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Manufactured Protectionism

By, 12/13/2006

There's a good chance you think the entire world's manufacturing production has moved to developing economies like China and India. We certainly don't fault you for that. It's sometimes hard to hear over the protectionist shouting of lost jobs, outsourcing, and the evils of globalization. But given how loud the rallying cry is on this one, we thought we'd throw our voice into the mix and highlight a few salient points.

We don't deny that a significant chunk of manufacturing has moved overseas to cheaper developing locales. China's share of world manufacturing output is about 9%, more than double the 4% it accounted for a decade ago. Yet, most people lose sight that the main developed regions of Western Europe, Japan and North America still account for three-quarters of world manufacturing. That doesn't sound like developing world domination to us.

In fact, there is reason to believe the manufacturing balance won't shift to developing nations for quite some time, if ever. That's because cheap labor is only one part of the equation. The developed world still holds the overwhelming advantage in technology, expertise, and innovation. While companies have outsourced much of their low-skill production, they have kept the specialized and sophisticated plants on their native soil.

You don't hear much emphasis on this in the press, but emerging market companies actually look to the developed world to expand their manufacturing. That's where the high-margin, complex processes are located. For example, just last month Russia's second biggest steel company, Evraz, purchased US-based Oregon Steel, which makes highly customized products for the railway and construction industry.

We're big proponents of globalization and capitalism here and wouldn't argue against all manufacturing moving to outer space if that's where the most value was added. But before we assume that's where we headed, we thought we'd at least point out that there's a long way to go. And the politicians don't even need to do anything.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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