America's Edge

The St. Louis Screw & Bolt Co. is not an industrial showcase. It uses no advanced materials, no computer-controlled machine tools, no automated warehouse. The sagging red-brick plant shows every one of its 66 years, and the grinding, hissing, thumping machinery inside isn't much younger. In this hot, dirty factory, union workers turn steel rods into fasteners for bridges and oil platforms, threading and capping one huge bolt at a time. It's a classic example of decaying American industry, save for one vital fact: it's doing a booming business abroad. "Very possibly we'll have 8 percent of this year's sales overseas," says chairman James Schiele. "It bodes well for us. I think we'll see more of it."

If you believe half of what you hear in this election year, the U.S. economy is a world-class laggard. In Washington an entire industry, including at least three "competitiveness" councils, thrives on worries about how well U.S. business measures up. Calls for industrial policy-a concerted government effort to aid key sectors of the economy-are growing louder. U.S.-Japan relations are at a low, due to Americans' belief that Japan plays unfairly in international trade, and "America First" is proving a potent campaign slogan. Yet the hand-wringing is increasingly out of place. It's time to lay the competitiveness crisis to rest.

Why can't America compete? The question has echoed in the media since 1980, when two of the most basic and most prosperous American industries-- steel and autos-began losing massive shares of their markets to foreign competition. Then, starting in 1982, an unfavorable exchange rate priced American-made products out of markets at home and abroad. By 1987, Americans imported $1.60 worth of goods for every dollar they exported. Hundreds of factories closed their doors. Sages warned that U.S. workers lacked the training to sustain an advanced economy. And a New York Times/CBS News poll last October found only one American in four expecting the United States to be the leading economic power in the next century. More than half believed Japan would take that role.

Undeniably, the United States has plenty of economic problems. Investment by business is far lower than it should be. Many students emerge from school lacking the basic reading and math skills employers need. Trade barriers abroad put some U.S. industries at a disadvantage. But while Americans flagellate themselves for their uncompetitive economy, U.S. business is coming on strong. With the dollar down 45 percent against the yen and the mark since 1985, the United States has become the lowest-cost producer of everything from steel coil to cardboard boxes. There's no sign of a letup. As the likes of Sony and BMW line up to manufacture in America, U.S. companies are pushing exports out the door, driving the United States to a trade surplus.

A what?

The "chronic trade deficit" has become the symbol of U.S. economic weakness. According to government figures, the last time the United States exported more than it imported was in 1975. But the trade numbers give a misleading picture. A government study last year concluded that official estimates of exports are anywhere from 3 percent to 7 percent too low. Even more important, the figures that hit the headlines concern only trade in goods. For a complete picture of U.S. competitiveness, "you don't want to talk about the merchandise trade balance alone," says University of Wisconsin trade expert Robert Baldwin. "You want to talk about goods and services together." Including services, NEWSWEEK estimates, the United States ran a negligible $9 billion trade deficit in 1991 and a small surplus in this year's first quarter.

That sort of calculation can make the competitiveness crowd go ballistic. Everyone knows, they argue, that a world-class economy needs manufacturing; a service-based future in which we all flip hamburgers and do each other's laundry sounds grim indeed. But the image of the assembly line and the stamping press as the sole sources of economic strength is seriously out of date. What happens on the factory floor is important, but when it comes to success in the global market the critical components are often intangible: customized design to suit the needs of buyers, quality-control programming, marketing, after-sales service.

In fact, much of what the statistics call merchandise" is really the value of services-services built into goods. When the government looks at Basler Electric Co., it sees a maker of voltage regulators and transformers. But when Basler vice president Herb Roach looks around the main plant in Highland, Ill., he sees bins of components anyone can buy-and dozens of computer and electrical engineers who add unique value to resistors and semiconductors. The company "is more and more moving into a software role," Roach says. Basler imports some mass-produced goods, such as transformers for microwave ovens, from low-cost Mexican factories, but complex equipment with a higher service component is made in the United States. Looking only at the hardware misses that intimate connection with services. The same is true when it comes to the number of manufacturing workers and manufacturing's decreasing share of the nation's income, both of which are frequently cited as evidence of competitive decline. Deindustrialization? Hardly. Eighteen million manufacturing workers produced twice as much in the recession year of 1991 as 19.2 million did in 1966, at the peak of the Vietnam War. But in order to focus on their core businesses, many manufacturers now hire out support work--equipment maintenance, cleaning, even public relations--once done in-house. Voila! The manufacturing sector looks smaller, because that work is now classified as services rather than being counted as part of the value of goods.

The truth is, U.S. workers turn out more per hour of work than any other workers in the world. Harvard economist Dale Jorgenson estimates that American productivity is 10 percent to 15 percent higher than Japan's and is growing just as fast. The average cost per unit of factory output has actually fallen since 1982; over the same period costs in dollar terms are up 48 percent in France, 67 percent in Japan, 76 percent in Germany. And America's competitors in Western Europe and East Asia have problems of their own. The cheap capital that helped Japanese companies flourish in the 1980s is no more; Tokyo's ailing stock market will no longer swallow whatever shares a company deigns to issue, and the struggling Japanese banks are more inclined to call old loans than to make new ones. European companies are hamstrung by high costs and an unfamiliarity with intense competition.

Those countries have shown that government policy can help individual companies prosper. Making them globally competitive is a different matter. Despite years of effort, Japan has failed to gain a major foothold in the U.S.-dominated pharmaceutical business. Europe's coddled electronics industry hasn't begun to close the gap with Japan and the United States. The American record is just as spotty. Washington has helped the steel industry by holding down imports and covering failed companies' pension promises, but neither that aid nor heavy private investment has made big steelmakers profitable.

The real key to competitiveness is not technology but sensitivity to the changing nature of business. Trends taking hold everywhere-close involvement by suppliers in solving customers' technical problems, a reluctance to hold costly inventories, global consolidation-have altered the meaning of competition in many industries. Boeing is a high-tech company by any standard, but that alone won't sell planes: competitors Airbus and McDonnell Douglas have leading-edge technology, too. Instead, Boeing won buyers for its new 777 jetliner by letting them put their own engineers on its design teams, so the plane more closely suits their needs.

Carr Lane Manufacturing, a 600-employee company in St. Louis, turns time to its advantage. There's nothing unique about the machine-shop parts it churns out, but an automated system ships 92 percent of orders the same day they're called in. "Price isn't a big factor," says Earl Walker, the 72-year-old founder. "You've got a $20-an-hour toolmaker standing there and you need a bushing. If my bushing is $1.60 and yours is $1.50, that [savings] doesn't mean much if you've got to spend three days waiting for the bushing." And Milliken & Co., the privately owned textile giant, has spent millions to improve productivity and quality. But even a mill so automated that two workers tend 50 knitting machines can't make up for the high cost of turning cloth into clothing in a U.S. factory. Milliken's response: a system, developed with garmentmakers and retailers, to turn out more copies of a hot item on short notice. The ability to restock quickly gives retailers a reason to buy American fashions, even though imports cost less.

American-based multinational companies have picked up on the same trends. Monsanto is building up chemical production in fast-growing East Asia. "A lot of our customers worldwide are moving into that region. As they do that, they are demanding local supply," explains executive John Hunter. That means fewer chemical exports in the future. Some read that as a sign of American weakness, but the company's alternative is to lose its foothold in the Asian market. Queens-College professor Robert Lipsey estimates that U.S. multinationals still account for 16 percent of the world's manufactured exports, a scant percentage point less than in 1966. That has preserved thousands of managerial, marketing and research jobs in the United States.

But what about the well-being of average American workers? A better standard of living requires a more productive economy, and the conventional wisdom is that manufacturing is where productivity grows fastest. Government data show that the service sector has been slow to improve productivity in recent years, but recent studies suggest the statistics are way off base. If they're right, living standards can rise even if manufacturing employment keeps falling-assuming, of course, that government policies assure everyone a piece of the expanding pie.

Example: the Commerce Department calculates that the U.S. construction industry has raised productivity by 60 percent less than the Canadian industry since the 1960s. "If that were true, this whole country would have been invaded by Canadian construction contractors who could build buildings for half," says Northwestern University economist Robert Gordon. In retailing, data showing productivity to be falling don't square with the spread of efficient outfits like Wal-Mart and Home Depot. The reason: when consumers shift from buying toothpaste for $1.29 at the local pharmacy to paying 89 cents at Wal-Mart, the government's price collectors don't register a lower price; instead, they treat Wal-Mart's toothpaste as a new product on the market, so Wal-Mart's workers don't show up as being more productive. Given such anomalies, "it's not at all clear that the growth in productivity in the U.S. has lagged behind growth elsewhere," says Columbia University economist Thierry Noyelle.

There have been periodic warnings of a competitiveness crisis in services, too. But U.S. firms' success in the international marketplace argues otherwise. Finance: eight of the 10 biggest securities underwriters are American, according to Securities Data Co. Aviation: Noyelle estimates the productivity of American airlines to be a stunning 61 percent higher than that of European carriers. Banking: Japanese and French banks long ago conquered the ranks of the world's largest, but when it comes to profitability, the best measure of competitiveness, U.S. banks like J.P. Morgan and Bankers Trust are consistently stronger performers.

Not all economists accept that U.S. services are performing well. Yet even those who don't accept that, like Harvard's Jorgensen, believe advances in computers, plus massive layoffs in industries like banking and insurance, have put the country "on the verge of a major advance in service-sector productivity." If that occurs-or is already occurring-then the claim that an uncompetitive manufacturing sector combined with an unproductive service sector endangers the nation's future is flat wrong.

Caution: don't expect competitiveness to be an economic cure-all. Not every industry will do well. With low-wage countries like Mexico and China holding a big cost advantage in labor-intensive sewing work, nothing short of more import protection is likely to save U.S. apparel makers, who provide more jobs than any other manufacturing industry. Foreign countries' trading practices can hamper even the most competitive industries. Most important of all, how well the U.S. economy stacks up in international competition doesn't have much to do with the welfare of individual workers. "Improving productivity doesn't necessarily create more jobs," says Harvard's Robert Lawrence. "If we make the changes we need in autos and steel, we're not going to be creating jobs, we're going to need fewer workers."

Abandoning low-profit product lines, computerizing equipment and taking labor-intensive operations overseas all help make the economy more efficient. But that offers little comfort to people like Renate Douglas of Southern Pines, N.C., who lost her job last month when Hamilton Beach/Proctor Silex Inc. moved production of irons and coffee makers to Mexico. After 14 years in the plant, Douglas, a mother of eight, is taking community-college courses with little prospect that her degree will lead to a better-paying job. High-skill, high-wage employers have no reason to locate in a small town and hire retrained factory hands. "They need to stop sending companies out of the United States," she says angrily. "My children ask me what's going to be out there when they grow up. I don't know what to tell them."

What will be out there, if we can rebuild the nation's overtaxed infrastructure and spend on investment instead of subsidies for the middle class, is an economy that can hold its own. Yes, those are big "ifs." But, then, maintaining competitiveness is mostly a matter of sound, long-term economic management. So forget about the competitiveness crisis, the crash programs, the tax gimmicks. Worry instead about Renate Douglas and the millions of others who, through no fault of their own, have become a drag on the economy instead of being able to make a contribution. The competitiveness crusades offer no solution to their problems, but finding ways to take advantage of their abilities may be America's greatest competitive challenge.

MYTH: The United States can't get rid of its trade deficit. FACT

The first quarter merchandise trade deficit was about $11 billion. But if services like consulting and air travel are added in and exports are adjusted for undercounting, the United States had an estimated $3 billion surplus.

MYTH: America is losing its financial clout. FACT:

U.S. investment banks underwrite more than two thirds of the world's securities. While U.S. banks aren't the biggest anymore, they're still among the most profitable.

MYTH: U.S. productivity is growing slowly. FACT:

By some estimates U.S. productivity is 15 percent higher than Japan's and is growing just as quickly. Productivity in services may be rising far more rapidly than official statistics report.

America's Edge | News