Does manufacturing matter?

Tradables and nontradables in the current account adjustment process.
by Menzie Chinn



The answer is yes, but not for the reason that many have pointed to. Certainly employment
has declined, fairly precipitously. But it is important to place into context why manufacturing matters. To do this, I need to digress briefly.
In a recent speech, Greenspan asserted that increasing financial globalization has allowed the United States to run
larger current account deficits. This point seems to be well documented; the increasing stocks of US assets and liabilities (denominated in foreign and local currency, respectivley) held abroad have
relaxed the financing constraint during
times of dollar depreciation. However, one question that has been somewhat neglected, but highlighted by
Obstfeld and Rogoff, is whether globalization on the real side has proceeded as rapidly.
This is important because when the US has to adjust to lower capital inflows, its current
account deficit will have to shrink. The 6.5% current account to GDP ratio doesn’t sound too large, especially by comparison to deficits run
by other developed countries in other instances. But the adjustment to a smaller current account deficit will have to be accomplished
by more exports and less imports — i.e., adjustment in the tradable goods sector. And here the US differs from, say
the United Kingdom or Sweden, in being much more “closed” to international trade, partly because of size and distance.
What is traded and what is non-traded is easier to define in theory than in practice. In many discussions in decades past, manufacturing
has been equated with tradables. It is in the context of this adjustment process that manufacturing matters. Let’s update our view of tradables. In the figure below, two measures of
the share of GDP that is tradable: (1) value added in manufacturing and mining, and (2) value added in manufacturing and mining, agriculture and
professional, scientific and technical services. The former is the traditional proxy, the latter incorporates the increasing tradability of
services, as stressed for instance by Catherine Mann here and elsewhere. (The data are from the BEA).
Clearly, the manufacturing and mining series misrepresents the share of GDP that is tradable. The broader measure also exhibits
a downward trend, but less pronounced. But what is interesting is that each bout of dollar strength induces a drop in the measured
“tradable” share. Certainly, both of these measures are flawed — in particular, some manufactures that weren’t tradable before are now (think nondurables and air freight), so the downward trend is misleading. But the key point is that, when we need to shift to a smaller
current account deficit, the base upon which the adjustment will occur is relatively small, at about 30% of GDP. The data ends in
2004; presumably, with the boom in housing construction in 2005, the share in tradables will have declined in 2005.
My view is that manufacturing matters, not because of any intrinsic attributes, but rather because the output is
fairly tradable. To the extent that certain services are increasingly tradable, services are also important in the adjustment
process. But there remain large impediments to trade in services, so we need to keep an eye on the share of output in
manufacturing, mining and agriculture.

34 thoughts on “Does manufacturing matter?

  1. Alex

    In other words, we have to ask ourselves “What is it that we do that others want”? It does not matter if it is planes, movies, or banking – as long as there’s something that we do (make) that others want in exchenge for theirs, we’re fine.

  2. Duncan Brown

    I’m not an expert, Alex, but it’s not as simple as finding “something we make” that others want to buy. Our prices may have to drop a little–for example through a decline in the value of the dollar–to make our exports more attractive to buyers overseas.

  3. Alex

    Duncan you’re correct, but I think the “want” part includes the price consideration – if our “stuff” is too expensive they won’t want it enough to buy.

  4. Mark Sullivan

    re: our prices have to drop a little.
    This question is going to sound naive, but I don’t understand why dollar stability hurts trade so much. If that’s true, shouldn’t countries with historically stable currencies (e.g. switzerland) eventually cease to have trading partners?
    Suppose there are two countries, A and B. A has an inflation target of 50% and B has an inflation target of 0%. A’s currency is clearly going to be much weaker than B’s. Does B’s trade go to zero because it has a significantly stronger currency? Can B only defend its ability to trade internationally by printing money faster than A?

  5. camille roy

    We’re offshoring our tradeables. What would change that? The value of the dollar vis a vis China is frozen by the peg. Our companies are racing for the exit, when it comes to domestic manufacturing. Our service economy (we sell houses to each other) is like a balloon which grows bigger and bigger until it bursts.
    I predict the free-trade economists will have tiny wet pieces of balloon rubber on their faces in a few years time. Of course, that’s nothing compared what working Americans will be dealing with.

  6. Alex

    Camille Roy, things are far more complicated than you describe. Yes, we offshore the profitless manufacturing and keep all the profits. This can last for a very long time.

  7. Alex

    By the way, I’d love to see the chart of the US manufacturing output here, too. I read that the biggest outsourcing is going not to China but to the machines.

  8. menzie chinn

    Interesting comments so far. Let me clarify a couple of things.

    1. The United States will always have a comparative advantage in something. It is important, in this era of decreasing transportation/telecommunications costs and falling regulatory barriers, to recall that services are becoming more tradable.

    2. When capital flows to the US decline, then the current account balance will have to improve. This will likely require what we call “expenditure switching” (reduction in price of domestic goods relative to foreign) and “expenditure reduction” (reduction in domestic demand for tradable goods). There is an exchange rate that will set the current account equal to capital inflows.

    3. But the smaller the tradable sector (both manufactures and services, among others), the harder it is to engineer a big shift in the current account (which is primarily exports minus imports). This is the sense that the decline in manufacturing share of value added is worrisome.

    4. The manufacturing value added share of GDP follows the (manufacturing + mining) share in the second figure I posted. The manufacturing share starts out in 1970 at 25.3%, and falls to 12.7% by 2004. But I stress, some of what was manufactured in 1970 was probably not tradable, and some of services in 2004 is tradable.

  9. dryfly

    Menzie – nice post. I think you’ve made a nice start.
    First a reading recommendation:
    Manufacturing Works: The Vital Link Between Production and Prosperity.
    By Fred Zimmerman & Dave Beal
    ISBN 0-7931-5198-8
    Your spam filter would ‘eat’ a link to Amazon so I leave it to you to google it. However I am sure the publisher would most certainly ‘comp’ a prof at a ‘distinguished’ university like Wisconsin… even considering those silly cheeseheads.
    Fred is a prof at Univ of St Thomas in St Paul MN and Beal is a business reporter. They did a 10 year study through the 90s looking at how manufacturing success & local prosperity dovetail (or don’t). This book was a result of that study and while completed around 2001, it still has a lot of relevance today. They clearly predicted many of the current issues we face now.
    I had Fred for a number of classes in the Manufacturing Systems program and he gets it – fully. BTW – Fred isn’t just an egghead, he has been a successful businessman in his own right and has been on a number of BODs. Corporate governance is one of his other passions (besides manufacturing) way before it was cool. If you want to dig deeper you might want to call him someday – he is approachable.
    Anyway the major theme of the book is that manufacturing is a HUGE driver of economic activity for both other forms of manufacturing and services. It is also a ‘leading’ driver as opposed to being a ‘secondary’ driver… meaning that mfg tends to start lots of other things happening while other drivers (like services & RE) are often first caused by some other demand driver and only then kick off other activities.
    Anyway you are 100% correct that there are few other ‘product & service classes’ that can be easily exported. But manufacturing does more… it can both store value added AND be transported/exported.
    Think about it – services can be transported & exported but not easily ‘inventoried’ or stored… For the most part they are consumed as they get produced. Real estate can store value over time (build inventory) but can’t be transported or exported. Mining & commodities can do both but have very little value added associated with these activities.
    Manufacturing does it all and if the value added is high it does it very efficiently (high percentage of value stored and/or exchanged per unit dollar sales). The communities with successful manufacturing operations are MUCH more prosperous on average than those without them… Z & B’s research clearly shows this. There are exceptions like Silicon Valley & Manhattan but they are exceptions that prove the rule and not typical.
    Our trading partners fully understand this… we don’t. It will cost us.
    Again nice read.

  10. brad setser

    Menzie — from your post, i would infer that you embrace the second part of the Rogoff/ Obstfeld conclusion, namely that large size of the US trade deficit relative to tradable sector implies a very large dollar depreciation (or a lot of expenditure reduction) would be needed to reduce the trade deficit to levels consistent with a stable external debt to GDP ratio …
    And given your post and your other work, do you have a rule of thumb estimate for the impact of dollar depreciation on the trade deficit — the rule of thumb from the 80s/ early 90s (when tradables were a larger fraction of US GDP) was a 10% real dollar depreciation led to a 1% of GDP improvement in the trade balance with a lag. Has that changed, and in what direction?

  11. Bill Ellis

    While everyone thinks of China as synonomous with import-export balance, there is an additional factor that distorts this balance. Many of the pharma companies, and tech companies, have production facilities in Ireland. These are both big margin products, but there is an income tax benefit to shifting the profits to Ireland. The result is that we make a pill for $.30 in Ireland and import it for $5.00, and sell it for $7.50. In that instance, I think you have a net of $2.50 in GDP, but the reality is that only $.30 was spent in Ireland.
    In manufacturing employment you have a domestic outsourcing affect. When GM transfered there data processing to EDS we technically lost manufacturing jobs and gained service jobs.
    I presume domestic petroleum production is part of mining, and so declining US production both reduces our domestic tradable production as well as increases our imports. While this certainly is a significant factor in the current account flow, it is less relevant to the state of domestic manufacturing.
    As you acknowledge, international trade, and business in general has became enormously more complicated over the 35 year period in your graph, and thus the are problems with comparisons. Like tracking the CPI, I am certain that the data distorts reality, but we still need some measurement.
    Have a great week end.

  12. menzie chinn

    Brad: This is an excellent question. I wish I had an answer for you. The rule of thumb you mentioned (10% for 1%) amalgamated expenditure switching and expenditure reduction effects. My prior is that the same rule probably applies. On one side, we have increasing tradability of services, and barriers to goods trade — both regulatory and technological — have declined. On the other side, the boom in real estate and (until 2002) the strong dollar have pushed resources into the nontradable sector (construction, real estate services).

    Seems like a good project — doing a kind of weighted average of value added, weighting by the degree of tradability. Of course, it’s not just the share that matters; the elasticities of substition also matter. I don’t know if anybody has strong priors on that.

    I guess I do embrace the view that either a drastic depreciation or a big expenditure reduction are necessary (in the Obstfeld-Taylor model, the two are inextricably intertwined; so I’m referring to a more ad hoc Keynesian model).

    Bill Ellis: I agree completely. The data on what constitutes manufacturing and what does not has been distorted by classification issues — although these issues are more likely affecting the trends in manufacturing employment and value added. That discrete drop in 2001 is pretty hard to rationalize as a “redefinition”.

    Truth in Advertising: In the second figure posted of valued added shares, there are several reclassifications (to NAICS, etc.). I’m hoping that the categories I have used are so aggregated that there aren’t big problems in plotting the data from 1970 to 2004.

  13. Stormy

    Alex says: Camille Roy, things are far more complicated than you describe. Yes, we offshore the profitless manufacturing and keep all the profits. This can last for a very long time.
    That is an old canard: We offshore that which no one wants to do; then keep the profits; we can continue to do this for a long time.
    First: Yes, no one can afford to do them at Chinese labor coststhe relative costs of living are too disparate. But that certainly does not mean that those lost jobs have been replaced with higher paying jobsor even jobs of equivalent pay. For those jobs to come home, the standard of living will have to fall a long way, adjusted in any way you would like, including revaluation. Further, offshoring is just not poor paying jobs, even in low-level manufacturing. Supervisory and other higher paying jobs go with them. The machines need qualified engineers.
    Second: Exactly who is keeping the profits? Certainly not the people who lost their jobs. The growing disparity of wealth in the U.S. is not a good sign.
    Third: The growing twin deficits clearly indicate that we cannot continue this line forever.
    Fourth: We have not even touched the services we are presently offshoring.
    The Obstfeld and Rogoff model makes the interesting assumption that each region will prefer its own tradables to those of the other two. Well, I guess housing falls into that category.
    An interesting side observation from:
    n 2004, the export of foreign-invested companies in China amounted to 338.6 billion dollars, or 57 percent of China’s total export in the year. China’s services import reached 72.1 billion dollars. Among others, China paid 4.5 billion dollars for patents alone.
    he current pattern of international trade, in the final analysis, results from worldwide industrial relocation and changes in division of labor, he noted. [Chinese President Hu]
    Very good post, Menzie.

  14. camille roy

    I love this, I really do. I am not a professional economist and so I use colloquisms such as ‘when the bubble bursts’, but the technical terms, in their own way, create even more excitement, through understatement:
    “I guess I do embrace the view that either a drastic depreciation or a big expenditure reduction are necessary…”
    That is, if one thinks what would lead to such outcomes, and what it would be like to live through them, Yikes! is the natural response.
    Methinks the next year or two will be most peculiar.

  15. WutangFinancial

    Seriously, the usa exports high value goods to the world. We even make goods other countries do not make or forbid but still get from the usa.
    For example can any economist quantify dollar value how much internet, dvd pornography we send to the rest of the world. Serious question… how much do our porn baed manufactures contribute to the value of the USD?

  16. Alex

    Stormy, I actually agree with practivally everything you said – the problem for me as an investor with a finite time horizon is this: what do I do NOW? If these imbalances are going to blow up next year it requires a certain investment position. If they are to last for the next 15 years it requires a very different one.

  17. Stormy

    That interesting side observation that I cited from President Hu was meant to pose another problem for the Obstfeld and Rogoff model: that countries prefer their own tradables.
    Quite a while back, Roche mentioned that 57% of Chinese exports are from Western companies. President Hu as of this week confirms this percentage.
    In a sense, we do prefer our own tradables, as long as someone else somewhere else makes them with our know-howwith enormous tax cuts and cheap labor in that somewhere else. But the Rogoff model postulates quite a different assumption, i.e., that a countrys tradables are made within its own borders.
    Manufacturing does matter. We will soon see that services matter as well.
    In one way, I agree with Alex and with the administration: This situation can continue for longer than most think. The West is enormously rich. Furthermore, the U.S. has reaped some of the profits from its own companies abroad. Real money is returning from those companies as profit. Thus we have relatively flat wages here but a growing disparity between the rich and poor: The average income is diverging from the mean. We hear that divergence as a growing protectionist rumble.
    Furthermore, there is enough elasticity in those profits that they are absorbing the rising cost of oil: Profits are falling. Take a look at Dell, for example.
    Oil is the wild and dangerous card, as Professor Hamilton is starting to note with his attention to peak oil.
    Porn, Wutangfinancial! I almost fell off my chair with laughter. I guess if if works. Chuckle.

  18. menzie chinn

    China always finds its way into these discussions. China is indeed important, particularly as a purchaser of US dollar denominated assets.
    But it is problematic to focus on the US-Chinese trade balance, and particularly Chinese exports to the US, for several reasons, chief among them the following:

    1. There are problems in tabulating US-China trade because of reexports via Hong Kong; US figures overstate PRC exports, Chinese figures understate. One guess is that the actual merchandise trade deficit is 75% of the officially reported deficit. See:

    2. Services are excluded in the figures usually cited — and it is likely that the US has a surplus on this account.

    3. Most importantly, there is a large amount of assembly of imported intermediate goods for exports going on in China. Larry Lau (Stanford) estimates that the Chinese value added in exports to the US may be as low as 20%. See:

    4. The resulting conclusion is not that China doesn’t matter — it serves an important link in the production chain. Rather, first, competition is arising from all of East Asia. And second, Chinese revaluation — which drops prices of imports of intermediate goods into China as well as raising prices of Chinese final exports — will not necessarily have a large impact on the US-China trade balance.

  19. menzie chinn

    Stormy: The Obstfeld-Rogoff model definition of home bias in consumption is bias toward goods produced at home, rather than produced by home-resident-owned factor of production.

  20. Stormy

    I thought that is what I said concerning the Obstfeld-Rogoff bias. We agree that the model assumes a home bias.
    I simply added a further ironic twist that we are still preferring our own products even when they are produced offshore: Dell and Intel, for exampleor all the products produced in the maquiladoras. Frankly, this is a sign of Americas power in some areas.
    At some point, the models will have to account for offshoring.
    I agree further that China alone is not the problem, only a gigantic symptom.

  21. menzie chinn

    Stormy: My apologies for missing the irony. So often, I’m told that it doesn’t matter that our imports are made by American companies (including by investment bank economists). I think it is an important factor, but doesn’t change the implications of a very large trade deficit expresed as a ratio to the tradables sector.

  22. brad setser

    Menzie — 100% agree on your last statement; i also am surprised by the number of wall streeters who say trade deficits don’t matter b/c us imports are made by us companies. it actually isn’t even all that true — most investment in China comes from others in East Asia (taiwan, Korea, etc). US firms subcontract to taiwanese firms who built plants on the mainland.
    I haven’t read the Rand study, but what is the argument that the US data overstates US imports from China? I believe that the US data may understate exports to China, as some goods shipped to HK may go to the mainland. But i had not heard the imports story.
    Finally, i would be surprised if US service exports to China are all that important. The US doesn’t export many “bnaking or financial” services to China; to do that, you need to use US labor to intermediate between Chinese bank deposits and chinese lending. that generally doesn’t happen. Software and movies count as service exports (don’t ask why, but the receipts on an american movie or from the sale of a US TV program are considered audiovisual services). but i think the general consensus is that China uses US “audiovisual” and “software” services without paying full price. IP and all.
    Incidentally, wutang, that is the answer to your question about US porn DVDs. If counted correctly, they should show up as the export of an audiovisual service. A DVD is a DVD. But if the DVD is pirated, the US won’t get the service export …
    Finally, Menzie, the 20% value added estimate strikes me as dated. China is now producing far more components than it did a few years ago — it used to import steel, now it imports iron ore. Same with many electronics components. Not all of course. But with exports of 40% of Chinese GDP, 20% value added works out to 8% of China’s GDP.
    China’s current account surplus is about that. Maybe the value added in exports to the US is well below the value added in exports to Europe and the rest of asia but it strikes me that the easiest way to reconcile the data is to assume that the value added in china probably has increased substantially.
    and, with investmet of 50% of GDP, things change quickly. Wait til China starts exporting auto components to the US …

  23. JDH

    Let me take this opportunity to confess to readers my technological incompetence with Spamlookup, a Movabletype plug-in. This feature automatically triggers any comment that uses a key word such as used by Wutang above (I won’t repeat the word because I don’t want to permanently blacklist myself from my own blog). Unfortunately, that means that anybody who states that word is thereafter always viewed with suspicion by the filter and needs to have their comments individually approved.
    I have tried to figure out how to fix this, but so far have not. So, if anyone knows how to edit the proxy cache log maintained by Spamlookup, please let me know. Until somebody can help bail me out with advice on this, some of you will be stuck in this Econbrowser limbo where your comments need to be approved by hand each time.
    My apologies. Anybody know how to fix this?

  24. brad

    Menzie — I looked at the Rand paper and the Lau paper, and was left unconvinced. Here is why:
    The Lowell/ rand paper is filled with assertions that i don’t think can be backed up — including relatively common ones like “As China continues to develop, it will spend more money in areas such as tourism, insurance and business and financial services all areas where American companies are highly competitive.”
    The problem here is the same as the problem with the argument that that trade deficit doesn’t matter because China is a production base for US firms. Put simply, US companies will not necessarily use US labor to produce those high value added services. Firms may get the profits, but that won’t generate lots from a BOP point of view. I know a fair number of folks who work in the financial services sector; i don’t know many why sell financial services to china. That business is done out of Hong Kong … US firms do lots of business in europe, mostly out of London employing a pan European labor force. Moreover, as Patrick Artus has documented, the US service sector’s surplus peaked some time ago —
    As for the Lau argument, it is from 03, and seems based on 02 data. He does have a higher value added for chinese exports to the world (30%) than Chinese exports to the US (20%), and I take his point that if you looked just at value added, the gap between what the US sells to China and what it imports is smaller (tho it also has increased a lot in value added terms recently).
    My problem: lots has changed since the end of 02, or even the end of 03. 03 is when 30% y/y Chinese export growth started. Moreover, the argument that Chinese export growth was simply shifting exports from one Asian country to another was backed up by the US data through the end of 03 (2003 us imports from asia where equal to 2000 US imports from Asia), but doesn’t hold for 04 or 05, when overall US imports from Asia starting rising relative to US GDP.
    Looking ahead, it seems pretty clear that a rising fraction of the value added will come from China, as more and more components are made in china. Chip factories and the like.
    Moreover, China increasingly will only be able to sustain 30% y/y growth by moving into new sectors — sectors where China will compete more directly with US products. So far that has happened in textiles where the US only produced b/c of protectionism, and in furniture. looking ahead, i suspect auto parts and various forms of machinery will be on the front lines. Just a guess.
    I’ll have a post on this too …
    Finally, the US exports high value added products to China is only partially true. Tis true with Aircraft, aircraft engines, turbines and the like. Not so much for scrap iron and various resource exports. And we can debate whether US soybeans are a high-tech export or not … (production process is pretty high tech).
    But all in all, i would note that Chinese exports to the uS have basically doubled since the end of 02, and china’s currnet account surplus has quadrupled (from @ 2% to around 8%). And if you look at any of the data on what China actually produces, it too has grown enormously since 02. So Lau’s arguments strikes me as an accurate description of China before its most recent investment boom, but much less accurate now.
    interested in your reactions

  25. menzie chinn

    Brad: I agree that the 20% value added figure is probably outdated, given the large boom in investment in recent years. However, I have not been able to find a more recent figure. I’d welcome any estimates based on data.

    Why do Chinese figures understate, and US figures overstate the US-China bilateral merchandise trade deficit?
    From: Lum and Nanto, “China’s Trade with the United States and the World,” CRS report RL31403

    “…PRC data show much smaller bilateral trade deficits than those claimed
    by its trading partners. PRC trade data differ from U.S. data primarily because of the
    treatment of products from or to China (mainland) that pass through the Hong Kong
    Special Administrative Region (SAR). China counts Hong Kong as the destination
    of its exports sent there, even goods that are then transshipped to other markets. By
    contrast, the United States and many of China?s other trading partners count Chinese
    exports that are transshipped through Hong Kong as products from China,14 not Hong Kong, ncluding goods that contain Hong Kong components or involve final assembly or processing in Hong Kong. Furthermore, the United States counts Hong Kong as the destination of U.S. products sent there, even those that are then reexported to China. However, the PRC counts many of such re-exported goods as U.S. exports to China. Some analysts argue that the U.S. Department of Commerce overstates the U.S. trade deficit with China by as much as 21% because of the way
    that it calculates entrepot trade through Hong Kong.”

    Of course, both series are trending upward, so we know what the first derivative of these series are, even if we are uncertain about the level.

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  27. Bill Ellis

    Menzie – My analysis of the 2000 – 2002 drop considers a number of unusual factors. It is my assumption that the growth in the value of the dollar preceding this time frame reflected currency flow into the US craze. With the crash of that market, the value of the dollar retreated with a reversed flow in the securities market.
    The second factor was that manufacturing suffered a huge pause after 9/11. In many instances this was only a draw down of inventories, but we saw significant losses among our manufacturing clients, and a resulting reduction in payroll as they struggled to regain profitability.
    The Fed then eliminated short term interest rates, and with Euro assets paying interest at twice US rates, the dollar continued it decline against the Euro.
    When oil was $20 per barrel, is was priced at 25 Euro per barrel. When the Euro went to $1.20, oil moved to $30 per barrel, or 25 Euro per barrel. Thus, I conclude that the initial increase in oil prices during this period of time reflected a decoupling of oil prices from the dollar.
    Considering these factors in tandem, there was a dsomestic manufacturing contraction, and increased cost of oil imports.
    This is not an attempt to deny that offshore manufacturing is having a significant affect on domestic industry. We repeatedly are encountering new forms and sources of competition. However, I do think that the early 2000 data has a lot of noise in it.

  28. brad

    Menzie — any thoughts on Steve roach’s column this am? Argues that the shift to services/ high value added strategy for the us may be a bit harder than we thought …
    Re: the data. I am convinced that Chinese data understates Chinese exports to the US b/c of HK. The argument that many US exports to HK are really exports to the mainland also makes sense, and it would help explain why US exports to China are so low relative to US imports (below the ratio even for Japan). but as you note, even if you treat HK and China as a single entity for trading purposes, the trend line is pretty clear.
    the other issue involves freight on board and all that stuff, and I am not sure I quite have pinned down the argument.

  29. dryfly

    Menzie — any thoughts on Steve roach’s column this am? Argues that the shift to services/ high value added strategy for the us may be a bit harder than we thought …
    I read it too… and Roach is right on. Why anyone thought ‘services’ would stay put if ‘production’ walked certainly didn’t have a ‘practioners eye view’ of operations or production… regardless of whether the ‘product’ being ‘produced’ is a ‘tangible object’ or an ‘action’ (ie service… or as is almost always the case an unseparable combination of both bundled up in one transaction.
    But the ultimate irony will be when Peak Oil sets in… then manufacturing will be less tradeable than services… since it will require expensive energy to transport the ‘cheap’ mfg’ed stuff around but not the services (those can just be wired in)… But will we still have any valued added mfg’ing by then?
    Probably get slapped up by the invisible hand coming & going.

  30. menzie chinn

    Bill Ellis: I don’t disagree that many special factors may have caused the drop in manufacturing employment in the early 2000’s.
    But this doesn’t change the basic fact that the tradable share of US GDP probably has declined a bit during the last four years — or at least is lower than it would have been absent the strong dollar 2000-02.
    Brad: I scanned Roach’s article; I seem much to agree with. In terms of the implications for the constellation of international macroeconomic balances, it seems like a variation of the Keynesian underconsumption argument, carried to the newly integrated markets of China and India. It makes sense to me, but on the other hand, the “miracle” economies of East Asia managed to overcome their aversion to consumption during the early 1990s.

    It doesn’t seem to me that it disproves the thesis that if the US were to undertake fiscal consolidation, this would eliminate the external demand for East Asian goods. But I freely admit I may be missing something.

  31. brad

    Menzie — I think we are more or less in the same place. Fiscal consolidation would tend to reduce some external demand for east asian goods, as would an end to the US housing boom … of course, if fiscal consolidation ends up keeping interest rates below where they otherwise would be, and housing up, the overall impact is reduced a bit.
    Roach is making a bit of an underconsumption argument, which makes sense to me for China. I am not so sure than the Asian miracle economies ever managed to really get into a consumption boom, but they certainly invested a ton without increasing (already) high savings rate in the mid 90s, leading to current account deficits. but the key was that consumption stayed constant as a share of GDP even as GDP rose, so savings also stayed constant. Not so in China. To me, the strangest thing about the past few years is that china’s current account surplus surged during an investment boom — i plotted China’s current account v. the oil exporters (in $ billion, not % of GDP), and from the way it is moving, you would think china is exporting oil, not importing it …

  32. TI

    In a sense China really is like an oil exporter. China is 94% self-sufficient in energy (it is mostly coal) and this means that it is a net exporter of energy if we take account of the export surplus and the energy embedded in its export goods.
    The huge investment boom in China has not increased imports beacause of the availablility of domestic resources, mostly energy. China is the center of heavy industry, making half of the cement of the world, being the biggest steel maker etc. China is following the traditionl industrial growth model – and it is virtually the only country in the world that still can do it. It doesn’t follow the consumption led growth model because it can do otherwise and be the maker of those goods others consume. Who else would make them?

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