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WORLD OF INDUSTRIES 05/2018

WORLD OF INDUSTRIES 05/2018

U.S. manufacturing

U.S. manufacturing sector now in resurgence mode For a long time there have been claims about U.S. manufacturing being in a downward spiral. But the fact is, U.S. still remains the second largest manufacturer of goods in the world, only behind China and with increasing adoption of automation and Industry 4.0 technologies in the manufacturing sector, it looks like America’s mojo for manufacturing is back. W ith a rapidly transforming global industrial landscape and challenges within the country, the U.S. economy is still the largest and most significant in the world. It represents about 20 % of total global output. American economy features a highly-developed and technologically-advanced services sector, which accounts for about 80 % of its output. It is dominated by services-oriented companies in areas such as technology, finance, healthcare and retail. Large U.S. corporations also play a major role on the global stage, with more than a fifth of companies on the ‘Fortune Global 500’ coming from the United States. Even though the services sector is the main engine of the economy, the U.S. also has an important manufacturing base, which represents roughly 15 % of output. It is the second largest manufacturer in the world and a leader in highvalue industries such as automobiles, aerospace, machinery, telecommunications and chemicals. America maintains its economic powerhouse status through a combination of characteristics like abundant natural resources, sophisticated physical infrastructure, and a large well-educated workforce. Economic growth in the United States is constantly being driven forward by ongoing innovation, research and development as well as capital investment. In 2010, the U.S. economy has emerged from one of the deepest and longest recession in more than 70 years. While the labor market has recovered significantly and employment has returned to precrisis levels, the economy still faces a variety of significant challenges going forward. Deteriorating infrastructure, wage stagnation, rising income inequality, as well as large current account and government budget deficits, are all issues facing the US economy. United States’ trade structure Over the past several decades, the U.S. has been involved heavily in international trade, which has mostly resulted in a trade deficit. Overall, the trade deficit implies that the value of the goods being purchased from abroad by the United States exceeds the value of the goods being sold to other countries. It is the 2 nd largest exporter and largest importer of goods and services in the world. America’s current account deficit has been increasing since the 1990s and reached an all-time high of 5.8 % of GDP in 2006. The deficit has since narrowed mainly due to increased oil production on U.S soil. America also is by far the top recipient of foreign direct investment (FDI), about 80 % of which comes from UK, Japan, the Netherlands and 6 other top industrialized nations. The manufacturing sector has a lion’s share, bringing in about 40 % of the FDI. Author: Sushen Doshi, International Correspondent for World of Industries NEWS AND MARKETS 12 WORLD OF INDUSTRIES 5/2018

Although the United States has lost some of its competitive edge in recent decades, capital goods still represent two thirds of its total exports. It mainly exports high-value capital goods and manufactured products, including industrial machinery, airplanes, automobiles and chemicals. In 2015, the U.S. exported $ 1.510 trillion in goods. In terms of imports, roughly 15 % of imports are crude oil and petroleum products. Industrial machinery and equipment also represent 15 % of imported goods. Almost 25 % of imports are capital goods, such as computers, electronics, medical equipment, and telecommunications equipment. Consumer goods such as smartphones, pharmaceuticals, household equipments and textiles represent another 25 % of imported goods. Automotive vehicles, components and engines represent 15 % of imported goods, whereas food and beverages represent only about 5 %. Picking up steam in 2018 The U.S. manufacturing sector has kept up its momentum in May, with ISM manufacturing index standing at 58.7 in May, up from 57.3 in April. The index remained comfortably above the 50-point threshold that separates expansion from contraction in the manufacturing sector, where it has been for 21 consecutive months. The uptick in the index in May was largely the result of strong domestic demand. However, new export orders fell compared to April, signaling weakening external demand. This indicates an increasing degree of divergence between the strong momentum of the U.S. economy and that of the rest of the world. Indeed, analysts have been concerned by weaker-than-expected demand data in Europe and parts of Asia in recent months. Manufacturers are also worried about the ongoing trade tensions with China and other important trade partners, increasing uncertainty for numerous sectors that rely heavily on multi-country supply chains. U.S. Manufacturing in the global arena For a long time there has been debate about U.S. manufacturing sector being in a downward spiral and can no longer compete globally. But despite all of this, United States is world’s second largest manufacturer, only behind China. Let’s take a look. One of the ways to look at the competitiveness of U.S. manufacturing is to compare its growth with competitor countries. The United States and 7 other countries including France, Germany, Italy, Japan, Mexico, South Korea, and the UK make up more than 80 % of OECD manufacturing activity. In 1997, the real manufacturing output of these 8 countries was nearly $ 4 trillion. The U.S. output was a little more than a third of this total, Japan accounted for more than 25 %. Germany provided 14 %, followed by Italy’s nearly 8 %. Other countries were less than 6 % each. By 2015, the U.S. share had risen to about 36 %. The shares of Mexico and South Korea had risen slightly and Germany’s share hadn’t changed much. All other OECD countries saw their share of manufacturing output decline, with Japan’s share declining nearly 3 %. By this standard, U.S. manufacturing is competing well against the manufacturing sectors of other large and developed manufacturing economies. The only exception is China, which isn’t included in the OECD. According to World Bank statistics, China surpassed the United States in 2014 as the world’s largest manufacturing nation. By 2015, China’s real manufacturing output totaled $ 4.2 trillion, considerably more than America’s $ 3.25 trillion. From 2005 to 2015, China’s share of the world’s manufacturing output rose by 10 % accounting to nearly 20 %, while America’s share declined to 15 %, a drop of around 3 %. Undoubtedly, Chinese manufacturing has gained market share from U.S. manufacturing. But it is also true that China has gained more of the manufacturing market share from other countries like Japan, whose share of global manufacturing output declined from 10 % to 8 %, and the Euro area, whose share declined from 18 % to 14 %. So, while China successfully expanded its market share compared with the United States, that success has come at a cost of all the leading manufacturing nations, not the U.S. alone. Trade and tariff wars Ever since President Trump took office, he has criticized the European Union, and particularly Germany, over the US’ trade deficit with the EU. He has also said the deficit is unfair given that many European members of the NATO alliance do not meet the defense spending target of at least 2 % of their GDP. To try and narrow the deficit, he has threatened to impose tariffs on imports from EU, a move that could severely hurt German automobile companies. The EU-US trade in goods and services was more than € 1 trillion in 2017. EU imported goods worth € 256 billion from the US and exported € 375 billion. The main export and import categories are industrial machinery, automobiles and its components and chemicals etc. At more than € 165 billion, machinery and automobiles are EU’s largest export category to the US. However, in March, when the United States announced tariffs on imported steel and aluminum, Trump exempted the EU from it. But on June 1, Trump has lifted the exemption and steel and aluminum exports from EU to America will be taxed 25 and 10 % respectively. Europe has said it would retaliate in July to the steel and aluminum tariffs by placing tariffs on US goods from those areas of the US that voted heavily for Trump during the 2016 presidential election. The list of goods are worth more than € 2.5 billion and include steel, bourbon, peanut butter, cranberries and orange juice. The bloc has also filed a complaint against the US tariffs at the World Trade Organization (WTO). United States vs. China: Even before getting elected, Trump has focused most of his ire on China. He has threatened multiple times since the beginning of 2018 to place tariffs on various Chinese products to try and close the US’ $ 375-billion trade deficit with the country. U.S. did not exempt China from the steel and aluminum tariffs in March. And despite talks between Washington and Beijing to try and balance the trade deficit, Trump announced in June that the US would place a 25 % tariff on Chinese goods worth $ 50 billion from July 6. Beijing responded to the steel and aluminum tariffs in April by imposing tariffs ranging from 15 to 25 % on $ 3 billion worth of US goods, including pork, nuts and wine. China has also said in June that it would mirror the US tariffs on $ 50 billion worth of goods by targeting the equivalent worth of US items. The list includes US beef and soy beans and is designed to hurt US regions that voted heavily for Trump. United States vs. Canada and Mexico: During the 2016 election campaign, Trump pledged to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico after calling it the “worst trade deal ever.” He has threatened to withdraw the US from the agreement since the negotiations over its renewal began in mid-2017. However, Canada and Mexico also received exemptions to the steel and aluminum tariffs along with the EU. And as with the EU, the US lifted the exemptions for both countries at the beginning of June. Canada and Mexico have also announced retaliatory tariffs on US products. Mexico has targeted $ 3 billion, while Canada has targeted over $ 16 billion worth of US goods. Over the near-tomedium term, if trade tensions escalate, there would be immense negative impact on global business confidence, which could hamper business models and overall growth. Photograph: Lead Pixabay z WORLD OF INDUSTRIES 5/2018 13

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