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

Communist Price — or Western Value?

by John Brian Shannon

Hey, stop, what’s that sound? Take a look around. Is everyone driving the cheapest car or carrying the cheapest handbags?

Hell no!

And why is that, exactly? Why isn’t everyone driving the latest Chery car — which is an extremely affordable car built in communist China? Or, why isn’t everyone buying the blue communist party uniforms made from a long-wearing material that will stand up to the elements for decades? Why are people all over the world buying expensive cars, handbags, jewellery and electronics, just for a few examples?

The reason is; There are effectively, only two kinds of markets in the world. Upmarket and downmarket and there are legitimate reasons for the existence of both markets.

On the one hand, you have upmarket goods and services, which have traditionally been the preserve of the rich Western nations along with an entire middle class in the West able to well-afford those upmarket goods and services. How convenient!

Could it have been planned this way? Why yes, it was. It has been the economic miracle of recorded history.

On the other hand, downmarket goods and services which have traditionally been manufactured and sold in the developing world — are priced according to local market conditions there. Very convenient for the developing world.

Since the industrial revolution, this is how the marketplace has worked. Upmarket goods were manufactured and sold in wealthy Western countries and downmarket goods were manufactured and sold in poorer countries.

Until now.

Suddenly, many upmarket goods are being manufactured in developing nations and a small but growing percentage are being purchased in developing nations.

The West used to own this part of the market, but for the first time since the Industrial Revolution, the East is increasing it’s ownership of this formerly Western-only marketplace. At the same time, the downmarket goods and services haven’t gone anywhere and are still being manufactured by and sold in the developing nations.

Translating into ‘a loss for the West’ if you see things through the Western prism. If you see things through the Eastern prism, you might call it, ‘Advantage East’ or something like that. I call it something else, but more later.

Let me speak clearly on the situation the West now finds itself in; When you haven’t manufactured downmarket products in the first place, but then relatively suddenly, you lose fully half of your upmarket manufacturing to the developing world — that can only be called a paradigm shift in the marketplace.

Some Western politicians, corporations and junior economists have looked at this and in a panic, have announced that we must lower our costs — to match our competitors costs in the developing world! And, either by lack of action, or by actively supporting this line of thought, they have allowed this trend to continue in the Western nations and over time the problem has become much worse. Unwitting traitors, all.

Wages, benefits, unions, workers, unemployment, health care, retirement age, the housing market, traditional Western upmarket manufacturers — all these have felt the winds of change blowing in from the developing nations. It’s a race to the bottom.

“We must compete with China, we must match their labour rates, lower our social entitlements, we must lessen our national infrastructure spending — otherwise we will be beaten in the international marketplace by countries which already have those lower costs built right into their economy” — or so the thinking goes.

Which is wrong.

Rather than call this new paradigm, ‘Advantage East’ or ‘Loss to the West’ — I call it what it really is, ‘Opportunity Knocks‘ for that is what it is. The shift in the world economy is not a time to recoil in horror and then race to the bottom to try to match our competitors costs.

It is a time to do what we do best. It is a time to do what we do better than any other nation or bloc of nations. It is time to remember what has made us great since the beginning of the industrial revolution — and profoundly, do more of it.

If the great wisdom says that we must win, or at least compete in the great race to the bottom by lowering our labour and other costs and manufacture products of lesser quality, why aren’t we all driving Chery cars and buying no-name handbags?

Why are car companies like GM, Ford, Mercedes, BMW, Land Rover, Toyota, Lexus, Infiniti and the like, selling at near-record volumes and recording great profits? Why are Chanel, Louis Vuitton, lululemon and many others selling their wares at good volumes and profits?

Value vs. price.

In the race to the bottom, the only thing that matters is price. Price of labour, materials, production line, merchandising and profit. Price, price price, comrades!

If price was all that mattered, wouldn’t we all be driving cars built by China’s Chery Motors, or India’s Tata Motors? But, we’re not. And that is not to knock those cars — as I said above, there is a legitimate market for BMW’s, just as there is a legitimate market for economically-priced cars.

If price was all that mattered, we would all wear the blue communist party uniforms, which cost the equivalent of $2.00 U.S. dollars. But, we don’t. Many of us in the West think nothing of walking out of the mall with a $60.00 pair of jeans, or a $100.00 pair of dress shoes. Why? The ‘price-only mindset’ says it is illogical to spend money on clothes.

But we do, because we know the value, of, well, value. If you are fortunate enough to own a Toyota or a Mercedes, you know that you enjoy the ownership experience of a quality vehicle, that you will be well-protected in case of a crash, it will last a long time (assuming you do the proper maintenance) and you can in good conscience, gift it to one of your kids after they graduate and know that they will have a safe, reliable car to drive to college and it will still be in great condition many years later.

Why do many women buy a Louis Vuitton handbag? Why not a purchase based on price alone? Well, I can’t answer that question for you. But, I notice those bags continue to be very popular and it is the rare woman in this part of the world that doesn’t have at least one. It is completely illogical from the ‘price-only’ perspective.

Which is my entire point. The price of something is just the price. Anybody with any disposable income will always opt for a better-quality ownership experience and will pay more for a better quality product  and sometimes, much more!

Which proves it’s not about price. It’s about value for money. So, let’s stop trying to compete on price.

Our economists must convince government policymakers of that fact. We need to stop trying to out-compete the communist system and their communist-priced products. It is a battle we will lose every time, for they have already won that battle. The  downmarket was always theirs. It is a state-subsidized market. We can’t compete in that low-profit world, unless we merge our corporations with our government to create our own communist state. Not many takers on that idea, I’ll bet. Goodbye Louis Vuitton — goodbye Mercedes!

We need to compete on what we do best. And why not? The statists compete on what they do best.

Here in the West, we build quality. It costs a little more. Our products have something intangible, something that will convince people to pay more — and that intangible is called value. This is what we do best, so let us return to compete on what we do best. We not only build products — we build value.

Let’s not race to the bottom trying to beat state-subsidized companies. We can’t win there. Rather, let’s create products with value, not only for Western consumers — but for a huge, new and growing middle class with real disposable incomes — the (conceivably) five billion (non-Western) consumers in the developing world, many of whom are approaching middle class status in their respective countries.

And, lets keep the manufacturing of our value products here, to provide jobs to Western citizens — so that the West can continue to have a middle class too!

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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