much so, that the West has lost fully 50% of the manufacturing jobs it once enjoyed previous to 1980. That is the single most important reason why there is significant unemployment, under-employment and worryingly, under-reported unemployment (people who no longer look for work) stats in the Western economies.

Which obviously leaves a big hole in the economy of the West, translating into lower Western economic performance and recessions in North America, Europe, Japan, Australia and New Zealand since the 1970’s.

The fact that many Western corporations are making huge amounts of money at this (outsourcing their manufacturing to Asia – resulting in better corporate profits due to the much lower labour rates there) is now a complete side-issue.

It has now come down to this; The once broad base of Western consumers with generous amounts of disposable income is changing to an ever-broadening base of Western consumers without much disposable income.

If things continue, soon it will impact the Eastern economies — as there won’t be enough people in the West with enough disposable income to afford much of those upmarket goods and services! Translating into reduced economic performance there.

For now, China and India are the only significant economies in the entire world which maintain a healthy growth rate. They have been the economic engines of the world since 1998. Here in the West, we have suffered two recessions since then — and that, with China and India firing on all cylinders and their admirable growth rates of at least 8% per year and sometimes much higher than that.

The U.S. growth rate was an anemic 2% last year and is expected to come in at 1.5% to 1.6% next year. The U.S has not seen any growth rate over 4% since the 1980’s. Europe and Canada have posted similar percentages over that same time-frame.

If demand for Eastern-produced goods slackens any further in the West, the Eastern economies will see recession too. At that point, with the West still mired in the fog of recession — the entire world economy will tailspin resulting in a worldwide depression. This is the fear of many economists — including economists in Asia.

Which is why I favour keeping some significant amount of manufacturing here in the West, as manufacturing produces (relatively speaking) a lot of jobs — while removing resources from the ground and shipping them to Asia produces relatively few jobs.

Oil refineries here cost 12 – 13 billion dollars, while in China they cost 1 billion dollars. No new refineries are planned for the West for obvious reasons. As much as I’d like to say otherwise, there is precious little chance of adding value to our petroleum exports when new refineries are so expensive here.

Which is why we need to find ways to add value to our other resources.There are many North American resources that are being exported away and some would say, squandered away. We need much more focus on a value-added economy. We need to add value to our diminishing resources before they leave our Western economy.

One way, is to manufacture products out of our resources — and then sell them abroad, to enhance our balance of payments, which would contribute to enhancing our GDP, thereby lowering our overall debt-to-GDP ratio. Those ratios are killing us right now in the West.

Another good way to improve our Western economic picture is to tariff all resource exports and use that money to fund infrastructure projects, which would contribute much to the economy, but only temporarily. After all those projects reach completion in about ten years, workers (consumers with disposable income) will again be unemployed or under-employed, just as they are now. What then?

Some economists have suggested a Goods and Services Tax for the U.S. economy and to use those windfall tax funds for national infrastructure programs, as was done in Canada so successfully from 1990 – 2004. I am one of those people. However, with the latest projected U.S. growth rates set to be 1.5% to 1.6% for next year, that means there is a lot of fragility in the economy and some economists say a large, useful Goods and Services Tax might stall the recovery process. A smaller tax would be much less useful, but the taxation rate could be increased as the economy builds positive momentum. Even with those limitations, it is still a good option for the U.S.

It keeps coming back to the fact that we need to add more value to our economy, especially to our export economy on a long-term sustainable basis. We need to create MORE jobs from the resources we extract and from our agriculture and forestry industries — or eventually there won’t be enough demand for Asian-produced products and when those Asian sales sag due to lack of demand in the West, it will hit the fan everywhere.

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John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, the Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com
Check out his economics blog at:
https://jbsnews.wordpress.com
Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

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