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Current Trade Deficit:    
A Skeptical Front-Line View of That Manufacturing Renaissance
Alan Tonelson
Tuesday, May 27, 2014
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Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
Anecdotes should never substitute for data.  But a vivid story is often worth a thousand facts in the policy world, as is known so well by the pitchmen behind recent claims of an historic U.S. manufacturing comeback.

So the following letter, received in response to May 15’s AmericanEconomicAlert article documenting domestic industry’s ongoing woes, deserves special attention.  The writer is the foreman of a small job shop, a manufacturing company that produces small quantities of specialized custom products according to its customers’ specifications.   Presented below in lightly edited form, his first-hand observations represent a sharp counterpoint to the manufacturing renaissance stories pervading the media and political rhetoric.  

Particularly noteworthy is the author’s portrayal of a clear lack of adequate pricing power throughout the manufacturing supply chain -- due largely to the pressures of competing with goods from China that are kept artificially inexpensive by currency manipulation, dumping, and numerous other subsidies provided by the Chinese government.

“As an employee in a small, privately owned durable goods CNC job shop manufacturing business in Northern California, I speak with people ranging from the steel supply companies, to tool and equipment salesman, foundry owners, other shop owners, and various related businesses not only in my industry, but in other manufacturing areas as well.  Over the last 14 years there, I have worked pre-recession (when I was hired), during the recession, up to the present time.  Here’s a summary of our situation these days:

“Our workload now is the lowest it’s ever been.  It’s basically at recession level – which means month-to-month, often week-to-week job security.

“Our backlog is at zero.  Since the recession, our customers have refused to hold inventory on their books.  The result is a right-now ordering process – at China prices

“Order quantities are at minimal levels – and far below those that could justify the kinds of discounts for large orders given before the recession.  Yet our customers keep making demands for such discounts

“Price demands for new products are RIDICULOUSLY LOW.  With conventional machining processes, margins now are so slim it’s of negligible value to do the work at all.

“A majority of the available work is ‘headache work’—prototype work that can be profitable in theory, but that often turns into a money loser because extreme complexity and/or unrealistic deadlines create a host of unforeseen problems.

“Customers constantly return products by citing ‘imaginary defects,’ like insignificant blemishes.   It’s a common practice that helps them avoid carrying inventory.

“Customers now require more in the way of paperwork certifying conformance to ‘international standards’, new requirements imposed by government regulations , etc.  When work slows down, their pencil pushers do more.

“(These paperwork demands, by the way, usually require guarantees of basically complete, unquestioned access to our entire facility, processes, records, and book work at any time, by the customer or in turn by any of its customers.  In addition, we’re essentially denied any access to our customers’ processes and business practices, and are prohibited from making sudden changes, including any pricing adjustments or process changes.)

“We also receive pamphlets and flyers from auction houses that regularly announce sales of closed manufacturing facilities and equipment.  Before the recession, we saw maybe two or three flyers over a three- year span.  We now regularly see three per week, often with multiple closures mentioned on the same flyer for businesses in California and the surrounding states.  In Southern California – El Monte, specifically – easily more than 75 manufacturing facility closures have been listed in the last year alone.  There is a rise in notices from Arizona as well lately.  http://www.aagauction.com/ is just one.

“We often receive calls from people wondering ‘what happened to that machine shop’ they used to do business with.  And many ask, ‘Can you make our parts because our guys went out of business?’  This work often turns out to be production for which the old shop was specifically tooled and equipped to deal with profitably.  Usually we have to turn these potential customers away due to dramatically increased tooling costs over the past few years, and because of their unwillingness to pay more than China prices when we provide a new quote.

“Several older shop owners from ‘the manufacturing golden years’ are reaching retirement age.  And this new harsh, unfriendly post-recession business atmosphere, coupled with California's burdensome business regulations, drives many to throw in the towel.  Many in the younger generation don't like to get their hands dirty, including shop owners’ children, so there's less family involvement when it comes to passing on the family business.  

“I could easily go on.

“With all this recovery talk, I am seeing very little actual evidence of anything happening.  And not in any part of the small private manufacturing world I see or deal with.”



Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).