How does the USA make money despite much less manufacturing?

Answer by Balaji Viswanathan:

US has less manufacturing? Are you talking about the country with – GE, Boeing, Nike, Caterpillar, 3M, Dow Chemicals, Exxon Mobil, Bose, John Deere, Ford, Du Pont, Procter & Gamble, Cisco, Johnson & Johnson, General Motors, Pfizer, Honeywell, Steinway, Xerox…

Even where its companies outsource most of manufacturing – like in the case of Apple and Intel, most of the value is captured by the US than its outsourced partner like Foxconn. You can see this in the profit margins of top US manufacturers vs those of Japan and China.

Stated plainly, the US is the leader of world’s manufacturing followed by China, EU (a large portion belonging to Germany) and Japan. Manufacturing output. International Statistics

[This data is 6 years old, but only change is China has moved to 2nd]

However, unlike the other 3, US two key elements that will decide the future of manufacturing – energy security and young population. US has already overtaken Saudi Arabia as the world’s leading oil producer – U.S. Seen as Biggest Oil Producer After Overtaking Saudi and doesn’t face a rapidly ageing population pyramid.

Unlike Japan and Germany, US is also a colossal food producer by being the leader of the world’s agriculture along with China and India. Food security can impact trade in multiple ways and in a time of abundance we can miss how important that is. And unlike China, the US has a very robust financial market that is still the most efficient in the world. Financial market superiority will impact long-term economic survival.

Military muscle: the US has the world’s largest military industrial complex producing a range of toys for the world. That is hundreds of billions of dollars every year. US ships can reach almost every part of the world and can quickly react to protecting its key assets. No other major economy can do this.

Energy production: The US has abundant amounts of every energy sources – oil, gas, hydro and is the world’s leader in nuclear power [in both capacity and number of reactors]. If someone says France produces more nuclear power, show them this chart below. [It is just that the US also produces so much besides nuclear power that the share of nuclear power is low.]

We have already seen that US is a top manufacturing, military, energy production and agricultural superpower. But, America’s key strength is in services.

  1. Financial services: American companies like Goldman Sachs, JP Morgan, NYSE are the lubricants of the world’s financial system.
  2. Software & services: Think of Google, Microsoft, Apple, Oracle. Nine out of 10 top software brands are based in the US.
  3. Education services: Think of MIT, Harvard, Stanford to a range of book publishers and companies like Kaplan. The US dominates the upper end of world’s education.
  4. Entertainment services: Think of Hollywood and Disneyland. The US dominates the world of entertainment and has had decades to tweak and build strong tertiary industries to support it, making them much better and cheaper to produce.
  5. Healthcare services: Healthcare is both the strength and weakness of the US. While consumers lose, US healthcare companies are among the most profitable.
  6. Research & Development: Think of NASA and a variety of labs such as Oak Ridge, Los Alamos along with the research centers of top US corporations, defense organizations and universities.

Then there are sports, real estate etc.

US and debt levels

Ok, wait a minute. Is not US “borrowing” a lot from China, Japan etc?  Coming there.

Did you know that Apple has among the largest debt among the corporations of the world – to the tune of $36 billion? But, is not Apple the richest the company in the world? Absolutely. How can one the richest companies be among one of the highest debtors?

Do you think being rich & successful is contradictory with having debt? On the contrary only the rich can afford to take on large debt. The key is to have way more assets than debt. Apple has that kind of collateral and market confidence. Same with the United states.

In fact, the US has been pushing China and Japan to stop lending more money to it. Just like banks queuing up to lend money to Apple, world investors queue up to buy US Treasury bonds, even if Obama asks them not to.

Oh, and by the way, China also has pretty high debt levels fuelled by shadow lending, provincial and municipal bond-buying, housing bubbles, and the subsidization of uncompetitive businesses in order to maintain much-needed social stability : The great hole of China. The same is true of Japan and Germany. Debt is bad only if you are not producing enough assets.

Risk levels

The US is the only major economy that can choose to cut itself off from the rest of the world with the least damage. It has enough domestic production of food, energy, technology, defense toys and finance. More importantly, it has a large enough consumer base [while the other top economies have to rely on the American consumers to open their wallets]. This means in future wars if there was a major disruption of supplies, the US will get an edge over others [one reason why the US ended up stronger after major wars of the past].  In addition, the US economic relationships through NAFTA have meant that a large number of states in the continental U.S. conduct a majority of their trading with Canada and Mexico, with great transportation infrastructure to cut down on costs.  Finally, the U.S., as opposed to many homogeneous Asian countries or nationalistic European countries is able to achieve integration of foreigners far deeper than simple citizenship.

Over the last century, there were a number of “promising” economies that were slated to out-compete the US. They said of Argentina, later the Soviet Union and later Germany and Japan. Then about China. Trends came and went and none of the threats materialized. China is far stronger than any past competitors of the US, but it has far bigger risks and potentially destabilizing flashpoints to its economic growth that it has been postponing and is now dealing with.  The new countries be looking out for are the PC-16 countries, including and in addition to Poland, Turkey, and Chile, to name a few.

Anybody who underestimates America’s economy and writes it off will come in for a nasty surprise. The US has a way stronger foundation than they give it credit for.  This is in no way rooted in patriotism, but is the objective truth.

With some small contributions from CC 🙂

How does the USA make money despite much less manufacturing?