The Competitive Edge -- Looking Ahead to Manufacturing's Future

Growth in U.S. manufacturing will be led by exports, capital investment and growth abroad.

A few years ago I co-authored a book taking a look at the next 200 years of human history. Despite the dangers of forecasting, it is useful from time to time to look ahead, if only 10 or 20 years. Manufacturing is after all a business that requires making large bets on future trends.

In short, I think demographic, economic and political trends will continue in coming decades to provide a favorable outlook for U.S.-based manufacturing. The growth of the world population sets the stage for continued economic expansion. The United Nations predicts that world population will grow by 28% by 2030 and a total of 40% by 2050, when it reaches nearly 9.2 billion.

Economic dynamism, moreover, is rapidly expanding the incomes and wealth of people around the world. Researchers at Goldman Sachs estimate that by 2030 two billion people will be added to the rolls of the middle class, defined as having incomes between $6,000 and $30,000 in purchasing power. Most of the new middle class will reside in China, India and newly emerging economic powers such as Brazil, South Africa, Vietnam, Russia and Indonesia.

As 70-80 million people are added to the rolls of the middle classes each year, the demand for manufactured goods will expand in tandem. The Goldman study, for example, puts the "sweet spot" for purchase of higher-end durables at about $8,000-$9,000 in annual income. U.S. manufacturers are highly competitive already in this category of goods, having seen over 30% growth in exports in the last three years.

On the global political economy front, trends are favoring domestic U.S. manufacturers in other ways. The shift in the value of the dollar relative to other major currencies reduces some of the disadvantages that U.S. firms faced in the past two decades. This trend is strengthened by the rise in wages in emerging economies, especially in Asia.

Will these trends, particularly the weaker dollar, continue? The still-sizable U.S. current account deficit helps weaken enthusiasm for holding dollar-based assets. The current financial crisis also contributes to this trend. In the United States, the decades-long credit bubble, which drove consumption-led growth, is at an end or at least facing a major contraction. Elsewhere, growing incomes and macroeconomic strength in the emerging economies strengthen both their purchasing power and their currencies. Domestic inflation in China and India also will have to be addressed, partly by appreciation of their currencies. In sum, growth in the United States will have to be led by exports and capital investment and growth abroad more by consumption, in turn leading to a rebalancing of global trade.

A final structural change should also help to strengthen domestic U.S. manufacturing. The startling, and long-term, rise in global energy prices is raising transportation costs to the point that local production of goods will be favored. This is already apparent in commodity goods, but is affecting higher value added products like automobiles as well. Growing foreign direct investment in the United States is another indicator of this trend.

All of these factors are working in the direction of enhancing domestic U.S. manufacturing over the coming decade or two. Maintaining the momentum will require continued deployment of America's ingenuity, capital investment and flexibility to meet the challenge of progressively sophisticated foreign competition. A bit of help from U.S. policymakers, in the form of lower corporate taxes, or even moving to consumption-based taxes, more free trade agreements, and reducing the structural cost burdens, such as our employer-based health care system and tort liability, would also contribute to this favorable trend.

U.S. goods exports are up a strong 18% this year, but to recapture market share lost in the last two decades will require these trends to last into the next two.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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