This past week, the focus turned to Germany, a U.S. ally that the Trump administration seems to regard as a frenemy. On Tuesday, top trade adviser Peter Navarro accused Germany of using a “grossly undervalued” currency to “exploit” the United States. Yet, just a few days prior, Navarro himself spoke of Germany as a model that the United States might emulate. “We envision a more Germany-style economy, where 20 percent of our workforce is in manufacturing,” he said on CNBC.
For Trump, a recurring strategy has been to tar America's trading partners as cheaters and job stealers. But it's difficult to fit Germany into that narrative. The weak euro is a relatively recent phenomenon; it doesn't explain how the German manufacturing sector maneuvered the last 15 years of globalization with such startling grace.
As a new study from economists Wolfgang Dauth, Sebastian Findeisen and Jens Suedekum shows, German factory workers actually benefited from increased trade and competition in the 2000s. Though the emerging manufacturing hubs in Eastern Europe and China damaged some industries, like toys and clothing, the Germans more than made up for it by expanding exports in other sectors, particularly cars and machine tools.
Of course, manufacturing employment has been in long-term decline in the United States and in Germany, a trend linked to robots, not globalization. Yet whereas trade further accelerated job losses in the United States during the 2000s, it helped retain German jobs against the forces of rising automation, the researchers say.
Many economists believe that such acts of protectionism will create pain for American consumers, not jobs. The German experience teaches us there’s an alternative. “Instead of complaining and pointing the finger to China, German companies made the best of this,” as one German analyst put it memorably a few years ago.
Some of the specifics of the German story would be hard to replicate in the United States. Germany has benefited in recent years from a relatively favorable exchange rate, the result of economic weakness in the other European Union countries it shares a currency with. And it has gotten lucky with the kind of manufacturing that it specializes in.
For instance, a major contributor to Germany’s success has been its machine tool industry. If China is the world’s workshop, Germany is the world’s workshop-builder. “Germany makes all kinds of tools that equip Chinese factories — robots, automation systems, programmable logic controllers — those are all exported from Germany,” says Willy Shih, a professor at Harvard Business School who studies global manufacturing. “If you go into a U.S. steel mill you will find tools from Germany. If you go to a steel plant in China, you’ll find some of the same tools.”
The larger lesson is that Germany was able to find its competitive niches. The country’s other top export, automobiles, faces a much more crowded marketplace — but brands like BMW and Mercedes-Benz were still able to grow by touting their reputations for top-notch engineering. “The Germans produce products that have a unique market position,” says Martin Baily, a senior fellow at Brookings. “They’re not the cheapest, but they are relatively specialized and have high quality.”
The German focus on export competitiveness helps explain how it preserved its share of the global manufacturing market even as much of the world's production shifted to countries like China. But it does not wholly explain why Germany has also held onto so many manufacturing jobs. For that, economists point to a number of other factors, including a strong culture of cooperation between the government, businesses and unions, as well as investments in training workers. This is the other lesson we can learn from Germany: Some of the jobs we lost can be blamed on our own choices.
“American companies are looking to make money — they have a pretty single-minded commitment to profitability,” Baily, the Brookings economist, says. “If that means moving to Mexico, that’s what they do. If it means outsourcing to Asia — that’s what they do. German companies make money too, but they’re a little more committed to the long term and to their workforce.”
Instead of cutting employees loose, German companies tried to find ways to make it worthwhile to keep them around by continually investing in new manufacturing technologies, as well as upgrading worker skills through the famed German vocational programs. Those efforts have more or less paid off. Nowadays, not only is a larger fraction of the German workforce employed in manufacturing, but the average German factory worker earns more than his American counterpart.
As this chart from Baily and his colleague Barry Bosworth shows, American manufacturing has been doing pretty well itself. Output remains high. But in the United States, the manufacturing sector survived globalization, in part, by shedding people. This touches on a problem with Trump’s efforts to reshore manufacturing employment. The jobs that we did lose to offshore competition tended to be the least valuable — which is why they will be the hardest to get back.
“What globalization has allowed U.S. companies to do is to focus on the parts of the production chain that the U.S. is really good at — primarily in the R&D phase, the marketing phase, and the very capital intensive parts of production,” says Gordon Hanson, a professor of international economics at the University of California, San Diego. “For the engineers of America, that change has been fantastic. For the high school-educated manufacturing worker, that change has not been so good.”
An example is the iPhone, which is designed and marketed by Apple, contains parts manufactured in a variety of countries — including the United States — and is assembled in China. That final step is the least lucrative. According to research firm IHS, it only costs about $4.50 to put together an iPhone 6s, which is less than one-tenth of one percent of the phone’s retail price. The real value of an iPhone isn’t in the assembly; it’s in the chips, the battery, the screen — and most of all, in the design work of the highly-compensated Apple engineers in California.
Moving those assembly-line jobs to the United States wouldn’t bring much benefit, because they just aren’t good jobs. What’s more likely is that, if Trump forced Apple to make the iPhone here, the company would find a way to staff most of the assembly line with robots. “It’s quite different to bring manufacturing production back than to bring manufacturing jobs back,” Hanson says. “The output that would return would be in 21st-century factories. The jobs we lost were in 20th-century factories.”
For this reason, any plan to expand American employment solely through factory jobs is unlikely to succeed. The task becomes downright impossible, though, if we don’t understand why the jobs left in the first place. It wasn’t bad trade deals; it was economics.