Manufacturing hasn’t vanished – it’s just smarter — The Globe and Mail Published Sunday,

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TheGlobeandMail.com – ROB/Commentary/Executive Insight
Nov. 20, 2016.   BARRIE MCKENNA, Washington

Donald Trump famously lamented during the election campaign that the United States “doesn’t make anything any more.”

Reversing the trend in homegrown manufacturing is now the U.S. president-elect’s mantra as he prepares to overhaul the country’s trade policies, starting by demanding that Canada and Mexico reopen the North American free-trade agreement – presumably to make it more favourable for the United States. A key objective of this new more muscular trade position will be to “retain and return manufacturing jobs,” according to a memo drafted by Mr. Trump’s transition team.

Unfortunately, Mr. Trump’s plan is based on a seriously flawed narrative. U.S. manufacturers actually make more than they ever have.

Factory output hit a new record high in the third quarter of this year, adjusted for inflation. Manufacturers now produce roughly a third more than they did in early 2009, after recovering all the ground lost in the global recession, and then some.

The problem, of course, is that manufacturers – in the United States and elsewhere – are doing more with a lot fewer workers. Robots, sensors and sophisticated software are transforming factory floors. The number of U.S. factory jobs is up a mere 3 per cent since 2008, to 12.3 million. And since the late 1990s, nearly 6 million manufacturing jobs have vanished. The trend shows no sign of abating, regardless of what Mr. Trump does on the trade front.

Bringing jobs back to the United States will increasingly hinge on building smarter factories, not ones dependent on protectionist walls.

Consider Germany’s Siemens AG, which this week offered to pay a hefty premium of $4-billion (U.S.) to buy Mentor Graphics Corp. of Wilsonville, Ore., an industrial automation and software maker. The acquisition is part of Siemens’s efforts to digitize factories – its own and those of other manufacturers.

Industrial giant General Electric Co. will similarly invest $1.4-billion this year on the so-called “industrial Internet” as part of an ongoing effort to digitally connect a quarter of its 400 plants across the world. Using sensor-enabled machines and smart chips, the company is gathering and analyzing vast amounts of data from its disparate locations to drive productivity and dramatically cut downtime.

Manufacturers are rapidly transforming themselves into tech companies.

And they’re hiring software engineers and data scientists in bunches.

But the downside is that they are doing it with a lot fewer lower-skilled assembly workers.

The jobs in this new world of manufacturing are less likely to be created in the faded Rust Belt states, where Mr. Trump did so well with his promise to “Make America Great Again.”

It’s not at all clear how renegotiating NAFTA would make any of the 6 million lost jobs magically reappear. Mr. Trump should forget looking for them in Canada or Mexico. They’re more likely to be in Silicon Valley, or replaced by machines.

GE’s software centre in San Ramon, Calif., near San Francisco, now employs 1,400 people, up from zero five years ago. Among other things, it’s developed a cloud-based operating system, called Predix, a sort of Windows for industrial applications.

GE chief executive Jeffrey Immelt says he wants to turn the largest U.S. manufacturer into a “top 10” global software company within four years. The company is projecting that sales from its digital businesses will grow to $15-billion a year by 2020, up from roughly $6-billion now.

In this new world, companies such as GE and Siemens are just as likely to be competing with the likes of Amazon, Cisco, Google and Microsoft, as each other, in their pursuit of the burgeoning industrial Internet market.

The problem for Mr. Trump is that a more-protectionist position will likely discourage the development of smart factories in the United States. Smart and connected global factories need open borders. Policy built on a false narrative is doomed to backfire on the United States.

These factories will get built.

But if the United States sets off a global trade war, they are more likely to be located in Guangzhou, China, than Canton, Ohio.

See Chart:  Manufacturing sector: real output

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