At the White House Rose Garden press conference with which he let loose this month’s whirlwind of tariffs, Donald Trump brought to the lectern a retired car industry worker from Detroit. Up came Brian Pannebecker of the United Auto Workers trade union. “I have watched plant after plant after plant, in Detroit and in the Metro Detroit area, close,” said Pannebecker. Trump’s policies, he said, would bring those plants back to life.
Pannebecker represents a key part of Trump’s coalition, and his observation of the death of industry is entirely correct. Where he goes wrong is the idea that Trump will fix the problem. Trump’s policies will surely attract companies back to the US. Yet these won’t be companies United Auto Workers members will work in, or will want to work in. Manufacturing will return — but not Pannebecker’s kind of manufacturing.
What happened in places like Detroit is the consequence of one of the most powerful ideas of economics going horribly wrong: David Ricardo’s theory of comparative competitive advantage. The simplified version of his idea is that countries should voluntarily give up doing things they are good at for things they are better at. This is how the US and the UK got out of manufacturing. It is how Detroit lost car plants, and how China and Germany gained them.
There is one big problem with this idea. It is people like Pannebecker. Ricardo was right in aggregate: the winners of globalisation won more than the losers lost. But what matters for politics is that there are more losers than winners. In the language of statistics: economists care about average incomes, or total incomes. Politics cares about median incomes. It is the median voter who swings elections.
While the diagnosis of what went wrong with hyper-globalisation is not difficult to make, it is harder to think about what comes next. We live in a world created by a nine-year period of trade agreements that began with the North American Free Trade Agreement between the US, Canada and Mexico in 1992; continued with creation of the World Trade Organization in 1995; and was concluded by China’s accession to the WTO in 2001. Worldwide, these changes brought a massive expansion of global trade. In the US, they triggered industrial off-shoring. This was over 20 years ago, and the world of industry has since changed beyond recognition.
What old industry used to do is take delivery of raw materials like steel or plastics — the “product” referred to by Pannebecker — and work them into a finished product. Plants employed thousands, sometimes tens of thousands of workers. If you live in Scunthorpe, in north-eastern England, chances are that you are a steelworker, or that you have a steelworker in your family. If you lived in Detroit in the Sixties, you were either in the auto business or into music.
Globalisation did not only push companies out of the US and the UK. It changed the way industrial companies work. Modern manufacturing companies are quite unlike those industrial plants of old. It is best to think of them as global supply chain networks rather than companies with a plant and a workers’ canteen. West European manufacturers get their raw materials from China, and recently also from Russia. They get their intermediate goods, which are used in the production process, from eastern Europe and other parts of the Eurasian continent. Many of the plants you see in Germany are final assembly plants. The main job of these plants is to put the Made-in-Germany stamp on the finished product.
Where, after that press conference in the Rose Garden, does that leave European car makers, such as Jaguar, Land Rover, Audi, and Porsche, that sell cars in the US but do not have production plants there? To nullify the tariffs, they would have to build factories in the US, thus reinventing their entire supply chain. Some will do this, but many will not.
The supply chain revolution was the big event in industry in the last 30 years. But there will be another big industrial revolution soon: Industry 4.0. Version number one was the industrial revolution in the late 18th century. Number two was the invention of mass production. Then came the digital revolution. Industry 4.0 is about the digitalisation of industry, and it will be epitomised by smart factories.
To understand the concept of the smart factory, recall the Internet of Things. That is the term for the bringing together of physical items into a digital network. Think about the refrigerator that knows the sell-by date of everything that’s inside it. Now apply this idea to a factory. Smart factories will be operated by robots, and they will be full of sensors that will be in constant communication. They will still need raw materials to make stuff, but they will be less reliant on complex global supply chains. This is why everybody in the world, not just Trump, is focused on securing supplies of critical raw materials like lithium and rare earth metals.
But what really distinguishes Industry 4.0 from its predecessor is the reliance on massive volumes of data, which will be stored and processed in energy-hungry data centres of the kind only China and the US currently have the capacity to develop at scale. It will take another generation of mobile communications, 6G, to be able to transmit the data from the factory sensors to the data centres. The data centres will be powered by cheap energy and supervised by a digitally literate workforce. These factories will still employ people, but these employees will have an educational background closer to that of tech workers in Silicon Valley than that of Pannebecker and his former co-workers.
Of all countries in the world, none is better placed for Industry 4.0 than China. The US might get there too. But we Europeans are hopelessly behind. While we struggle with our rollout of 5G mobile communications, the Chinese are already developing 6G. The Chinese government has just approved the construction of a massive hydropower dam on the Yarlung Tsangpo River in Tibet. The expected output of this dam will be 60 gigawatts, which is about the average annual electricity consumption of Germany. The output will be roughly three times that of the Three Gorges Dam, hitherto the biggest of its kind. The construction of the dam will affect local populations, displace entire villages and submerge ancient monasteries. It will also impinge on the livelihoods of communities that live downstream in Bangladesh and India. But its biggest impact will be on how industry works.
There is no way that a Net Zero focused Europe can compete with this. Germany, for example, was one of the big winners of the global supply chain revolution. But it does not have cheap energy, especially after the closure of its nuclear power stations and the stoppering of its supply of cheap gas from Russia. Nuclear fusion could change the picture, but this is still decades away. Industry 4.0 is not going to wait that long. It will come soon, and it will be powered by dams, American fracking, nuclear power, and gas. If there is one Western country capable of exploiting the commercial advantage of Industry 4.0, it is Trump’s America.
“Of all countries in the world, none is better placed for Industry 4.0 than China.”
I see a lot of wishful thinking among the macroeconomists and other commentators who keep telling us that Trump’s policies are bound to fail. The German poet Christian Morgenstern once wrote: “For, he reasons pointedly / That which must not, can not be.” I keep an open mind on whether Trump will fail or succeed. But if he succeeds, I am absolutely certain it will come as a total shock.
The most likely avenue for Trump to succeed is through Industry 4.0. It is a scenario that few of his critics have on their radar. This goes especially for economists who are primarily focused on the effect of tariffs on GDP. Their focus might lead us into drawing the wrong conclusions. I myself understood the economics of Brexit when I saw an obscure statistic, published by the Department of Work and Pensions in the UK, according to which the median British voter had suffered a fall of real disposable income in the 10 years leading up to the 2016 referendum. If you stared only at GDP, unemployment and the usual official metrics, you would not have seen this. The Ricardo-indoctrinated economics fraternity did not see Brexit coming, nor did it see the backlash to globalisation.
Trump may well underestimate the difficulty of disentangling global supply chains. His tariffs are crude. But I think he is onto something. So was Joe Biden with his misleadingly-named Inflation Reduction Act, a large subsidy programme to lure global industries to relocate to the US. Some companies will relocate to the US. Apple has already announced that it will step up production in the US. So has TSCM, the world’s largest manufacturer of semiconductors, based in Taiwan, and Eli Lilly, the pharmaceutical company. What will not come back is old industry, with its unionised shop-floor workers.
One of the 20 ex-colleagues Pannebecker took with him to Trump’s Liberation Day jamboree was Chris Vitale, a third-generation auto worker. He told the Detroit News that de-industrialisation had hollowed out his community. This is why Trump got elected. But even if he succeeds in bringing industry back, I fear Vitale’s community may remain hollowed out.
