Manufacturing matters. While it has become increasingly automated and globalised over the past several decades, it still holds a special place in the national psyche in the US and other big exporting nations, such as Germany, China and Japan.
Part of that is down to its disproportionate benefits to the economy. In the US, for example, although manufacturing represents just 11 per cent of gross domestic product and 8 per cent of direct employment, it drives 20 per cent of the country’s capital investment, 30 per cent of productivity growth, 60 per cent of exports and 70 per cent of business R&D, according to figures from the McKinsey Global Institute. Manufacturing’s share of the economy in many other developed countries is far higher.
No wonder the debate over where things are made is both emotional and political. This debate has come to the forefront in recent years, not only because of US-China tech and trade wars and supply chain shortages in the pandemic, but also because of human rights. Western brands including Nike, H&M, and European luxury producers find themselves in an increasingly difficult position for using cotton produced in Xinjiang, some of which may be harvested and spun by forced Uyghur labour.
US and European companies are under tremendous pressure to boycott Xinjiang cotton and use homegrown alternatives. Yet when they do, they risk a backlash from the Chinese, who seem to have added the Uyghurs to the list of “no-discussion” areas such as Tibet, Taiwan and Tiananmen. I suspect that the side brands take will depend largely on how important China is to their overall revenue and future growth.
But the textile industry has been becoming less globalised for some time now. In the US, sectors including textiles and furniture were among those hit hardest by the accession of China to the World Trade Organization, since they are both labour intensive and tradable.
However the calculus has shifted now that wages and domestic demand have risen in China. Well before the Xinjiang concerns, apparel supply chains were shifting. Chinese producers exported 71 per cent of finished apparel goods in 2005. By 2018, it was just 29 per cent.
This change is coming at the same time as other tailwinds for the regionalisation of apparel. More brands are going directly to consumers, bypassing expensive bricks and mortar shops. This is also increasing investments in software, which will boost efficiency, shorten production cycles, and thus further shift the labour/transport cost/productivity arbitrage in favour of local production.
Whether such reshoring matters for national economies depends very much on the industry. A fascinating study by MGI, to be released on April 15, examines 30 main manufacturing sectors in the US. It finds that 16 of them stand out for their economic and strategic value, as measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. Apparel is not on the list. But semiconductors, medical devices, communications equipment, electronics, autos and auto parts, and precision tools are.
Of course, some of those industries are dividing along national lines, often more for political than economic reasons — witness the US-China chip wars. While the US still has the edge in chip design, domestic production capacity has fallen dramatically over the past three decades. That is one reason for the shutdowns in the US automotive industry that began in February, when post-pandemic production started to ramp back up. That same month, President Joe Biden called for a national review of supply chain vulnerabilities.
His administration has already made it clear that it would like to see more domestic production of semiconductors, medical supplies and other strategically important items. But, says MGI chair James Manyika, “size of demand for domestic production matters, especially in industries where there are scale and learning curve effects”, such as semiconductors, which are made far more cheaply in Asia. The US could create more demand for domestically fabricated chips, but only if the government underwrote investment via guaranteed federal procurement of supplies, as it did for semiconductors in the 1950s and 1960s.
Given the push towards “buy American” under Biden, as well as the use of the federal balance sheet to support union labour in government contracts and healthcare infrastructure, that’s not inconceivable. Indeed, some within the defence community (which needs high-end chips for military equipment) as well as the progressive left (which wants the US to lead on cutting-edge clean tech, which might also create semiconductor demand) would like the US and China to decouple supply chains for chips.
Where would this leave Europe? Sitting very uncomfortably between two economic superpowers. It does not matter much at a national competitiveness level what fast fashion purveyors and luxury retailers do about Xinjiang, though the moral questions involved may well have brand value implications.
But it does matter what governments do to support domestic demand or control supply chains. I suspect that those decisions will start to revolve less around simple cost and efficiency calculations, and more around a broad discussion of national competitiveness.